When it comes to bank failures, Georgia has earned the dubious distinction of leader of the pack. Federal regulators had a banner weekend as they shut down six U.S. banks — half of them in Georgia. Going forward, the number of failures in the Southern state is likely to rise, as only 40% of its banks are profitable, and commercial real estate problems are compounding the crisis in the residential real estate market.

Across the country, regulators have closed 130 banks since the beginning of the year. The highest number, 24, are in Georgia, followed by 20 in Illinois, 15 in California and 12 in Florida. The Federal Deposit Insurance Corp. (FDIC) has been appointed receiver for the banks.

Georgia’s unwanted role as the nation’s current bank failure capital stems from a perfect storm of economic factors. The state’s rapid growth, coupled with the recession and collapse of the residential mortgage market contributed powerfully to the weakening of banks that were heavily invested in residential development and construction loans.

“We are in a 500-year flood in the world, and in Georgia it is especially significant. We are no different from other fast-growing states — Florida, Arizona, Nevada, California — states where people want to live,” says Joe Brannen, president and CEO of the Georgia Bankers Association in Atlanta. Georgia, which has a population of 9.7 million, is the largest state east of the Mississippi River.

The carnage isn’t over yet. According to the FDIC, the number of insured institutions on its problem list, 522, is the largest in 16 years. The FDIC reports that 50 institutions failed in the third quarter. Total assets of troubled banks reached $345.9 billion, the highest level since 1993, when they totaled $346.2 billion.

“We expect that it will be at least a couple of more quarters before we see a meaningful improvement,” FDIC Chairman Sheila Bair said in a statement.

In Georgia, banks that were heavily concentrated in residential real estate development have been the hardest hit, says Brannen. “Those are the ones that we have seen closed by the regulators.” But he adds that 86% of the state’s remaining 308 individually chartered banks are well-capitalized, and more than 40% are profitable.

The other 60% have been affected by the collapse of the residential mortgage market, and the inability of newcomers to the state and others to obtain mortgages, leading to a standstill of transactions and implosion of development. “Nobody can sell their houses,” says Brannen.

There is a spillover effect on commercial real estate. Retail strip centers that were in development to follow housing projects but never got built, in turn affected the banks that had allocated loans to developers.

A cadre of commercial trades catering to residential development, and their office and industrial quarters, also are affected. “Surveyors, plumbers, pipe-fitters — they’re struggling,” says Brannen. “You’re talking about the people who hang the drywall. You’re talking about the folks that develop the roads, the infrastructure, that lay pipe, that put the electricity in the house. You’re talking about an entire industry. And all those people have individual loans with banks.”

Before the relatively recent trend among many lenders of concentrating portfolios in residential development, commercial loans were the bread-and-butter loans for community and regional banks in Georgia, says Brannen. “You lend money to someone you’ve got a total relationship with. You loan them money to build their building. You loan them money to expand their building and bring in tenants.”

Many of those traditional commercial real estate loans are still performing well, although some loans related to the residential market have been affected by the downturn.

“Firesale” prices hurt values

Georgia’s real estate values have been appreciably affected by the bank failures, says Brannen. “We’ve got FDIC coming in and closing institutions, selling assets at firesale prices, further depressing the market. It’s a vicious cycle that has been created as a result of that and prices have been artificially devalued.”

Another major problem for banks, according to the state association, is the regulators’ requirement that banks set aside hefty reserves as a hedge against potential future losses. “The regulators are forcing the banks to heavily reserve for loan losses that may or may not occur,” says Brannen.

Because of changing federal banking rules, regulators did not permit financial institutions to set aside reserves during relatively prosperous times, and now, during the downturn, the requirement poses a significant financial burden, Brannen says.

FDIC fund balance dwindles

In September, the FDIC’s Deposit Insurance Fund balance fell below zero for the first time since mid-1992. To improve the fund’s position, on Nov. 12 the FDIC board agreed to require institutions to prepay three years’ worth of deposit insurance premiums, about $45 billion, at the end of 2009. The FDIC said the measure would give the agency enough funds to carry on its role of resolving failed institutions in 2010 without increasing assessments on the industry’s earnings and capital.

Although the FDIC’s fund balance was negative $8.2 billion at the end of the third quarter, when combined with reserves set aside for expected closings in 2010 the fund’s reserve balance recorded a positive total of $30.7 billion, officials said.

In the mood of caution, meanwhile, the increased capital reserves required of community banks are posing a hardship, says Brannen. “[Banks] are having to use any income this year to reserve for future losses. Will those losses occur? Some will. Will they all occur? Of course not.”

Going forward, the banks’ stability will be affected not only by the economic downturn, but also by the unavailability of the capital set aside for reserves, Brannen notes. The banking industry has proposed that the Treasury Department allow the use of federal bank bailout funds to ease their capital shortage.

In the meantime, Brannen is reluctant to estimate how many more banks could fail. “We never predict that. We don’t know what banks are doing to raise more capital. It’s all about loan losses and about the ability to address those loan losses while raising capital. And the banks are working hard to do that every day.”