In Depth

Banking: Mr. Cleanup


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.

The trouble with brokered deposits is that they let banks grow more quickly than their managers can handle. They're also riskier than local deposits: Because owners of brokered deposits have no personal relationship with the bank (no tellers greeting them by name or asking about their kids), they're likely to flee at the first sign of trouble or offer of a better deal.

Brokered deposits helped turn the Atlanta region's building boom into a banking boom. Old institutions expanded and new ones mushroomed: Regulators approved 112 new charters from 2000 to 2007. At some of the banks, brokered deposits accounted for upwards of 50% of their total. "It was very easy," says Edwards. "All you had to do was get on the Internet."

For a while it seemed as though almost anyone could scrape together some capital and open a bank in the Atlanta suburbs. Lawrence White, an economist at New York University, saw a similar pattern when he was a bank regulator involved in the savings-and-loan cleanup in the early 1990s. White says brokered deposits aren't bad per se but adds that "any time you see an organization grow very quickly, you have to worry."

"It's like a crowded escalator at the airport," says Joe Brannen, president of the Georgia Banker's Assn., a trade group. "If it stops suddenly, then everybody falls."

WILLPOWER AND OPPORTUNISMStretched out over an armchair in United's two-story brick headquarters, picking through one of the paper cups of boiled peanuts handed out during a recent Customer Appreciation Day, Edwards reflects on his bargain purchases of the past year. "I don't want it to sound like we're some kind of geniuses," says the third-generation banker. "My dad always told us not to think we were smarter than everybody else." The Edwards clan knows about opportunism: In 1990, when Jim's father, Joe, and uncle, Bill, ran the bank, they bought the building that's now United's headquarters for a pittance from a failed S&L. Their father, Joel, ran the bank before that.

The town of Griffin is a bit too far south of Atlanta to have been caught up in the real estate boom. While the surrounding farmland is pocked with new subdivisions, malls, and a seeming oversupply of Dollar General stores, downtown Griffin looks just as a Yankee visitor would expect, its wide main thoroughfare lined with towering shade trees and stately old homes.

Jim Edwards, who graduated from Emory University in 1987 and received his MBA from the University of Virginia in 1993, has long resisted the temptation to expand as quickly as some of the other banks inside the Circle of Death. While those institutions relied heavily on brokered deposits, United steered clear. Last winter that willpower started to pay off.

In December, First Georgia Community Bank, with four branches and $237 million in assets, failed. Founded in December 1996 and based in Jackson, First Georgia had been under the scrutiny of state and federal regulators for years. By 2006 about 50% of the bank's deposits were brokered, much more than the 20% to 30% level that regulators consider a red flag. Moreover, roughly half its total loans were to developers and construction companies, a worrisome concentration. As the real estate bust worsened, federal and state regulators pushed the bank into receivership.

At his office in Griffin, United's Edwards got an e-mail from the FDIC saying First Georgia's deposits and assets were up for bid. Edwards was intrigued for several reasons. United was in growth mode, opening new offices in 2004 and 2007. Being so close to Griffin, Jackson was one of the towns in its sights. And the price was right: United walked away with First Georgia's deposits for 88 cents on the dollar. It also got the option to buy any of First Georgia's loans at face value—it grabbed $60 million worth—and leave the others for the FDIC to deal with.

Nearly a year later those bad loans, many of them made to finance convenience stores and real estate development, continue to be a strain on regulators. "It just got too big, too fast," says Edwards. United is still renting office space at the Jackson branch to FDIC operatives working through the mess.

Yet First Georgia wasn't the Circle of Death's worst disaster. FirstCity Bank, based in Stockbridge, about 30 miles northeast of Griffin, was so rancid by the time potential buyers took a sniff that they passed on everything—even the healthy assets.

Stockbridge is in Henry County, just on the outskirts of Atlanta. An easy commute to downtown or to Atlanta's Hartfield-Jackson Atlanta International Airport, Henry County enjoyed phenomenal growth during the boom. The crash has been correspondingly brutal. Edwards says he has heard bankers with plenty of their own problems joke: "We may have made a lot of bad loans, but at least we didn't lend in Henry County."

FirstCity was a bubble bank like few others. In 2001 a group of local investors including David Everitt, a mortgage broker, bought the charter of the 94-year-old Bank of Gibson, moved the bank's headquarters to Stockbridge, renamed it FirstCity, and devoted the enterprise almost completely to making loans to local builders. By the end of 2008, FirstCity's assets had soared fifteenfold, to $285 million. The bank, run from an office in a mall, supplemented its small base of local deposits with a generous helping of out-of-state money. At the peak, brokered deposits accounted for 67% of FirstCity's capital.

Everitt, a former chairman of the bank, says FirstCity for years had more business than it could handle. But the real estate bust was so sudden and so devastating that loan demand dried up overnight and defaults surged. "It shocked all of us," he says. Everitt claims he lost $6 million in the collapse.

