United Community Banks Inc. in Blairsville, Ga., could be on the hook for millions of dollars in bad loans after it unwittingly became tangled up in a fraudulent real estate scheme.
The $7.2 billion-asset United
United's shares fell nearly 6% on the news and were downgraded by two analysts. They closed at $27.50 Wednesday.
United chief executive Jimmy Tallent said that, though the situation is unfortunate, the potential losses are small relative to United's size. "I am embarrassed by it, I'm disappointed," he said. "But at the end of the day, if you wrote off every loan…that's only a fraction of the earnings for this year. We have to keep that in perspective."
United earned $19.3 million in the first quarter, up nearly 21% from a year earlier. The company said it believes it has sufficient reserves to cover potential losses.
North Carolina Attorney General Roy Cooper won a court order last week to stop work at The Village of Penland, a development that allegedly used "inflated appraisals" and "deceptive practices" to lure buyers.
Mr. Cooper alleged in a
But after receiving more than $100 million, the developers did not complete any part of the project and used the money instead "to fund other failed projects in South Carolina and St. Thomas and to pay for trips such as a cruise of the Greek isles and a ski trip to Switzerland," the attorney general's office said.
United also has exposure to a nearby project, which is linked to the same developers. It is also unlikely to be completed on time.
The company made 83 loans, totaling $23.8 million, to property owners involved in the two projects. Of these, 51 borrowers, with $12.2 million of debt, may have trouble making payments, United said. (Late Wednesday, South Financial Group Inc. in Greenville, S.C., announced that it had made 80 loans, totaling $18 million, related to the projects.)
Corey Shipman, an analyst at Stanford Financial Group, said, "There's really not a whole lot that [United] could have done to avoid this. You just had fraud from so many different players that there's not a whole lot of procedures you could put in place to safeguard that."
He added that he expects United to emerge from the incident relatively unscathed. United has "never had really anything like this before as far as these big surprise credit problems," he said.
But Jennifer H. Demba, an analyst at SunTrust Robinson Humphrey who downgraded the stock from "buy" to "neutral," sounded a more ominous tone.
"It seems like more cockroaches are coming out for the entire industry," she said. Heading into another earnings season, she said, she is not overly enthusiastic about bank stocks, "particularly banks with heavier real estate exposure."
More than 40% of United's portfolio is in construction, Ms. Demba said.
