Southeast Banks Weigh Implications of Scheme

Article excerpt

Depending on who is asked, a sophisticated land-fraud scheme that has ensnared several Southeast banks is either a sign that loan books are finally feeling the effects of a real estate downturn or an isolated event that will have little long-term impact on the banks involved.

At the very least, the discovery of the fraud calls into question the lenders' credit oversight practices.

So far three banking companies - United Community Banks Inc. in Blairsville, Ga., South Financial Group Inc. in Greenville, S.C., and First Charter Corp. in Charlotte - have announced that they made 230 loans totaling $58 million to individuals buying lots on a single development in Spruce Pine, N.C.

The banks said they believe many of the loans could default, which has several analysts questioning why they would take on so much exposure to a single project.

North Carolina Attorney General Roy Cooper last week won a court order to stop work on the Spruce Pine project and another one nearby linked to the same developer, Peerless Development Group.

Mr. Cooper charged that the developers used "deceptive" practices to sell lots to individual buyers and used the proceeds to fund other projects and expensive vacations to Switzerland and the Greek islands instead of building homes on the lots as promised.

Other banks appear to be on the hook as well. The attorney general said Peerless received payments of about $100 million from individual buyers, meaning about $42 million is still not accounted for.

One company that might have exposure to the project is the $513 million-asset Mountain 1st Bank and Trust Co. in Hendersonville, N.C. Greg Gibson, its chief executive, said his team is reviewing its portfolio.

"We're working through the process of seeing what [exposure], if anything, we have," Mr. Gibson said. "We just don't know yet."

Court documents show that BB&T Corp. in Winston-Salem, N.C., is involved, but a spokesman said its exposure was immaterial and that the company does not comment on matters subject to litigation.

Peyton Green, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said the discovery of the fraud should be a concern for the entire banking industry.

"We've had almost zero losses associated with commercial real estate lending or real estate lending period," Mr. Green said Wednesday. "I think you're starting to see things bubble up to the surface - and the fraud stuff usually comes up first, before the real problems."

Jefferson Harralson, managing director of equity research at KBW Inc.'s Keefe, Bruyette & Woods Inc., who focuses on Southeast banks, said that the incident should be a "wake-up call" for the region's banks.

"I think you're seeing real estate pressures," he said. "You're seeing fraud occur at the end of a bull market for real estate."

So far investors seem to be taking the news in stride. South Financial's shares fell just a penny Thursday and First Charter's fell 2.6%. Shares of United Community, which revealed its exposure late Tuesday, fell about 6% Wednesday but rebounded slightly Thursday. …