Georgia's Banks Show Signs of Sustainable Recovery

Newfound stability at some of Georgia's banks has provided hope that the state's beleaguered industry has turned the corner.

Synovus Financial (SNV) in Columbus recently exited the Troubled Asset Relief Program. United Community Banks (UCBI) in Blairsville took advantage of an accounting benefit to significantly clean up lingering credit issues.

Other banks in Georgia, including Ameris Bancorp (ABCB) in Moultrie and Fidelity Southern (LION) in Atlanta, were able to improve profitability in the second quarter.

A rebirth of the state's banking industry could also spur consolidation, which has been largely lacking as more deals take place in nearby states such as Florida, North Carolina and South Carolina.

"We're encouraged by the number of constructive conversations that have been taking place," Tom Wiley, vice chairman of the $2.6 billion-asset State Bank Financial (STBZ), said Wednesday at a conference in New York hosted by Keefe, Bruyette & Woods.

"The environment for bank deals has been described as tepid," added Wiley, who plans to be an active consolidator.

In addition to improved banking conditions, several private-equity firms that invested in Georgia banks during the financial crisis are nearing a point when they will pursue exit strategies, says Steve Dunlevie, a lawyer at Womble Carlyle Sandridge & Rice. "The investment banking community knows … that Georgia is back and Atlanta is back," he says.

Investment bankers "are approaching virtually all of the financially able banks," Dunlevie says. "The banks with good call reports are having meetings with lots of investment bankers who are encouraging them to consider growth."

Synovus is "bullish" on Georgia, Kessel Stelling, the company's chairman, president and chief executive, said in an interview last week. Georgia was "certainly harder hit than other areas, but it's more stable right now."

Georgia still lags the nation in terms of employment. Its unemployment rate stood at 8.6% in June, compared to 7.6% nationally, according to the Bureau of Labor Statistics. But the rate is an improvement from a year earlier, when Georgia had 9.1% unemployment.

The most notable progress has involved purging classified loans. Georgia's banks have lowered noncurrent loans, as a percentage of total assets, to 1.8% at March 31, compared to a 4.5% peak in early 2010. The credit profile is now on par with the national average, according to the Federal Deposit Insurance Corp.

The $27 billion-asset Synovus and the $7.2 billion-asset United Community, Georgia's second- and third-biggest banks by assets, have also chipped away at credit quality issues.

Synovus' nonperforming assets, as a percentage of total assets, fell to 2.4% at June 30, compared to a peak of 4.9% in the third quarter of 2010. In December, the company sold $530 million of problem assets.

An extended period of losses cost banks such as Synovus and United Community their deferred-tax assets, or DTAs, an accounting benefit that can be used to offset income tax expense.

Synovus and United Community recaptured their DTAs after showing sustainable profitability. Synovus tapped into an $800 million DTA benefit to help it repay the nearly $1 billion in Tarp funds it owed the Treasury Department. (The company also sold common and preferred stock to complete its exit.)

Conditions are improving in many of Synovus' key markets, such as Columbus and Atlanta, contributing to a 1% rise in total loans at June 30 compared to a quarter earlier. Still, Synovus confronts the challenge of generating higher profits in the face of stiff competition from other recovering banks.

United Community used the recapture of a $256 million deferred tax asset to slash problem loans. The company cut nonperforming assets to 0.4% of total assets at June 30, compared to a high of 5.9% in early 2010.

United Community is now looking to improve its return on assets to at least 1%, Jimmy Tallent, the company's president and CEO, said at the KBW conference. He said the company is cutting costs to get to that level, though it will also require sustained loan growth.

"We've got to grow earning assets," Tallent said. "You can't save yourself to profitability in this industry."

Changing fortunes at Synovus and United Community, along with symbolic changes that include the appointment of a new banking commissioner, have industry observers in the state optimistic.

"Certainly we're not completely through it, but the winds have turned more favorable," Dunlevie says.

Jackie Stewart contributed to this article.