Georgia's Community Banks Making Progress in Slow Turnaround

The survivors of Georgia's banking industry are slowly shaking off the dust from a financial crisis that wiped out 88 of their brethren in the state.

A number of the state's banks have finally had regulatory orders lifted, while others have brought in new leaders to help them stage a comeback.

A recent open-bank deal — the first in years in Georgia — along with the stabilization of larger banks such as Synovus Financial (SNV) and United Community Banks (UCBI) is leading to more optimism.

"More banks in Georgia weathered the economic storm of the past five years and have returned to a healthy status," says Rob Braswell, a former Georgia state banking commissioner who leads the Community Bankers Association of Georgia. "It's very encouraging to see the pace of lifted regulatory orders accelerating."

Peoples Community National Bank, in Bremen, Ga., is proof that a once-struggling bank can succeed in getting a regulatory order listed. Peoples was dealing with credit quality when Larry Mathews invested in the bank in December 2009; he later became president and chief executive. Earlier this year, the Office of the Comptroller of the Currency lifted a cease-and-desist order against the $73 million-asset bank.

Mathews, a former Renasant (RNST) executive purged classified loans and raised capital. Peoples is now overcapitalized, with a 43% Tier 1 risk-based capital ratio at June 30. Mathews says he will consider deploying capital by acquiring a bank or a specialty lender such as a lease-finance company.

Mathews also wants Peoples to reach $170 million of assets through organic growth, mostly by lending to "owner-managed businesses." Because the bank's legal lending limit is just $3 million, it can chase loans that bigger banks don't want, he says.

"Something that can't move the needle in a lot of the large banks around Atlanta can move the needle for us," Mathews says.

"We're looking at some self-storage, convenience stores, industrial painting companies, a fishing-lure manufacturer," Mathews says. Peoples has also seen demand from apartment owners who want to refinance.

Many of Peoples' loans are guaranteed by the Small Business Administration or the Department of Agriculture and can be sold in the secondary markets, Mathews says.

To be sure, several of Georgia's banks are still struggling, such as Northwest Georgia Bank in Ringgold. At mid-2008, the bank had $613 million of assets and was profitable, but it was subsequently clobbered by exposure to real estate loans. Today, the bank has $385 million of assets; it lost $4.3 million in the second quarter of this year.

The bank is trying to make a turnaround. Last month, it hired Steve Rownd as president and chief executive, succeeding longtime CEO Wesley Smith. Rownd was charged with right-sizing expenses to reflect the fact that the bank is nearly half its previous size.

Rownd has a track record to lean on. He handled a cost-cutting effort at GreenBank after being hired as the Greeneville, Tenn., bank's CEO in 2010. The bank's assets shrank by 10%, to $2.7 billion in assets before selling to North American Financial Holdings.

GreenBank was "acting like a $3.3 billion-asset bank," Rownd says. "Unfortunately, in that environment, we did have to have an employee reduction … to get the thing right-sized."

Rownd will look at Northwest Georgia's staffing and renegotiate contracts, but it is unlikely he will close any of its nine branches. "They are all of a relatively decent size," he says.

Northwest Georgia is also making loans, in part because of its location in the growing Chattanooga, Tenn., market, Rownd says. Private equity has shown a recent interest in banks in Chattanooga, including investments in the $432 million-asset Cornerstone Community Bank and the $1.1 billion-asset First Security Group (FSGI).

"The bubble burst a little bit with private equity, but I'm hearing that it's still available for the right situation," Rownd says.

The state still has a fair share of challenges. Georgia continues to slog through a prolonged period of high unemployment. Its unemployment rate at Aug. 31 stood at 8.7%, higher than the 7.6% national average.

Georgia's banks, as a whole, are posting lower returns. The average return on average assets in the eastern region of the Southeast, which includes Georgia, Alabama and Florida, was 0.48% in the second quarter, according to the OCC. That's lower than banks in the Southern region, which posted 0.76% returns.

The $105 million-asset First National Bank of Decatur County in Bainbridge, Ga., was placed under a formal agreement by the OCC in March 2011, requiring it to address its loan-loss reserves and adopt other policies and procedures. It made the changes and the order was lifted in January.

Unlike banks in other parts of the state, First National does not enjoy the luxury of a rebounding economy, says John Monk, the bank's CEO. First National operates in southwest Georgia.

"We're seeing very little loan growth and very little demand," Monk says. "We're still at 11% unemployment."

First National is located in a heavily agricultural area, but ag loans only make up about a fifth of its $48 million loan portfolio. Compared to other parts of the country, farming in southwest Georgia is dominated by big companies that mostly borrow from large banks or the Farm Credit System.

"I can't compete against Farm Credit," Monk says. A big farming operation "would blow through my legal lending limit in about 30 days."

First National is located less than 15 miles from Florida, but the bank has virtually no loans in the Sunshine State, Monk says. While that strategy kept First National from being battered by the real estate bust in Florida, it has also limited some growth opportunities, he says.

"In Atlanta, they're seeing increased employment," Monk says. "We just need the economy to pick up." Until then, First National is relying on loans for home renovations and originations tied to small shopping centers.

In north Georgia, where there are opportunities to expand a loan book, Rownd said he's trying to stay mindful of what got Northwest Georgia, and many other community banks, into trouble the last time. Northwest Georgia had focused too heavily on construction loans and commercial real estate. Rownd says his preference would be to split the loan portfolio into thirds among consumer loans, real estate, and commercial and industrial.

"Commercial real estate is not a bad business," Rownd says. "It just can't be all of what you do."