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The failure of McIntosh Commercial Bank last spring prompted one prominent shareholder — U.S. Rep. Paul C. Broun (R-Ga.) — to recently complain that federal regulators were being overzealous in closing banks.
But regulators, banking experts and the top executive at the institution that picked up the Carrollton-based bank’s pieces say the reasons behind McIntosh Commercial Bank’s crash were all-too-similar to those that brought down dozens of other Georgia banks since 2008.
They boiled down to too much lending to developers and homebuilders who got into trouble when the real estate market crashed.
Not long before it lost its multi-year fight for survival, McIntosh Commercial Bank had lost so much money on such loans that, by one measure, it was financially the weakest of Georgia’s roughly 300 banks. The Federal Deposit Insurance Corp. estimates the closure will cost its deposit insurance fund more than $123 million.
“I think they got caught in this downdraft in this economy,” said Robert L. Johnson, chairman of Charter Financial Corp. The West Point-based bank holding company’s subsidiary, CharterBank, acquired McIntosh’s deposits, some of its loans and other assets when it failed.
McIntosh is only one of 39 Georgia lending institutions that have failed in the past two years — the most in any state — but it’s drawing a bit more scrutiny following comments made last month by Broun, an Athens congressman who invested in the bank his brother co-founded.
Broun blames the bank’s troubles, and that of others, on bank examiners who he said have shuttered institutions that shouldn’t have closed. In a recent interview with The Atlanta Journal-Constitution, Broun, a physician, said he doesn’t know what led to McIntosh’s failure and wasn’t involved in its day-to-day operations. However, he contended regulators have been overzealous.
“The federal government is closing these banks down when there is absolutely no reason to do so,” he told a reporter with the AJC late last month. “It’s just totally wrong.”
Broun’s spokeswoman, Debbee Keller, said the congressman was traveling out of the country last week and could not be reached to elaborate.
The official version of what triggered the bank’s closure could emerge in late September, when a type of audit by the FDIC’s inspector general is expected to be released.
The audit, known as a Material Loss Review, is designed to see if bank regulators took appropriate steps leading up to a bank’s failure, said John Kline, a Decatur-based bank consultant who advised McIntosh executives during its formation. The audits are done whenever a failure costs the FDIC fund more than $25 million.
“They look at the deterioration of the loan portfolio and foreclosed real estate and whether or not the bank was properly recognizing or reserving for anticipated losses,” Kline said. “They’re in effect doing a report card on the FDIC and they’re asking did examiners correctly identify the problems in a timely manner and did they take appropriate supervisory action.”
A preliminary examination of McIntosh suggests its failure stemmed from having a big concentration in real estate-related loans when the recession hit and housing tanked, say regulators and its new owners.
“The mistake they made — and a lot of other banks made — is they probably pursued some types of loans too aggressively, particularly a lot of development type loans,” said Johnson, Charter Financial’s chairman. “Those are the ones most susceptible to a downdraft.”
By the end of 2009, more than 80 percent of McIntosh’s $209 million loan portfolio was real estate-related, with most of those borrowings in so-called ADC, or acquisition, development and construction, and CRE, or commercial real estate, the FDIC said.
“Both ADC and CRE lending have been a common thread in just about every bank closing the past couple of years in Georgia. McIntosh Commercial Bank was no exception,” David Barr, an FDIC spokesman, wrote in an e-mail. “In fact, it was the bank’s ADC loans that gave it the most trouble and ultimately led to its closure in March. These loans weighed heavily on the bank for some time leading the FDIC to eventually place McIntosh Commercial on the problem bank list in August 2009.”
Since mid-2008, the bank had appeared seven times on an unofficial quarterly list of troubled banks that is based on the so-called “Texas ratio.” That ratio, which compares a bank’s level of foreclosures and problem loans to its level of cash reserves and other capital available to absorb losses, is one indicator of a bank’s degree of financial strength.
Critics say it doesn’t take account of measures some banks can take to improve their position, such as renegotiating loans, selling assets and raising additional cash.
Still, dozens of Georgia banks with Texas ratios well over 100 percent have failed in the past two years. By the end of 2009 — the last time McIntosh Commercial Bank appeared on the list before it failed — the bank had the highest Texas ratio in the state, 884 percent.
By then, regulators had little choice but to close the bank, suggested Kline, the bank consultant. Under federal banking regulations, he said, a bank is considered unsafe or unsound once its core capital, known as “Tier 1” capital, drops below 2 percent of assets.
The regulation “has trip wires built into it,” Kline said. “When a bank’s Tier 1 capital drops below 2 percent, the sort of default position the FDIC takes is to take the bank down.”
By the end of last year, McIntosh’s Tier 1 capital percentage was near zero.
McIntosh was founded in 2002 by a group of business owners and doctors, mostly from Carrollton, who raised $10.5 million in capital. Among the 13 directors who organized the bank, according to state records, were six doctors, two real estate developers, a lawyer and a banker.
William H. Gafford Jr., one of McIntosh’s founders and its first CEO, declined to comment. None of seven other directors and three former executives returned calls about this story.
The group was among several around Carrollton that decided to organize banks several years ago after their appetites were whetted by a wave of lucrative acquisitions of earlier start-ups by bigger regional banks.
“Everybody and his brother opened banks,” said longtime banking lawyer Walt Moeling.
Among the McIntosh organizers was Conway Broun, an Athens-based developer and Rep. Broun’s brother. He had done well with an investment in Athens-based Georgia National Bank, which itself had acquired pieces of a failed thrift in 1991.
As with the earlier bank venture, Conway Broun invested in the Carrollton bank through a partnership that includes Rep. Broun and a third brother, Michael Broun. Their father was the late Paul Broun, who had been a state senator who represented the Athens area for 38 years.
Michael Broun said he wasn’t involved with McIntosh Commercial Bank beyond his investment. “We all lost,” he said.
Gafford, a former executive with Synovus Financial Corp.’s Columbus Bank & Trust Co., started working on launching the bank in 2001. According to a resume Gafford posted online, he had previously worked for 18 years at Synovus, the state’s second-largest bank, in Columbus and Carrollton, eventually becoming executive vice president and senior lender at Synovus’ Carrollton operations.
Within six years, Gafford said in his resume, he had raised more than $20 million in capital and built McIntosh into an organization with $434 million in assets, 100 employees and six branches.
Moeling said Gafford led McIntosh’s expansion into Newnan, Covington and other markets ringing Atlanta. Those markets became “some of the toughest in the state” in the real estate bust, said Moeling.
Gafford was forced out amid growing losses, said Moeling, and new managers and consultants spent a year and a half trying to fix the bad loan portfolio, raise capital and find a buyer. Their job was made harder, he said, by tougher accounting standards adopted in recent years that require banks to quickly write down bad loans and foreclosed properties to reflect falling property values.
“They had exhausted every opportunity,” he said. “The hole was just too deep.”
Atlanta Journal Constitution, Atlanta Business News, July 11, 2010