One small bank’s course to safer seas

Pat Shepherd’s office at the Bank of Georgia is decorated with paintings of the waterfowl the avid outdoorsman likes to hunt.

These days, though, it’s Shepherd and his staff who are under the gun.

Shepherd, the Peachtree City bank’s president and CEO, is trying to revive a once profitable company that’s been hammered by the recession and real estate downturn — and, he admits, by mistakes the bank made during the boom days of the real estate bubble.

Bank of Georgia’s real estate-fueled rise and recent struggles is a story line seen at banks across the state.

It’s been a year and a day since the banking crisis hit Georgia with full force. That’s when Alpharetta-based Integrity was shut down by regulators after recording enormous real estate-related losses.

Since then, 22 other Georgia lenders have failed, most of them small institutions like Bank of Georgia with business models dependent on a thriving housing industry. Georgia has seen the most failures of any state over the past 12 months, nearly a quarter of the nation’s 98.

Meanwhile, nearly a third of the state’s 300 banks are estimated to be operating under state or federal regulatory orders aimed at preventing them from failing.

One of those is Bank of Georgia. In June, federal regulators issued a “cease and desist” order requiring the 10-year-old bank to take a variety of steps to bolster its finances and reduce its concentration of real estate loans.

Shepherd, 61, a veteran banker with a syrupy drawl, is determined Bank of Georgia will not become another casualty.

He’s aggressively cutting expenses, trimming staff, selling foreclosed properties and making other moves to shore up the bank’s operations and bottom line.

Shepherd and the bank’s chief financial officer, Lynn Gable, agreed to talk in depth with the Atlanta Journal-Constitution about their turnaround plans, providing a detailed look at what one troubled Georgia bank is doing to survive — and perhaps thrive again — in the worst economic environment since the Great Depression.

“We will comply with this [cease-and-desist] order,” Shepherd said. “We will change our risk profile. We are not going to fail.”

‘We got careless’

The story of how this small Peachtree City-based lender fell on hard times is sobering, but all too common across the state, particularly among community banks doing business in metro Atlanta’s suburbs.

Compared to most states, Georgia has an unusually large number of small community banks. Many were created just in the past decade, aimed at cashing in on metro Atlanta’s long-running population boom.

Like many of its peers, Bank of Georgia lent heavily to home builders and developers during the boom years, especially in Fayette and Coweta counties. And at first, the strategy paid off, helping the bank double its earnings between 2004 and 2006 to nearly $4 million.

The collapse of the housing market hit hard, sending Bank of Georgia and many other banks tumbling into the red in 2008. So far this year, the bank has lost $6.2 million and has another $31.5 million worth of nonperforming loans.

In retrospect, Shepherd and Gable admit they bet too heavily on real estate, devoting more than 80 percent of the bank’s total loan portfolio to the sector. And the intense competition for business during the boom led the bank to ease its standards. To match what other banks were offering, it allowed some home builders to borrow money with little or no money down.

“I guess we got careless to some degree and loaned too much,” Shepherd said.

In spite of its ominous-sounding name, a cease-and-desist order does not signal a bank is doomed to fail. In fact, Shepherd says, Bank of Georgia is better equipped to right its ship than many other banks as the industry shakeout continues. The pace of bank failures has been increasing in recent months both in Georgia and across the nation.

For Bank of Georgia, getting its house in order won’t be easy, particularly if the economy fails to recover anytime soon. Shepherd and Gable acknowledge that it will have to change its business plans substantially.

Plans to scale back

Moving forward means, more than anything, that the bank must lower its ambitions. The Bank of Georgia that emerges from the crisis, Shepherd and Gable say, will be smaller and grow much more slowly than the company that prospered during the housing bubble.

The plan is to scale back by shrinking the bank’s overall loan portfolio — a move that will help the bank maintain its regulatory capital levels even as its capital cushion deteriorates amid mounting losses.

That means not renewing some loans and passing on other business opportunities.

“There are some types of lending that we’d like to do, but we know we have to shrink the size of the bank,” Shepherd said.

This business strategy calls for fewer loans to home builders and an increase in consumer loans such as home equity lines. The bank also hopes to finance more loans to professionals like lawyers and doctors who want to buy the buildings they practice in.

Those loans won’t come as easily as before. The bank has hired a senior credit officer to give loans an extra layer of scrutiny, and is requiring more information from borrowers. Loan applications that once ran four pages are now 20 pages thick.

The bank has trimmed staffing levels by 15 percent, and doubled up duties for some employees, such as junior lenders who also serve as branch managers. Business travel has been curtailed, and the company stopped contributing to employee’s 401(k) accounts. Three of its nine branches are no longer open on Saturdays.

In all, the cost-saving moves save about $1 million a year, said Gable.

And, Shepherd notes, Bank of Georgia doesn’t have as large a hole to crawl out of as some more troubled banks.

Unlike many of the banks that have failed, Bank of Georgia has a relatively large capital cushion to absorb losses and has a bond sale planned to raise up to $5 million from investors. The bank also began to foreclose on delinquent borrowers early in the crisis, mitigating losses. And it didn’t dabble in some of the most risky practices, such as loan participations, in which banks buy pieces of loans originated by other banks.

Hurdles and hope

Bank of Georgia is just one of many Georgia lenders scrambling to overhaul their businesses.

How much regulators and lawmakers may be involved in reshaping how banks do business in the future is unclear. At both the state and federal levels, most new efforts have been aimed at stabilization rather than reform. The Georgia legislature will take up legislation regarding subprime loans in its next session, but many experts say they do not expect much in the way of new laws.

State banking leaders, meanwhile, have been indicating they believe they can reform the industry without new laws or regulations. (See accompanying story.)

Bank of Georgia’s turnaround efforts face many potential hurdles.