Georgia’s community banks feeling the pain

Georgia banks are bleeding red ink as they near the end of the year, battered by bad real estate loans and a deteriorating economy.

The state’s largest community banks — those with more than $500 million in assets but smaller than regional banks such as SunTrust and Synovus — lost a combined $105 million in the third quarter, compared with earnings of $96 million a year earlier.

Twenty of those 34 banks lost money in the third quarter. None was in the red this time last year.

And banking experts say not to expect a recovery any time soon. More problems loom on the horizon, including a vulnerable commercial real estate sector, falling interest rates and a fierce fight for deposits.

The banking climate “is more unusual than anything I’ve ever seen, and I’m 65 years old,” said Gordon Teel, chairman and CEO of Atlanta-based Georgian Bank. “There’s no quick fix. We have to work our way through it.”

Teel’s gloomy outlook is notable, considering that his bank has remained profitable. Georgian Bank earned $1.8 million during the third quarter, posting one of the state’s better performances.

But Teel said profits have declined every month of the year, and he’s unsure his bank will remain in the black this quarter.

“I don’t take a lot of comfort in where we are profitwise, because we are suffering along with everybody else,” he said. “We’re not immune. I don’t think any bank is immune.”

Georgia banks are riding out one of the roughest economies in decades, punctuated of late by rising unemployment and a dramatic drop-off in consumer spending. Five banks in the state have failed this year, including two in Alpharetta, one in Duluth and one in Loganville.

Metro Atlanta banks have been hit particularly hard by the implosion of the region’s residential real estate market, which has left many home builders unable to pay back loans. Banks in less-populated corners of the state have generally fared better, though profits are down across the board.

A bank’s income is only one way of gauging financial health. Other factors include capital base and how much money is stashed away to protect against future loan losses. But like any business, a bank’s bottom line is its earnings. And the news this year has been grim.

Less boom, less bust

One of the few bright spots has been United Bank of Zebulon, which serves a mostly rural area between Atlanta and Macon that missed out on the real estate boom. The bank earned $3.1 million in the third quarter.

United Bank’s CEO, Joe Edwards, said his bank has a diverse loan portfolio, deep community roots and hardworking employees who share in the company’s profits. But he said geography, more than anything, appears to have set the bank apart.

“We were not in an area of as much growth as, say, Henry or Clayton or Gwinnett [counties], and now that things have slowed down, we don’t have as far to come down,” Edwards said.

Edwards struck a humble tone, saying he didn’t want to appear boastful about his bank’s success.

“I’ve been around long enough to know how fleeting success can be,” he said with a chuckle. “This is a time when bad things are happening to some really good people. I often think, ‘There but by the grace of God go us.’ “

United Bank, which has 15 locations in places such as Thomaston, Barnesville, Griffin and Madison, has earned $10.8 million through the first three quarters of the year and recently took over the deposits of failed First Georgia Community Bank in Jackson.

But Edwards said the future remains uncertain. He’s expecting fourth-quarter profits to take a dip.

“I’m an old banker,” he said. “I’m always nervous about what’s coming.”

David Oliver, a spokesman for the Georgia Bankers Association, said while conditions are clearly challenging, the industry remains sound. Oliver noted that 96 percent of the state’s 339 financial institutions remain well-capitalized and 60 percent made a profit in the first nine months of the year. In the same period last year, 88 percent of Georgia’s banks were profitable.

Banking experts expect the tough times to last well into next year.

“It took many years to build up to where we are, and unfortunately it’s going to take many years to work out the issues we have,” said Chris Marinac, a banking analyst with Atlanta-based FIG Partners.

Challenges ahead

So far, Marinac said banks with a high concentration of residential construction loans are having the most problems. Better-performing banks include those with diversified portfolios and younger institutions that have relatively few problem loans on the books.

But Marinac said he sees trouble brewing in another real estate-related sector: commercial real estate, particularly loans tied to retail properties. Storefront vacancies are rising as shoppers cut back on their spending, making it tougher for property owners to find tenants and make loan payments.

Real estate is not the only problem, Marinac said. Banks of all stripes have seen profit margins squeezed amid a series of rate cuts by the Federal Reserve, which has reduced the amount of interest banks are able to charge on loans. At the same time, it’s costing more to attract new customer deposits because hard-hit banks have driven up rates.

Georgia’s two largest banks, SunTrust and Synovus, have been hit by a lot of the same forces as the state’s community banks but are much more diverse and have other businesses and sources of income to act as cushions.

SunTrust earned almost $306 million last quarter, a figure that included the sale of Coca-Cola stock. Synovus posted a $21 million loss for the quarter.

Among the state’s hardest-hit banks are Macon’s Security Bank Corp. and Blairsville-based United Community Bank, which lost $19 million and $40 million, respectively, in the third quarter. Both banks bet heavily on the suburban Atlanta residential real estate market and got burned.

United Community Bank President Jimmy Tallent said the quarterly loss, which included $20 million to protect against future loan losses, was the 58-year-old bank’s first.

Trying to bounce back

“I’m not proud of the loss, but that’s less than half of the earnings we made last year, so it’s not fatal,” Tallent said in a recent interview.

The bank remains well-capitalized, he said, including a $180 million investment from the federal government as part of the Treasury’s economic stabilization program.

Still, the financial crisis has made life tough at the bank. A hiring freeze is in place, and no bonuses will be doled out. Even the holiday Christmas party is off.

Tallent took responsibility for United Community’s problems, acknowledging that under his watch the bank concentrated too many of its loans in the Atlanta residential real estate market. But he said he’s learned a hard lesson and vowed the bank, the state’s third largest, is making the hard decisions needed to improve.

United Community has been aggressively writing down and selling distressed properties to be one of the first banks that emerge from the crisis once the economy turns, Tallent said.

“At the end of the day, we will come through this stronger and better,” he said.