Banking: Mr. Cleanup

At the epicenter of the financial crisis, small-town bankers like Jim Edwards are building their businesses by mopping up the damage to their communities

A photo illustration of United Bank's Edwards Photo illustration by Sean McCabe, based on a photograph by Ann States

By Peter Carbonara

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Georgia's financial crisis is making accidental heroes out of people like Jim Edwards. The 44-year-old Edwards is CEO of United Bank, a small, family-controlled outfit based in Griffin, about an hour's drive south of Atlanta. Late last year he began to turn United's sleepy headquarters into a hotbed of dealmaking, at least by the standards of suburban Georgia. At the invitation of regulators, Edwards in December took control of First Georgia Community Bank in Jackson, one county to the east. Last month he acquired First Coweta Bank, 45 minutes to the west of Griffin, making United the only bank in the state to buy two failing neighbors.

Edwards emphasizes that the deals were nothing more than opportunities to expand at bargain prices. But they were also acts of public service, if unintentionally. United's arrival in Jackson and Coweta reassured frightened depositors, kept most bank employees in their jobs, and made it possible for two institutions that had lumbered along for months as virtual zombies to resume lending to good customers. "It was really stressful for employees and customers," says Edwards, "They really welcomed us."

Regulators need many more people like Edwards to help clean up America's banking mess. While some big lenders are returning to profitability, the Federal Deposit Insurance Corp. and other government agencies are still very much in crisis mode. Some 106 banks have failed in the past year across the U.S., and 416 others are on the government's watch list.

With its cash reserves depleted from all the recent seizures, the FDIC is desperately looking for healthy banks to buy troubled ones, or at least some of their assets. If it can't find buyers, it will be forced to shutter banks and write checks to depositors for up to $250,000 apiece. That requires massive outlays; it could also lead to years of economic stagnation in the affected regions, with capital-starved businesses and consumers competing for scant loans.

Nowhere is the task before regulators more difficult than in Georgia. California and Florida may garner more headlines, but the Peachtree State is the Bank Failure Capital of America, accounting for 20 of the nation's 106 blowups. By one commonly used measure, the so-called Texas ratio of bad loans to total assets, 49 other Georgia banks, about one in six, are in imminent danger.

Georgia leads the nation in bank failures partly because it has so many banks: There's one for every 29,000 citizens, among the highest concentrations in the U.S. An antiquated law in place until 1996 protected local Georgia banking monopolies by making it difficult for a lender based in one of the state's 159 counties to open a branch in another. As a result, Georgia has always been glutted with small banks: Despite the recent failures, the state still has 309 of them.

Yet most of Georgia's problems are limited to a 50-mile radius around Atlanta, a region now known to regulators, bankers, and realtors as the Circle of Death. Like other Sunbelt areas—Las Vegas, Phoenix, and the Florida coast—the Atlanta suburbs got swept up in the building boom of the early and mid-2000s. But the banks inside the Circle of Death were more reckless than most.

Anxious to make loans and starved for cash, these tiny banks used a common but little-known tool known as "brokered deposits" to attract out-of-state money. Brokered deposits come in a variety of forms, but usually they're short-term certificates of deposit. In a typical transaction, an independent broker connects a bank with a wealthy investor or institution seeking a high rate of return on cash and FDIC protection, having gone over the $250,000 limit at other institutions. The bank pays the brokers for their efforts.

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