EconSouth (Fourth Quarter 2008)

The past year was volatile for the banking sector in the Southeast. Banks headquartered in the region were not immune to the upheaval and turmoil in financial sectors worldwide, and some parts of the region bled from exposure to the real estate correction. Ballooning mortgage payments, falling home and land prices, tightening lending standards, and increasing loan default rates took their toll on consumers and banking institutions alike.

At the beginning of 2008, many consumers were already having difficulty making ends meet in the face of soaring food and gas prices and rising mortgage payments. As the housing market slowed further and lenders tightened their belts, foreclosure rates soared in the region. In Florida, the percentage of seriously delinquent subprime mortgage loans (those 90 days past due or in foreclosure) increased to 35.1 percent in September, significantly higher than the U.S. average of 22.8 percent. Georgia, at 23.3 percent, was just above the national average while Alabama (19.1 percent), Louisiana (20.3 percent), Mississippi (22.7 percent), and Tennessee (22.5 percent) were just below it (see the table).

Competing for profits
As credit quality conditions worsened, earnings and profits at most of the region's banks were lower because of falling net interest income and substantially higher loan-loss reserve provisions. More than half of the banks in Florida reported a net loss for the third quarter. Competition for deposits intensified across the Southeast as wholesale funds became more limited. In addition, some banks chose to hold onto any excess liquidity rather than resell it in the interbank market, further reducing the availability of money for even low-risk borrowers. Small businesses were particularly affected by the limited availability of loans, stringent conditions attached to the loans that were available, and high borrowing costs.

The banking landscape saw some changes in 2008. As the financial crisis deepened, small banks that mushroomed during the real estate boom were now seeing their portfolios strained as the percentage of bad loans increased. Some banks closed their doors and reopened under different banners. By mid-December, seven banks in the Sixth Federal Reserve District had failed and were shut down by regulators.

In the third quarter of 2008, loans and leases in the Southeast rose 6.6 percent relative to a year earlier. But these increases were not uniform across all loan types. Commercial lending saw the largest increase, 17.6 percent, and home equity lines of credit grew 14.8 percent. Construction lending, which accounts for approximately one-fifth of all lending in the region, fell 5 percent.

Looking ahead to 2009
Conditions in the banking and finance industry in the Southeast are likely to remain difficult in 2009 as tighter mortgage markets make existing and new homes difficult to sell and deteriorating credit conditions make banks less willing to assume risk. Some states may see more bank closures as smaller banks with portfolio concentrations in real estate loans become weighed down by higher default rates. As credit quality problems and intense competition for deposits continue, further banking industry consolidation is likely.

The outlook for the banking industry is cautious as banks gravitate toward a new equilibrium after swinging from more liberal lending policies prior to 2007 to a very cautious stance in 2008.