What Goes Up… Must Come Down

A shakeout in Georgia’s community banking market

Two years ago, Georgia was burning up the roll books, chartering 20-something de novo (new) banks thanks, in large part, to the unparalleled real estate boom the economy – particularly in the Atlanta metro area – was enjoying.

Established banks were snapping up the competition and the Community Bankers Association of Georgia (CBA) expected 10-15 of its then 325 members to cross the $1 billion assets mark – the FDIC’s official dividing line that determines a bank is too big to officially be considered a community bank.

That particular banking boom is over. Georgia Department of Banking and Finance Commissioner Rob Braswell says that while nine new banks came online in 2008, completing a chartering process that began in 2007, he doesn’t expect any new banks to be chartered this year or next.

Worse, between August 2008 and press time, Georgia has lost 13 banks. Nine banks failed this year alone: American Southern Bank, Kennesaw; Omni National Bank, Atlanta; FirstCity Bank, Stockbridge; Freedom Bank of Georgia, Commerce; First Bank Fi-nancial Services, McDonough; Silverton Bank, Atlanta; Southern Community Bank, Fay-etteville; Community Bank of West Georgia, Villa Rica; and Neighbor Community Bank, Newnan.

This year, of Georgia’s 300 community banks, only three have crossed the $1 billion line: Georgian Bank in Atlanta, Community Bank and Trust in Cornelia and Brand Banking in Lawrenceville.

Consumer Confidence

Despite a general perception that says banks aren’t lending money, Braswell and the community bankers polled for this story say quite the opposite is true – banks have money to lend, but patrons either aren’t asking or they don’t meet stricter lending criteria.

“In an economic downturn,” Braswell says, “the consumer usually kind of draws in a little bit and gets more conservative, tries to save and limit their expenses and not borrow as much. The vast majority of community banks continue to make loans to creditworthy borrowers, although banks in general have become more cautious in their lending, considering the current economic environment. Admittedly, there are some isolated instances in which a bank may be limited in its ability to lend due to its capital falling below regulatory requirements.”

“For individuals, we have continued to make loans for construction, additions to houses, other consumer purposes,” says Jackson McConnell, Jr., president and CEO of Elberton-based Pinnacle Bank. “For businesses, we are making term loans for new equipment, lines of credit and owner occupied real estate. We do not generally make loans for investor type real estate, speculative construction or for acquisition and development of residential subdivision type real estate. There is not a lot of demand right now as both consumers and businesses are being quite conservative, which is understandable.”

“People are just a little scared to borrow money right now,” says Dwight Stout, president and CEO of Greater Rome Bank.

But a lack of loans ultimately will affect any bank’s profitability – banks make money on loans, not deposits. Right now interest rates are at historic lows and profit margins are down. That, combined with a lack of demand for new loans, has bankers tightening their belts.

George Andrews, founder of Atlanta-based Capitol City Bank & Trust, says the bank isn’t making money, but isn’t losing money either. “We’re trying to beef up our capital reserves, we’re tying to cut expenses where we can and we’re trying to develop good solid banking clients.”

“We’re probably making about half the money we were making,” says Derek Wil-liams, president of First People’s Bank in Pine Mountain and incoming chairman of the CBA, “but the beauty is we’re making it. The doors are open.”

Changing Times

The bankers also agree that loans of a certain type played a role in the downfall of those banks whose doors are no longer open. The majority of them became involved with making ADC – acquisition, development and construction – loans to developers.

“Most of the banks in Georgia, probably the vast majority of them, did do a lot of loans to developers who were going to build subdivisions, and that’s where the real collapse has come, particularly in the Atlanta area,” McConnell says. “The builders can’t sell their houses and can’t pay for their lots, and the developers can’t sell their lots, and it has just sort of collapsed on itself.”

Though hindsight may make such loans appear ill-advised, Braswell is quick to point out that things were different when the loans were made.

“Many of these loans weren’t considered high risk when they were made. They were to very strong developers or builders in a growing market,” he says. “The community banks weren’t making subprime loans, they were making acquisition, development and construction loans. That was the gasoline, if you will, to much of the state’s economic engine over the last 15 years.

“The real estate market didn’t come to a slow halt. It came to an abrupt halt, so it caught many of the banks with a large portion of their loan portfolio in acquisition, development and construction loans. I think the lesson that the banks have learned is that they will need to more closely monitor and limit the amount of concentration risk in any one particular lending category.”

Another practice still-thriving banks didn’t get caught up in was participation. That’s when a bank, because of FDIC lending limits, can’t make an entire loan to one borrower, so it sells parts of the loan to other banks.

“A lot of small banks had to go into participation because they didn’t have enough generic loan business locally,” Williams explains. “Some of these participations have been in the Atlanta metro market, and maybe even down in Florida. These are the guys that are causing problems. It’s not usually the guy next door that has a second mortgage on this house, or the farm down the street, it’s the commercial loan in Atlanta that the bank owns one-twelfth of.”

