Georgia banks struggle with credit crunch

Federal officials this week issued an extraordinary plea that illustrated just how deep the economic crisis has cut.

The officials, a group that included Treasury Secretary Henry Paulson and federal banking regulators, called on banks to perform their most basic function: make loans.

But Georgia bankers say any expansion of lending may be easier said than done, given a deteriorating economy that’s been pummeled by mounting job losses and a dramatic pullback in consumer spending.

“In booming times, it’s a lot easier to get new customers because new businesses are starting up, and people are flourishing and having more income to spend,” said Ron Francis, president and CEO of First Landmark Bank in Marietta, which opened earlier this year.

Now, Francis said, the economic climate “is as tough as I’ve ever seen, and I’ve been in the business almost 40 years. And it’s probably going to get worse.”

The government’s concern is that after years of offering easy credit, banks have swung too far in the other direction and are hoarding cash instead of lending it out. The government is investing $250 billion in U.S. banks in an attempt to shore up the economy, and the officials want to make sure the money is put to good use.

Friday was the deadline for publicly traded banks across Georgia and the United States to apply for a federal infusion of cash. Most Georgia banks are expected to apply.

Banking experts say loan demand in Georgia has fallen as businesses abandon expansion plans and consumers delay big purchases. At the same time, banks have tightened their lending standards after having been burned by bad real estate loans.

Joe Brannen, president of the Georgia Bankers Association, said it’s not realistic to expect banks that receive federal funds to suddenly boost lending.

“It’s not like there are lots of loans sitting in inventory waiting to be funded,” he said. “It’s going to take some time to deploy all this capital.”

Georgia bankers stress that lending has far from frozen up, with new loans being made to creditworthy customers. And while banks have largely pulled out of the risky real estate construction loan business, they’ve turned to sectors that typically do well in down economies, such as health care, technology and education, Brannen said.

Also popular, Brannen said, are commercial real estate loans, particularly those in which a small business owner who is leasing work space borrows money to purchase the building.

“The person buying the building is in the building. They have skin in the game,” said Brannen. “This is bread-and-butter for a lot of banks.”

The changing economic landscape has forced banks to re-think their strategies.

First Landmark’s initial business plan, for instance, called for almost a third of loans to be made in the residential construction and development sector — an area that, when times are good, offers robust growth possibilities.

But the real estate market turned south before the bank opened in March. Construction and development loans now make up just 5 percent of the company’s loan portfolio, said Francis, the bank’s president.

“We found growth slower than what we expected,” he said. “It’s going to be a challenge. You just have to go about it slowly and methodically. You can’t jump out there and make loans that don’t fit the economy now.”

At Atlanta-based SunTrust Banks, one of the nation’s largest regional banks, loan growth has slackened as the bank shifts emphasis from real estate construction to consumer and commercial lending markets.

SunTrust has been approved to receive $3.5 billion from the government’s economic stabilization program, which requires banks to pay 5 percent returns to Uncle Sam for the first five years.

“We are acutely aware of the importance of lending to economic growth in our markets, and we are committed to doing our part,” SunTrust spokesman Barry Koling said.

SunTrust’s total loan volume in the third quarter stood at $122.3 billion, up 3 percent from the same period a year ago but flat when compared to the second quarter of this year, according to the company’s most recent earnings report.

“Loan demand is not as robust as it is in a booming economy, and that is a reality,” Koling said. “However, we remain committed to, interested in, and active in, capitalizing on the opportunities we see to provide good loans to qualified borrowers.”

Bill Linginfelter, the top executive in Atlanta and North Georgia for Birmingham-based Regions Bank, said the company’s loan portfolio continues to grow, though at a slower rate.

“There is still a bit of consumer demand out there,” he said. “The heavier demand is coming from the business community. Even in an economy like this, there are opportunities to grow.”