A month after warning of its exposure to an apparent real estate scheme, United Community Banks Inc. in Blairsville, Ga., is now saying that its loan losses will be higher than expected.
The $7.2 billion-asset United announced late Monday that it would record a special $15 million loss provision for the second quarter and classify as nonperforming the full $23.6 million of loans it made for land purchases in two western North Carolina developments.
The company said when it disclosed the problems June 12 that it had expected losses to be about half that amount and that it had sufficient reserves to absorb losses.
During a conference call Tuesday, United's chief executive, Jimmy Tallent, said: "I want each of you to know just how disappointed I am to be reporting a special provision of this magnitude. Quite frankly, it is absolutely unacceptable."
Mr. Tallent said that United has not yet charged off any of the loans but that he expects it will over the next two quarters. Rex S. Schuette, United's chief financial officer, said that the loss provision will reduce earnings per share by 20 cents.
United is one of a handful of banks that made loans to individuals who bought plots of land at The Village of Penland, a development in Spruce Pine, N.C., that the state's attorney general shut down in early June.
South Financial Group Inc. of Greenville, S.C., said July 2 that it would charge off $1.5 million of its $21 million exposure to the developments in the second quarter.
According to the Attorney General's Office, the developer duped investors into obtaining loans to buy the land by promising to buy it back within a few years at the same price and pledging to make additional payments when homes built on the land were sold. The developer, Peerless Development Group, received about $100 million from investors but did not complete any part of the project and instead used the money to fund expensive vacations for its executives, the Attorney General's Office said.
United also made loans for lot purchases at a nearby project, Winery Heights, linked to the same developer.
Mr. Tallent said United took the provision after discovering new information about the purported scam.
"We have found that many if not most [borrowers] were active participants in this scheme, and were compensated by the developer with an up-front cash payment equal to 10% of the loan amount, as well as interest reserves to make payment for the first year or two," he said.
In addition, many borrowers obtained loans from several banks at once, without disclosing such information on their loan applications. Their complicity in the supposed scheme will make it more difficult for United to collect on the loans, executives said.
Mr. Tallent said the company has strengthened underwriting practices and provided additional lender training. He said that the situation is an isolated incident and not a reflection of the portfolio as a whole.
Investors largely shrugged off the news. United's shares rose 3.6% Tuesday, to close at $26.23.
"I'm not concerned at all," said J. Corey Shipman, an analyst at Stanford Financial Group. "It's a company that consistently has very solid credit quality, and this is really the first bump in the road they've hit."