When banking authorities invited Edwards and others to evaluate FirstCity, he took only a quick peek before passing. Unable to find any bidders, regulators were soon forced to shutter FirstCity and send checks totaling about $100 million for insured deposits to the bank's customers. Two other failed Georgia banks have proven similarly unappetizing to healthy banks, resulting in government payouts of about $1.5 billion.

Edwards wasn't finished trawling for bargains, though. In September he bought Newnan-based First Coweta Bank for $167 million. First Coweta's story is classic Circle of Death: A small community bank grows in a hurry on real estate loans and brokered deposits, then crashes. In June regulators issued a cease and desist order, giving the bank 60 days to clean up its loans and raise new capital—and barring it from taking new brokered deposits or making loans, even to good customers.

Edwards thought there was a decent business amid the wreckage. Regulators asked him and other potential bidders to examine the books discreetly: They slipped into the branch through the back door, having been instructed not to wear clothing bearing bank logos. "They wanted people to think you were an auditor or something," says Edwards.

Regulators, increasingly eager to sell ailing banks, were offering attractive terms. In addition to buying First Coweta's deposits at a discount, United grabbed all of the bank's $105 million in loans under a "loss share" deal: The FDIC agreed to eat the first 80% of losses on those loans, while United is on the hook only for the remainder.

Dennis Trimper of the FDIC's Dallas office spearheaded the Friday night seizure and turnover. After the branch closed for the evening, he brought Edwards and his team into the branch through the back door. They quickly began poring over the books. "He was there with about 80 people from the FDIC, and they went right to work basically auditing the bank, so you knew exactly what you were getting when you opened for business on Monday," says Edwards. "I don't think he slept all weekend, which is pretty amazing for a government employee." Trimper declined to comment.

A sweet deal for Edwards was even sweeter for employees: Of the 40 or so employees of First Coweta, all but five are still with the bank. "I don't think we could have gone out and handpicked a better acquirer," says Harold McCoy, vice-president of retail lending at First Coweta, now United.

United being a family bank, it put John Edwards, Jim's cousin, in charge during the transition. John, 49, is United's chairman. (Two other Edwardses work for United: Jim's younger brother, Chris, is the chief information officer, while John's older sister, Allie, is a lawyer.) John, beefier than Jim and a bit more blunt, has done a good job of bringing First Coweta into the United fold, say employees. One customer, Unity Baptist Church, faced the prospect of losing part of a construction loan that had been arranged by First Coweta. When United took over, John Edwards set up a meeting with the church. "He looked me in the eye and told me this was the first loan United Bank is going to do here in Newnan," says Carey Jackson, 54, a deacon at the church.

Saving two community banks has bolstered Jim Edwards' reputation in the Atlanta suburbs. "He's the man on the white horse," jokes Brannen of the Georgia Banker's Assn. "He shows up and people say, 'Oh, thank God, it's Jim.'"

LOOKING FOR A SAVIORThe bad news for the FDIC and the Georgia economy is that Edwards is done making deals for a while. Integrating the new branches, employees, and assets is consuming all of his time. "I can't say if something came along we wouldn't take a look at it," he offers while cruising in his 11-year-old black Mercedes from Newnan to Griffin. "But for now I think we have enough on our plate."

That means bankers like Pat Shepherd will have to find rescue elsewhere. Shepherd is a founder and CEO of Bank of Georgia, in Peachtree City, which lies between Griffin and Newnan. It's headquartered in a new and nondescript office park just off a highway that's lined with competitors: Regional giants BB&T and Suntrust are just around the corner from Bank of Georgia, while rival Delta Credit Union is a few miles up the road.

In 1999, Shepherd, an effusive and informal career banker with salt-and-pepper hair, hooked up with some other investors, amassed an $11 million grubstake, and opened Bank of Georgia. Building loans were soon fueling fast growth: Between the end of 2003 and this June, the bank's assets more than doubled, to $448 million, with over 85% of its loans in real estate.

Now Shepherd, an avid duck hunter, is fighting to save his bank. In August the FDIC and the Georgia Banking & Finance Dept. placed First Georgia under a cease and desist order. After that, says Shepherd, it was hard to overcome the impression among locals that "Y'all are going down in 60 days."

Shepherd says he's optimistic about the bank's survival but admits his efforts to attract new capital haven't yielded much. He has tried without luck to sell bonds and has talked with private equity firms about acquiring a stake. As for healthy institutions that might be interested in buying his bank outright, he says: "In Georgia, there aren't a whole lot of them."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkWalking WoundedThe Georgia banks that weathered the collapse of the housing market could yet be knocked out by losses on commercial property loans, wrote Paul Donsky in the Atlanta Journal-Constitution on Oct. 17. One sign of trouble: In Atlanta, the retail vacancy rate has risen by almost 50% in the past two years, Donsky reported.To view the story, go to http://bx.businessweek.com/banking-industry/reference/
Carbonara is a senior writer for BusinessWeek.

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