Yadkin Valley Financial Corp. has felt pain.

It closed branches. It laid off a quarter of its workforce. It wrote off millions in bad loans. But last week, the parent company of American Community Bank branches in Charlotte and of other banks around the region posted its first profit in more than a year. "This is the quarter where our plan came together," Yadkin Valley CEO Joe Towell said in a conference call with analysts Thursday. "We are beginning to turn a corner with regard to our performance."

Things may finally be starting to look up for community banks in the Charlotte region. After several quarters of losses while wading through bad loans, a few posted profits in the third quarter. In general, they're setting aside less to cover for future losses and writing off fewer bad loans.

Small businesses help keep the economy going - and small banks help keep them going. Community banks make up more than half of the outstanding bank loans to small businesses.

In a still-stagnant economy, analysts say there are likely to be some hiccups and a full recovery for community banks will take time. Loan demand, for one, has yet to come back strongly. But optimism is returning.

"You'll see people beginning to return to profitability, as we have, and others will as well. Not without some pain along the way, but I think that will happen," said Kim Price, CEO of Citizens South Banking Corp.

"Most people are moving on to the second half of the ballgame."

His Gastonia-based bank reversed a steep decline in the same time period last year. Nonperforming loans fell 14 percent, and the company reduced the amount of money it has set aside to cover loan losses by about 18 percent.

Lincolnton-based Carolina Trust Bank reported its first profit of the year with net charge-offs at the lowest levels in several quarters, and nonperforming assets were down from the quarter before.

Strong capital positions

Like the big banks, community banks got into trouble with residential real estate speculation at the start of the economic downturn. Later in the cycle, they were hurt by the decline in commercial real estate and losses in small-business loans, said William Wallace, an analyst at Raymond James.

"The health of the local economy is directly related to the health of the community bank," said Paul Merski, executive vice president and chief economist of the Independent Community Bankers of America. "They depend on each other."

The banks that are ahead are the ones that came into the cycle with the most capital and were more conservative with their lending standards, analysts said. That lets the banks be more aggressive in writing down bad loans.

Citizens South, which has one of the stronger capital positions, has had an aggressive philosophy of marking down losses.

"You can be very deliberate in your process because you have the ability to take the loss when you see a problem, and you take it and move on," said Price, whose bank has a Tier 1 risk weighted capital ratio of 16.1 percent, well above minimum standards. "That's probably helped us along the way to move through the cycle, maybe faster than some."

The main risk that remains is in small-business lending, where loans are larger and where problems arise later in the business cycle.

Banks and analysts warn that profits could be derailed by a big account or two going bad. But overall, credit quality is improving.

"I'm very hopeful we've seen the bottom. There's some evidence that we have," said Joe Smith, North Carolina's commissioner of banks. "I'm hoping we go on to better things from here. But right now, it's hope."

When will rebound come?

Of course, not all community banks have broken through into profit yet. Those with a weaker capital position or later-forming credit problems are still in the red. The light at the end of the tunnel may be coming, but when?

"I'm just not sure how far away that light is," Bank of Commerce CEO Wes Sturges said. "Our goal was to be through, too."

Still hurt by problem loans, Charlotte-based Bank of Commerce posted its second quarterly loss in a row as charge-offs on foreclosed properties increased.

"Community banks basically reflect the community. There are a lot of small businesses that have hung on, hung on and hung on, but just not made it," Sturges said. "We thought we had pretty well finished, and then had one or two issues pop up that have been on our books a while but were worse than we originally thought."

While he didn't want to make a definite prediction, Sturges said the bank was positioned to return to profitability soon.

NewDominion Bank, based in Charlotte, has hopes as well. It's had weaker capital ratios, and posted a $2.15 million loss in the second quarter. It hasn't yet reported third-quarter results.

But its CEO has predicted a return to profitability in 2012.

"Things are certainly stabilizing," said Blaine Jackson, the new chief financial officer at NewDominion Bank in Charlotte. The bank has overhauled its management team in the past year. "Our trends are looking really good."

But analysts warn that a true recovery for community banks will be a long time coming as long as unemployment remains high and small businesses are hesitant to borrow and expand.

"There have been wonderful improvements at a lot of these banks. That being said, there are still a lot of credit risks," said Carter Bundy, an analyst at Stifel Nicolaus. "We've come a long way, but we still have a good ways to go."