Georgia banks’ wait for recovery may be long

Georgia’s community banks, which rode a wave of profits during the housing boom earlier this decade, experienced a stunning decline last year as the recession took hold.

Recently released year-end figures paint a grim portrait of Georgia’s financial industry. By almost every measure, the showing was dismal:

• Income. As a group, the state’s community banks lost $186 million last year. Almost half of the state’s banks ended the year in the red.

• Loan quality. In all, the community banks reported $2.8 billion in nonperforming loans last year, up from $1.1 billion in 2007.

• Charge-offs. The banks wrote off $811 million in bad loans, nearly triple the loan losses taken in 2007.

And don’t look for a turnaround anytime soon, experts say, as banks work off a mountain of bad loans tied to the troubled real estate market.

“Georgia banks are, as a group, on their knees,” said Jeff Davis, a banking analyst with Howe Barnes. “Georgia banks are going to be very weak for an extended period of time.”

To gauge the performance of the state’s community banks last year, The Atlanta Journal-Constitution examined Federal Deposit Insurance Corp. data on more than 300 institutions, leaving out the state’s two banking giants, SunTrust and Synovus.

The numbers reveal just how tough a year it was.

The amount of unsold homes, vacant lots and other bank-owned property on banks’ books soared to $1.5 billion in 2008, up from just $120 million two years ago. The amount of money banks stashed away to cover future loan losses grew by 20 percent last year, to just more than $1 billion.

The most stark measure of bank health, of course, is failures. Eight Georgia banks have been taken over by regulators in the past seven months. Only California has seen more failures.

It’s a remarkable change of fortune for Georgia’s banking industry, which saw robust earnings for most of the decade. Between 2004 and 2007, community banks earned a combined $2.9 billion.

Many banks fattened their profits by lending heavily to real estate developers and home builders, who were throwing up houses to keep pace with metro Atlanta’s booming population. That strategy backfired when the housing market tanked, sending banks tumbling into the red.

To be sure, Georgia is one of many states facing a banking crisis. The problems are most acute in high-growth areas such as Georgia, Florida and the West Coast, where the housing markets have been hardest hit.

“Banks are a reflection of the economy that they are serving,” said Joe Brannen, president of the Georgia Bankers Association, who noted that many parts of the state are reeling from job losses and the collapse of the housing market.

“So it’s a combination of factors that have just created an economic tsunami for Georgia,” Brannen said.

More tough times are on the way. Consider that as of the fourth quarter, Georgia’s community banks had only set aside enough money to cover 35 percent of their $2.8 billion in nonperforming loans. Experts say they would like to see numbers at least in the 75 percent range.

Many of the troubled loans are backed by real estate, which will mitigate some of the losses. But banks are having trouble unloading property at anything close to face value. The market for undeveloped housing lots in Atlanta’s outer suburbs, for example, has all but vanished.

Georgia bankers complain that their losses are exaggerated because accounting standards force them to value foreclosed homes and vacant lots at today’s fair market values, even if they don’t plan on selling the property in such a distressed market.

Banks are “having to use real capital to account for theoretical losses,” Brannen said.

Despite the tough economy, 54 percent of Georgia’s banks turned a profit last year. Many are based in far-flung areas of the state such as Zebulon and Elberton that didn’t experience a housing boom, insulating them from real estate-related losses.

If there are any lessons to be learned from the better-performing banks, it’s that a conservative strategy, marked by a diversified loan portfolio, pays off, said Dan Blanton, CEO of Georgia Bank & Trust in Augusta and chairman of the American Bankers Association’s community bankers council.

“We always have just tried to be consistent and not shoot for the moon in anything,” said Blanton, whose bank earned $8.7 million last year, one of the state’s best showings.

Still, the bank’s earnings fell by a third last year as profits sagged due to exposure to the real estate market, Blanton said.

John Kline, a banking consultant based in Decatur, said there are glimmers of hope for bankers, such as improving interest rates that could boost earnings. But given the number of problems, any real improvement may have to wait at least another year.

“I think 2009 is going to be pretty much like 2008,” he said. “There’s still business going out of business, and [property] values continue to go down.”