Georgia's Banking Landscape

The industry has struggled – Georgia leads the nation in bank failures. There are a few bright spots, but bankers worry about the costs of new regulations.

Payback Time: CEO Mark Tipton’s Georgia Commerce Bank was the first bank in Georgia to repay TARP funds to the federal government.

Payback Time: CEO Mark Tipton’s Georgia Commerce Bank was the first bank in Georgia to repay TARP funds to the federal government.

Adam Komich

“In the land of the blind, the one-eyed man is king.” It originates with 16th century Dutch philosopher Desiderius Erasmus. But it’s also a lyric from the Tom Waits song, Singapore, and a line from the Steven Spielberg film, Minority Report.
 

And just lately, it’s been dusted off by CEO Mark Tipton to explain the relative success of Georgia Commerce Bank at a time when the concepts of “success” and “banking” are almost mutually exclusive, especially in Georgia, which leads the nation in the number of bank failures since the financial crisis began.


 

“We’re lucky to have that one good eye,” Tipton says. “Because I’d say we certainly have taken our lumps. No one is immune when the economy goes into a free fall. If you bank in this economy, you’re going to feel it.”
 

Nonetheless, the bank he runs is managing to raise capital, and it is the first bank in Georgia to repay its Troubled Asset Relief Program (TARP) investment to the federal government.
 

TARP, the Bush administration’s response to the subprime mortgage crisis, benefitted financial institutions of all sizes, including 26 banks headquartered in Georgia. Buckhead/Atlanta-based Georgia Commerce Bank made its $9.1-million payment to the U.S. Treasury Department in February, fulfilling its obligation. Two more banks, including Georgia’s largest, SunTrust, have followed suit and repaid their TARP investments as of July.
 

“TARP was a good deal for us, and it was something we were proud to be a part of, and we’re proud we paid it off,” Tipton says. “It morphed into something that became a negative label – a bailout. We never felt like we bailed out, though. We used it in the spirit it was intended, to help get the economy going by loaning money.”
 

But the program couldn’t save everyone who received a TARP infusion – Tifton Banking Company, which received $12 million from the federal government, went into FDIC receivership last November. It’s just one of the 67 banks that have failed in Georgia (through mid-July) over the past four years, costing the FDIC insurance pool about $9 billion.
 

While many banks continue to struggle, many on the brink of closure, others are seeing a little light with that one good eye, and some that already have failed are feeling bullish in their new skin under different ownership.
 

But the cycle isn’t over yet. There are plenty of banks in Georgia with cancerous assets, banks that gorged like ticks on residential real estate, in retrospect a sucker bet that has wounded an entire industry. And with new, costly and complex federal regulations in place, smaller banks will be challenged to achieve new levels of compliance while trying to replace the revenue stream that used to flow from housing-related finance.
 

So while there are signs of hope in some corners of the industry, the situation is still scary, the state’s chief regulator indicates.
 

“Unfortunately, many banks are still saddled with a large number of non-performing real estate loans that will cause them to struggle until the housing market strengthens,” Georgia Depart-ment of Banking and Finance Com-missioner Rob Braswell writes – as a rule, he refuses to give in-person or telephone interviews (recorded or otherwise) but will provide written answers to questions via email.
 

Braswell’s email indicates that 65 percent of the banks in Georgia “have less than satisfactory earnings and/or capital levels.”
 

But, he adds later, “We are seeing signs of economic stability that we hope will allow ‘at risk’ banks the breathing room re-quired to restore themselves to a healthy condition,” and, “we have seen a reduction in the level of exposure at Georgia banks to some of the higher risk segments of real estate lending,” which he claims is partly due to increased regulatory scrutiny – this in a year when Georgia lost 12 banks through June, and in spite of his department’s larger workload combined with limited resources (including fewer examiners).
 

“It’s been extremely challenging over the last three and a half years,” Braswell writes, but, “I am heartened that we have already weathered the worst of the storm and that our department has come out the other side on solid footing.”
 

The industry he regulates and the citizens he claims responsibility for in writing haven’t quite reached (or clearly seen, for that matter) the proverbial other side, but a number of banks – such as Georgia Commerce Bank – and industry advocates are en route, treading confidently, if carefully, through the land of the blind.


 

Playing By New Rules


Joe Brannen and Carolyn Brown might be the leading voices for the state’s banking industry. He’s president and CEO of the Georgia Bankers Association (GBA) and she holds the same titles for the Community Bankers Association of Georgia (CBAG).
 

It is June, and they are concerned about what they can’t yet see, wondering how much it will cost their constituents to play by the new rules. Specifically, they are worried about the onset of the Dodd-Frank Wall Street Reform and Consumer Protection Act (which took effect July 21), and what they think will be a burdensome load of new regulations that the American Bankers Association predicts will bury more than 1,000 banks by the end of this decade.
 

“I believe Congress missed a great opportunity to fix what was wrong on Wall Street, and in the process they have the potential to kill Main Street,” Brannen says. “The same rules that apply to large Wall Street banks are going to apply to small community banks in this new era, and that will present an enormous compliance burden.”
 

