Banking in the Southeast

June 2010

Moderator: Welcome to the Federal Reserve Bank of Atlanta's Financial Update Focus podcast. It's not an understatement to say that Southeastern banks have experienced an eventful period and have endured significant challenges. Here to speak with us today about the general state of banking in the region is Brian Bowling, vice president in the Atlanta Fed's banking supervision and regulation division. Thanks for joining us today, Brian.

Brian Bowling: Thank you.

Moderator: Brian, Southeast banks have been through a very difficult period the last couple of years, and here it is mid-2010. How are the banks in the Southeast generally doing now?

Photo of Brian BowlingBowling: Well, there are a few positive signs, but overall the banking industry is still pretty fragile, in my opinion. On the positive side, balance sheet liquidity generally has been improving as a result of retail deposit growth and weak loan demand. Also, following the large bank stress test last spring, the markets seemed to open up a bit, and a number of banks—including some in the Southeast and even some community banks—have had success raising new equity, which they had not been able to do in 2008 and early in 2009. And finally, some banks are reporting that the flow of new problem loans has begun to slow down somewhat.

But despite a few bright spots here and there, overall, I think banks in the Southeast are still struggling under the weight of nonperforming residential construction loans and land acquisition and development loans, primarily. And Southeastern banks have a disproportionate exposure to those loan types relative to other parts of the country. Problem loans can have ripple effects on a bank's financial condition in a number of ways. Typically, the first hit is to earnings through the loss of interest income and larger loan loss reserve provisions. And that in turn can lead to declines in capital. Now, in the worst situations, a rapid erosion of capital can lead to solvency concerns and trigger liquidity outflows if depositors get skittish and interbank funding lines dry up. Once it reaches that point, it's pretty difficult for a bank to turn that around, even if the economy is starting to recover. So while a number of the banks in the region are on a more stable footing than they were, say, a year ago, about a third of the banks in the District were still unprofitable in the first quarter.

Moderator: Brian, while we know Southeastern banks, especially in Georgia, were hit hard with the collapsing of the residential real estate market, as well as the challenges of the commercial real estate market, is their situation with regard to real estate owned and foreclosures improving at this point?

Bowling: No, not really…I wouldn't say it's improving just yet. As I said, for some banks, the flow of loans going into nonperforming status has begun to slow, and that's a positive; but the level of problem real estate loans remains quite high. In some cases banks are able to modify loans and allow the borrower to maintain control of the property and keep it out of foreclosure and service that debt at a lower payment. But in other cases that's not really an option because the borrower's ability to service even a restructured loan just isn't there. And, when banks do have to foreclose and take ownership of the real estate, they're finding it difficult to dispose of that at the prices that buyers are willing to pay, because the resulting write-down can be substantial. Now, there are foreclosure sales occurring, but to some extent a bank's ability to rid itself of foreclosed properties quickly really depends on its capital cushion to absorb the loss. And, in some cases, that difference between buyer and seller price expectations is preventing some sales from occurring, and that hinders the overall market clearing process that really needs to occur.

Moderator: Let me ask you this, Brian: In gauging the health of the banks in our region what do you think are the most important factors to watch for in the next, say, six months?

Bowling: For bank health, I would say first, stabilization in the housing market is a key, and by that I mean I would look for price stabilization, a sustained increase in sales activity, and a decline in foreclosures. Job creation is also another important factor, because not only will that help the housing sector, it will also give a needed boost to commercial real estate, particularly retail and office space, which are also problematic areas for banks right now. And a third gauge that I would watch for is the overall level of bank credit outstanding. For example, total loans outstanding at Sixth District banks—and this is primarily community banks—total loans peaked in the third quarter of 2008, and since then they have declined for six straight quarters. And, it's difficult for the economy to grow, it's also difficult for banks to make money if they're not lending. So, when we see net credit expansion, again, that too will be another sign that banks are more confident not only about their own outlook but also that of their borrowers.

Moderator: Right. Brian, for my last question I'd like to ask you about the banking climate in our region. Would you say that the banking climate regionally currently is different from that of the rest of the nation, or do we mirror the nation's banking system as a whole?

Bowling: I think it's a little bit of both. Banking in the Southeast was different leading up to the recession in that this region had one of the most pronounced real estate booms, along with some markets like Las Vegas and parts of California. And, you may recall, not that long ago, banks from other parts of the country were really fighting aggressively to break into the Southeast, primarily the Florida and the metro Atlanta markets because of the perceived growth opportunities.

Now, I would say, we're unique in that this has been ground zero for the bust that has followed the boom. It's well reported that we lead the nation in bank failures, although if you look at failure trends, the rest of the nation has begun to catch up to us a little bit over the last few months. Still, the typical balance sheet structure of banks in the Southeast is overweighted toward real estate loans compared to other markets, and so that might lead to a longer workout process for this region.

There are some areas, as I said, where we're not unique. This recession has really affected banks everywhere to some degree, because there are a lot of facets of this financial crisis that were not at all unique to any one region. For example, things like broken securitization markets, slack loan demand, or difficulty raising capital are challenges that banks everywhere are having to face and having to deal with while the economy and financial system recover.

Moderator: Brian, thank you so much for your time and for sharing your thoughts with us about recent trends in banking in the Southeast.

Bowling: Thank you.

Moderator: Again, today we've been speaking with Brian Bowling, vice president in the Atlanta Fed banking supervision and regulation division. This concludes our Financial Update Focus podcast on the state of the banking industry in the Southeast.

For more information, please see Financial Update on the Atlanta Fed Web site, Thanks for listening, and please return for more podcasts. If you have comments, please send us e-mail at