Lifeline for troubled bank a hopeful sign

Montgomery Bank & Trust should be a goner, another casualty in the state with the most failed banks since mid-2008.

The bank, based in Ailey, a town of 450 people in Montgomery County, 170 miles southeast of Atlanta, was among the most troubled in Georgia by one measure. An ill-timed thrust this decade into loans for seaside real estate was nearly fatal.

But last week the 85-year-old South Georgia bank pulled itself back from the brink with a New Year’s Eve deal that industry observers say is a hopeful sign for the state’s battered banking industry.

An investor group with metro Atlanta and South Georgia ties teamed up with locals to pump $14.1 million into the bank and stave off failure.

“We have a long way still to go. But we can see the light. It’s there,” said Pete Robinson, Montgomery Bank's chairman and also head of the lobbying arm of Atlanta law firm Troutman Sanders.

“We can now manage the problems rather than triage the problems,” said Robinson, also a nephew of the bank's founder.

Fifty-one Georgia banks have failed in the current shakeout, and Montgomery Bank looked like a good bet to be No. 52.

With$12.3 million in losses in 2009 and $6.2 million through the first nine months of 2010, the bank was criticized in an October 2009 regulatory order for lax management, poor loan underwriting and other business practices.

As of Sept. 30 Montgomery Bank was No. 3 on the state's so-called Texas ratio list, an unofficial misery index of troubled lenders. One bank above it and a handful below were closed during fourth quarter.

But regulators, presented with evidence of a workable turnaround plan, gave Montgomery Bank time to cobble together its investor lifeline.

On Friday, the Federal Reserve approved a change of control for Montgomery Bank, with a McDonough-based investment group, PFGBI, taking a majority stake.

It is the first time a Georgia bank so troubled has saved itself from the gallows, and is at least a small sign of investor confidence in the state’s banks, industry insiders said.

“I’m impressed. It’s incredible. I haven’t seen a bank doing that poorly actually survive,” said Derek Cunningham, a managing director at Commerce Street Capital.

To be sure, failures are expected to continue in Georgia for the next few years, though at a slower rate. Large banks, too, remain under pressure. On Monday the state's third-largest bank, United Community,  said it is deferring interest payments on long-term debt. Columbus-based Synovus continues to post losses, while Atlanta giant SunTrust just returned to profitability in late 2010 after nearly two years of red ink.

Experts predict many more small banks will merge, a healthy thing in the long run for a state that was considered "over-banked" during the real estate gold rush.

Healthy small banks are vital to the state's economy. While a few big institutions such as SunTrust and Synovus dominate the retail market, most Georgia-based lenders are community banks that typically fund employment engines such as small businesses.  One of the factors that led to Georgia's crisis, though, was too many small banks betting too heavily on real estate development loans.

Many struggling small Georgia lenders that failed had been shunned by investors or had their plans to raise money derailed by regulatory hurdles.

“Here’s a group that actually did it,” said Cunningham.

The $14.1 million infusion in Montgomery County Bancshares, the bank’s parent company, comes on the heels of Lawrenceville-based Brand Banking Co.’s $200 million partnership with private equity investors. Brand's deal stabilized the bank and officials said will give it the horsepower to buy up struggling rivals.

Two Georgia community banking heavyweights — State Bank & Trust Co. and Community & Southern Bank— successfully raised big chunks of money to take over failed banks. But institutional and local investors have largely stayed out of the state's small banks.

“We’re glad to see a success story of a community bank raising significant new capital,” said Joe Brannen, president and CEO of the Georgia Bankers Association.

The investor group, PFGBI LLC, acquired a majority stake with a little more than $10 million. Seventy other local investors -- including directors, employees and customers of the Ailey bank -- invested an additional $4 million.

Brennan Ryan, a banking attorney with Nelson Mullins Riley & Scarborough LLP, which represented the investors, said the blend of local backers and real estate professionals of PFGBI helped make the deal work.

"I’m not sure in 2008 or 2009 individuals would have been able to come up with this kind of money,” Ryan said.

The investments by locals helped attract the largest investment group, said Trae Dorough, president and CEO of Montgomery Bank.

“I think that community support showed that there was an affinity for this bank,” he said.

Lee Price, general partner of PFGBI, said in a news release the investors are committed to returning the bank to profitability. As part of the deal, PFGBI also receive warrants for additional shares.