Surveying Southeastern Banking

December 2011

Tom Heintjes: Welcome to the Federal Reserve Bank of Atlanta's Financial Update Focus podcast. Banks in the Southeast, as well as across the nation, are in some ways still healing from the aftermath of the financial crisis. 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. I'm glad to be here.

Heintjes: Brian, you've had a chance to look over the third quarter banking data for the region's banks. How are the banks in the Southeast generally doing now? Do you see the industry's condition in the Southeast as distinct in some ways from its national condition?

photo of Brian BowlingBowling: Yeah. After looking at the latest quarterly data, the third quarter data, I think the headline might be that positive trends are finally emerging for Southeastern banks, but challenges remain amid a slow economic recovery.

So, what do I mean by that? What are some of those positive signs? First, on an aggregate basis, banks headquartered in the Sixth Federal Reserve District reported positive net earnings for the third quarter. That might not sound like a big deal, but it hasn't happened since the third quarter of 2008. To be a little more specific, the district's aggregate return on assets in the latest quarter was 0.3 percent, compared to a –0.3 percent in the same quarter last year. So we've seen some improvement there.

Asset quality measures also indicate that the worst may be behind us. Bad real estate loans have been, really, the root of banks' problems in the region since the onset of the real estate downturn in 2007. In the latest quarter, loan charge-offs fell to their lowest level in three years, and the level of loans that are past due 90 days or more—what we call "noncurrent" or "nonperforming" loans—also declined for the fourth consecutive quarter.

So some things are starting to move in the right direction, but to keep it in perspective, banks still face some significant challenges. For example, banks in the Southeast, generally, are still underperforming their peers in other parts of the country in terms of things like loan performance, profitability, loan growth, and bank failures, which is well-known that this region has led the nation in bank failures throughout the crisis. This is largely a reflection of the real estate downturn, which was felt nationwide, certainly, but hit Florida and Georgia especially hard.

And as a result of that, in terms of differences from the national view, we continue to deal with high levels of mortgage foreclosures, a lot of stalled real estate projects, and overall high unemployment in the region, and that's a challenging environment for banks. In fact, while I mentioned that we had net profitability on an aggregate basis in the third quarter, one in four banks in the [Sixth Federal Reserve] district still lost money during the latest quarter, and in Georgia that number is even higher, at about 40 percent of the states' banks.

Heintjes: Interesting. Brian, you mentioned that banks in the Southeast have seen improving returns on aggregate assets, and I'd like to get you to elaborate on that if I could. What factors have played a role in that improvement?

Bowling: Yeah, you're hitting on an important point there, so let me provide a little more perspective on that. While the improvement in earnings is certainly a welcome sign and, we hope, an indicator of a stabilizing banking sector in the region, at this point it largely reflects efficiency gains or cost controls, along with lower loan-loss reserve provisions as the level of expected future loan losses declines. So, we have yet to see, really, a sustainable growth in what you would call "top-line revenue"—mainly interest and fee income—and for that to occur, we need to see more loan growth.

Heintjes: Once again you brought up a point I'd like to get you to talk more about. You mentioned that when the real estate market swooned, it hit the region's banks hard, especially in Georgia and Florida. How are the banks faring in the current real estate environment?

Bowling: As I said, banks are beginning to fare a little bit better after a long and difficult transition from a real estate–led, high-growth environment to a sluggish economic recovery in which real estate really is not a growth driver. So, because of that shift, a lot of banks have had to refocus their business models.

Many of the region's banks, I think, have been diligent in working out problem loans and have bolstered their capital positions either by raising new capital or by shrinking their assets to a level that their current capital base can better support. Those are difficult steps, but necessary to place these banks on a more stable footing so that they're able to expand lending to participate in, and also help stimulate, recovery going forward.

Heintjes: Brian, are there other areas that have compensated for the business banks lost once real estate stopped being so profitable?

Bowling: As far as other businesses offsetting the slowdown or the void in real estate finance, I would say that banks—not just in the Southeast but across much of the country—are struggling right now to find good loan growth opportunities. Many are looking to commercial lending, including small business lending. And there are some opportunities there, and banks are competing pretty aggressively with one another for that business, but overall demand for credit is low.

I think there are a few reasons for that. One is that businesses, like households, have been shoring up their own balance sheets by reducing debt and conserving cash. And, in fact, in Sixth District banks, core deposits now represent over 63 percent of bank assets, which is the highest level that we've seen since 2002. I mention that because one thing that that could portend is that even as the economy improves, we may see commercial loan demand lag because companies will use that cash liquidity first to fund growth initially before seeking credit.

Second, we continue to hear that uncertainty is keeping some would-be borrowers on the sidelines, and that's uncertainty not just about the domestic economy or what might happen in Europe, but also uncertainty about fiscal and economic policy direction. And a third factor is banks have tightened underwriting standards compared to where they were, say, five years ago after recognizing that, perhaps, things had become too lax in the years leading up to the recent recession.

Heintjes: Brian, I have one more question for you, and I want to get you to look a little down the road here. What are the most important factors to watch for, say, in the next six months to gauge the ongoing improvement in the health of banks in our region?

Bowling: I'd say at the macro level, unemployment and overall economic growth across the region are obviously important. When the economy is expanding and producing jobs, business and household cash flow improves, and that helps banks in a couple of ways: first, by allowing some borrowers to cure delinquent or past due loans and, second, by stimulating new loan demand as people become more confident about the future.

Another area that will continue to be important for banks, particularly in the Southeast, is residential and commercial real estate. Some things to watch there would be banks' real estate loan performance, mortgage foreclosure trends, housing starts, and inventories of unsold homes—to mention a few things. And, on the commercial property side, something that we continue to monitor is the ability for maturing commercial real estate loans to be refinanced given the pretty significant value declines that we've seen in commercial properties over the past few years.

And finally, the regulatory environment is an area of uncertainty for banks. For example, we will continue to monitor the rule-making process and implementation related to the Dodd-Frank Act, which was signed back in July of 2010. How well and how cost effectively banks are able to implement these new regulations could impact their performance over the next six months and longer.

Heintjes: Yeah, there'll be a lot to keep our eye on. 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.

Heintjes: Again, today we've been speaking with Brian Bowling, vice president in the Atlanta Fed's 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 website at Thanks for listening and please return for more podcasts. If you have comments, please send us e-mail at