The financial difficulties at Winder’s 84-year-old hometown bank reflects much broader problems throughout Georgia’s banking system.
And as community banks fall like dominoes, mainly around metro Atlanta and its suburbs, it is a situation that bodes poorly for the state’s economic recovery.
On March 19, the Federal Deposit Insurance Corp. closed seven banks nationwide. Three were based in Georgia. Two more Georgia banks have since closed.
That brings to 37 the number of Georgia banks that have been closed by federal regulators in the past year and a half.
The vast majority of the failures have been in and around metro Atlanta. Those close to home were First Piedmont Bank in Winder, which was shut down last July and re-opened as a branch of the Athens-based First American Bank and Trust Company; Commerce-based Freedom Bank of Georgia, which reopened as a branch of Lavonia’s Northeast Georgia Bank; and Community Bank & Trust which is based in Cornelia, but had branches in Barrow and other North Georgia Counties.
The closures since 2008 represent 10 percent of the banks that were in business in Georgia in the summer of 2008. Consequently, Georgia now leads the nation in failed banks.
Unfortunately, the crisis is not over.
BauerFinancial, a leading bank-rating firm, has given 56 Georgia-based banks, including Peoples Bank in Winder and Hometown Community Bank in Braselton, its lowest rating of “zero.”
That second wave of troubled banks represents a fifth of the 293 surviving Georgia banks that Bauer has rated. Ten other start-up institutions – including Verity Bank in Winder and Independence Bank of Georgia in Braselton – have yet to be rated.
Widely respected Georgia economic forecaster Rajeev Dhawan told the Barrow Journal that Georgia has been hit particularly hard by the double whammies of the U.S. recession and the crash of the development industry that had been fueling the metro area’s economic growth.
“No. 1, the recession that we have experienced in Georgia by the metric of job losses has been a lot more severe than what the rest of the nation has experienced,” said Dhawan, who is director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“We are not as bad as Florida or California or Michigan, but we have definitely have had more trouble compared to other states.”
According to the U.S. Labor Department, Georgia in January had 158,700 fewer jobs than it had in January 2009. Only six other states across America, all with much larger populations than Georgia, lost more jobs in the same one-year period.
The recession, which has dramatically slowed the metro area’s population growth, also punctured the red-hot building boom and brought down many banks, Dhawan said.
“What has been the growth engine in North Georgia and Metro Atlanta? It was the construction boom. Whether it was residential, commercial, office buildings, industrial parks or vacation homes, we were in it.”
“As the market has collapsed and lenders have gone away, there is a glut of these assets. And a lot of banks, especially small and community banks, were unfortunately dependent on doing construction loans or financing of real estate deals.
“When the markets dry up, there are not many customers, and loans are bad assets on your books, which make you insolvent if you cannot find new capital.”
A bank with a good reputation could attract new investors to help rebuild capital, though in today’s market it would be a challenge, he said.
“You can do that if you are considered a good bank otherwise, you have a good reputation, and people believe in your business model,” Dhawan said.
“The issue is do you have enough money to write off the bad assets? And when you write them off, would you be above the minimum level of capital to still function?
“Basically, the net worth of the bank has to be positive and above a certain number so when people are investing in the bank, it is something that will recover its value down the road,” he said. “If it looks like it is a lost cause, then people don’t.”
With deposits up to $250,000 insured by the FDIC, a bank’s failure most directly affects its owners and investors rather than customers.
However, Georgia’s banking crisis has a far broader impact than that, because the financial institutions hold in the balance the state’s economic recovery, Dhawan said.
“If you don’t have a well-functioning banking system, you are going to have trouble creating jobs down the road,” he said.
Banks hold the capital that is lent to businesses in order to create jobs, and if they are trying to amass capital in order to survive, they will not be in a position to lend a lot of money, he explained.
“The surviving banks are all facing the problem of bad assets and are trying to find more capital; so even they are not able to lend as much as they could before. It is not just one bank. There are a lot of banks all over that are facing the same problem.”
Georgia’s economic recovery, as a result, will be slow, he said.
“For the Georgia economy to emerge from the recession, its banking system first has to become healthy and functional,” he said.
“There’s no magic bullet. It’s going to be a slow and steady climb by cleaning up bad assets and cleaning up the banking system so that credit can flow to the small businesses that create jobs.”
In his Feb. 24 “Forecast for the Nation,” Dhawan said that sharp recoveries from previous economic downturns were accompanied by a strong recovery in jobs.
However, investment spending, a leading indicator of job growth, continues to be weak, he wrote.
In addition, consumers are opening their wallets “only when price incentives or outright gifts, such as cash for clunkers, are thrown at them,” Dhawan wrote.
But he cautioned that "government spending will only add to our mounting national debt and cannot possibly lead to substantial job growth, as corporate spending is the only solution."