Personal Touch

The community banks that didn’t get involved with these practices, either through good decision-making or lack of demand for such loans in their community, are still around. And among them, there’s one thing that hasn’t changed, says Carolyn Brown, CBA’s president and CEO – their attitude toward the community they’re part of. A community bank is determined by its attitude, not its balance sheet, she says. “It’s more a philosophy than assets or deposits.”

Steve Bridges, CBA’s executive director of legislative and regulatory affairs, elaborates. “It’s characterized by local decision-making, where you go into your local bank or the local branch of your bank and have people right there in that branch who are able to make decisions about your loan,” he says.

That level of localized attention is perhaps more important this year than ever before. Community bank patrons – primarily local residents and small businesses – are losing jobs or seeing revenue dwindle as a result of the recession that has cost Georgia more than 200,000 jobs since this time last year, according to the state Department of Labor.

“I would say certainly a couple of times a month we have a good customer come in who says, ‘Hey, I need some help. I need to maybe take this loan to interest only for 60 days, I have work on the horizon,’” Williams says.

“We have folks we talk to weekly just trying to stay on top of it,” Stout says. “We make every effort we can to work with them.”

Atlanta-based Capitol City Bank & Trust, which has branches statewide, is facing a different problem. Andrews created the bank specifically to serve the African-American community and, as a result, it holds several church loans. “A lot of our churches are struggling,”Andrews explains, “because a lot of parishioners are unemployed.”

One thing bankers haven’t noticed is patrons queuing up to withdraw their funds and stash them in the mattress. That’s because when a bank fails, the FDIC steps in, guarantees deposits, establishes a receivership and usually finds a buyer fairly quickly.

“The FDIC insurance is very solid. They have extended that to $250,000 for interest bearing accounts; it’s unlimited currently for non-interest bearing accounts,” Braswell says. “In the vast majority of the failures we’ve had, the deposits have been assumed by an acquiring institution and there was no interruption in service.”

Pinnacle Bank is addressing potential solvency concerns with a document called Safe, Sound and Secure that does double-duty as talking points for employees and a takeaway for nervous customers. So far, no one’s needed it. It’s more likely, McConnell says, that “if someone had a concern, they would come to me directly and I would have a conversation with them one on one.”

Williams agrees – some 250 of his customers are shareholders in the bank, he says, and know that “they can stick their head in my office and say, ‘Hey – what’s going on with our bank?’”

Maintaining A Presence

Whether the economy picks up or just holds steady, bankers agree that the key to keeping the doors open is keeping the focus on the community.

“It’s going to cost us a little money,” Williams says, “but we’re going to stay active in the community. We’re going to continue to sponsor the bike race. We’re going to continue to have our full-page ad in the yearbook for the local high school. I think those things are important.” First People’s also will be continuing its customer appreciation days, complete with hot dog cookout.

Marketing Capitol City involves sponsoring civic groups as diverse as the Boy Scouts and Atlanta’s Hosea Feed The Hungry And Homeless, a nonprofit that helps those in need with a food bank, job training and clothing in addition to holiday dinners. The bank also sponsors church and pastoral anniversaries and statewide conferences and workshops for churches.

It’s the same in Elberton. “I would daresay you can’t go to a Little League field or a Rotary meeting or to a club meeting somewhere and there not be someone from Pinnacle Bank there,” McConnell says. “On a local level, we do an awful lot of trying to be visible in the market. That’s the spirit of community banking.”

Signs Of Life

From their perch on the front lines of the economic slowdown, these bankers are uniquely qualified to analyze the economy. Are there signs of a recovery?

Williams says Pine Mountain didn’t see that much of a downturn to begin with, thanks in large part to the new Kia plant in West Point and growth at Fort Benning. “I think we’ll be coming out of it a little quicker maybe than other areas,” he says. “Like everybody else, I’m cautiously optimistic that we’ll see some upturn by the fourth quarter.”

Andrews shares Williams’ optimism about a fourth quarter recovery, as well as his concern that jobs may be the sticking point. “I think if we’re not at the bottom, we’re very near the bottom,” he says. “But we’re still seeing a lot of job losses. When the job losses start drying up, then you’re going to see more consumer spending, more confidence.”

Bridges adds that bankers around the state are seeing houses move more quickly, and that the housing inventory in the Atlanta metro area may be lower than it was during previous recessions. “That’s probably a good sign in that once the economy picks up, it will help us move through the inventory more quickly,” he says.

“So much of the problems our banks are experiencing here in Georgia are very dependent on how quickly the real estate market rebounds,” Braswell adds.

As for bank failures, both Braswell and Bridges, a former state banking commissioner, believe there may be a few more to come. “Which ones,” Bridges says, “is anybody’s guess because you have a lot of banks that are making efforts to raise capital. It depends on which banks are successful.”

Williams, however, isn’t looking back. He’s looking to the future and sees better days ahead for those banks that are left after the economic dust settles. “I really believe that the community banks that survive this thing are going to come out stronger, with more loyal customers than we ever had before,” he says.