The FDIC order also requires Macon Bank to develop a comprehensive turnaround plan — and a contingency plan for a sale or merger of the bank in the worst-case scenario that targets aren’t ultimately met.
Macon Bank has foreclosed on hundreds of lots and tracts of land over the past few years. Steeply declining real estate values meant the property was no longer worth what the bank had originally loaned, and the bank was left holding the bag.
The losses eroded the bank’s capital ratio to a level the FDIC wasn’t comfortable with.
Capital ratio is a bank’s all-important safety net against bad loans. Macon Bank CEO and President Roger Plemmons said the bank has made strides, however. Specifically, Macon Bank is increasing its capital ratio.
“We can build capital by making money, or we can decrease our assets, and we’ve done both of those things to help improve our capital ratio,” Plemmons said.
When banks make a loan, they must earmark capital equal to a small percentage of each loan’s value to cover any losses.
It’s a game of averages: while a few bad loans might take a bite out of the capital reserves, normally it’s just a small blip on the bank’s overall balance sheet.
“You can absorb one of those, two of those, 10, 20, 100 — but eventually one day the absorption ability stops. In simple terms, you are broke,” said Ken Flynt, a finance professor and associate dean in Western Carolina University’s School Business, who was speaking in general terms only, not about Macon Bank specifically.
Macon Bank has seen far more than its fair share of foreclosures in the real estate bust, and bad loans taken in totality became more than a blip. It is still considered well-capitalized under FDIC standards, however.
“We feel like we are adequately reserved for any hits,” Plemmons said.
But given the bank’s portfolio — a small bank that is heavily vested in the real estate economy of a hyper-local geographic area — the FDIC has set higher standards for Macon Bank than it would for larger banks with a more diversified portfolio, Plemmons explained.
“According to FDIC regulations, we meet their definition of well capitalized, but because of our portfolio make-up they want us to increase our capital,” Plemmons said.
A slowly rebounding real estate economy is also helping matters.
“You are seeing a lot of positive things in the economy,” Plemmons said. “We have seen prices somewhat stabilize.”
The more real estate values rebound, the more Macon Bank can sell its large inventory of foreclosed properties for and the less of a hit it takes to its capital reserve ratio.
De-valued real estate hurts banks
Macon Bank isn’t alone in these troubling times. Banks everywhere have taken a hit as real estate values tanked.
Borrowers fled in droves from their mortgages, and banks were left holding a bulging bag of foreclosed properties — properties worth a fraction of what the bank initially loaned.
“Land has gone down 60, 70, 80, even 90 percent,” Flynt said.
The conundrum is exacerbated here in the mountains, where speculative real estate development accounted for a disproportionate share of lending by homegrown banks.
Macon Bank can’t necessarily be faulted for the loans they were making. At the time, property actually seemed to be worth that much.
“When people came in to buy, the appraisal was there,” Plemmons said.
After all, real estate has historically been a safe harbor. But, that all changed.
“We had an enormous explosion in value or perceived value in the early part of the 2000s,” said Flynt, who also worked in the banking industry for 35 years. “It was just an incredibly scurrying to keep buying, building and developing real estate.”
Then reality set in. A lot that sold for $100,000 a few years ago might be worth just $20,000 now. A wave of foreclosures ensued.
In some cases, the borrower couldn’t pay. But in many cases, they simply didn’t want to pay anymore.
“There’s the realization or anticipation by people that ‘In my lifetime, I will never see this thing appreciate back to what I bought it for so I’ll just walk away,’” Flynt said.
Even if it meant a so-called “credit ding,” Flynt said, borrowers let the bank foreclose rather than keep making payments on an upside-down mortgage.
The rationale created a major problem for banks, which were stuck with a huge inventory of property worth far less than the original loan values.
There was another tier of borrower: developers who counted on the steady sale of lots to pay off their loans. When lot sales all but dried up, the developers had no money coming in and couldn’t make their payments. Macon Bank became the unlucky new owner of several giant tracts. The bank had little hope of unloading them — at least not for anything close to the small fortune the bank had been stiffed.
Last month, Macon Bank saw three of its foreclosed properties sell for more than the appraised value on its books — a hopeful sign.
“For a while, you would get an appraisal, and you would see huge decreases and now those are stabilizing,” Plemmons said.