More than 5,000 new pages of new rules are expected from the Consumer Financial Protection Bureau (CFPB), the new federal agency with wide-ranging powers to regulate financial products and services, created by the reform act.
 

Most banks have someone who is a dedicated compliance officer keeping up with new and changing regulations, but often, especially at smaller community banks, it’s someone wearing several hats doing it on a part-time basis. Some banks, though, seem to be prepared.
 

“We have put what I consider world-class resources in our risk and regulatory compliance areas,” says Joe Evans, chairman and CEO of State Bank & Trust Co.
 

“I don’t have any more control over the regulations that I operate under than truckers have over the weight they’re allowed to put on the back of their trucks or the price of diesel. So my job is to comply as effectively and efficiently as I can, and to run my bank accordingly, and make it balance out.”
 

But, then, Evans took a $30-million Dooly County bank (State Bank & Trust Company) and turned it into one of the state’s most valuable banking companies (with nearly $2.7 billion in total assets and about $2.2 billion in total deposits) after acquiring Security Bank of Macon and several other failed banks in a series of FDIC-facilitated transactions.
 

“If we were a $500-million bank, I don’t think I could afford world-class resources,” Evans says. “There’s a greater scale today that I think a bank needs to be in order to competently deal with regulator expectations and at the same time be a really great provider of financial services for its customer base.
 

“Smaller financial institutions are going to feel the pressure, because you have fewer people trying to dribble a lot of balls.”
 

Brannen says a cottage industry is growing in the midst of the pressure Evans is talking about, “consulting companies that are hiring former bankers and beefing up in anticipation of the tsunami of new regulations coming at us.”
 

Companies like MSB Compliance provide regulatory compliance consulting services to money service businesses like check cashers, check sellers and money transmitters, as well as banks, especially community banks.
 

“There are greater expectations on senior management and boards of directors, and those people responsible for the actions of the bank and whether or not the bank is complying properly and effectively,” says MSB’s president, Jay Postma. “We help them figure out how to make sure they’ve done enough when they’ve got limited resources and a lot of pressure on their earning potential.”
 

Brown expects the Dodd-Frank’s most immediate impact could come from the “Durbin Amendment,” which puts a cap on interchange rates that banks charge for debit card transactions. Though the amendment is meant to target very large banks, Brown says smaller banks will feel the pain.
 

When you buy something at your local SuperDuperMart with a debit card, SuperDuperMart ultimately pays a transaction fee to your bank. Durbin gives the Federal Reserve authority to cap this fee, this interchange rate (the Fed has proposed a cap that is about 30 percent of the standard rate). That’s just a small but significant part of the complex amendment to the already complex Dodd-Frank Act.
 

“Many big banks have already announced decisions to charge certain fees for debit cards or debit transactions, or to do away with free checking accounts,” says Brown, who believes community banks will consider similar actions if they experience substantial income loss due to the debit card interchange rule.
 

“Obviously, this means consumers are likely to pay more for their banking services,” Brown says.


 

From Rubble To Empire


In early 2007, a private equity company in Atlanta called Bankers Capital Group, led by Joe Evans, formed an alliance with Vulcan Capital, an investment company owned by Microsoft co-founder Paul Allen.
 

“We were looking for significant bank recapitalization opportunities and significant distressed asset opportunities,” says Evans who, along with his partners, had recently sold Flag Financial Corp. “We were fortunate to have an intact management team that was on the sidelines with some capital of our own and access to capital at a time when things began to unravel.”
 

The partnership never yielded a single transaction, but it opened a lot of doors for Evans and his group.
 

“It got us inside a lot of shops,” Evans says, “partly because we had a good banking reputation and partly because Vulcan had the reputation of having a pretty deep pocket.”
 

One of the shops was Security Bank of Macon, the fourth largest lender in Georgia, which was being buried alive by real estate-related losses. After the partnership with Vulcan was terminated in early 2009, Evans heard from an old friend, Tony Collins, interim CEO at Security Bank.
 

“He told me the best possible outcome he could envision at that stage would be for an organization like ours to put together an FDIC-assisted recapitalization of Security Bank,” Evans says. “So we put ourselves in position to bid on Security when and if the FDIC decided to intervene.”
 

Bankers Capital Group needed a charter. They ap-proached tiny State Bank & Trust Company in Pinehurst with a proposition for taking control of that bank if two things happened: They could raise the capital to acquire Security Bank, and they put in a winning bid.
 

Evans’ group gave the Pinehurst bank a modest (undisclosed) amount of earnest money and went into action, raising $300 million from 22 investors (many of whom had been investors in Flag Financial). They agreed to share losses with the FDIC on a large portion of Security’s assets, sealing the deal in July 2009.
 

Since then, State Bank & Trust has soaked up other failed institutions, like The Buckhead Community Bank and First Security National Bank, and by February of this year had become the state’s third most valuable bank (trailing only SunTrust and Synovus), with a market capitalization of nearly $570 million.
 

Now headquartered in Macon, State Bank & Trust’s footprint covers three contiguous MSAs – Atlanta, Macon and Warner Robins. “That geographically compact area represents about 65 percent of the banking deposits in Georgia,” Evans says.
 

While Evans was trolling for his next big thing in the center of the state, a pair of century-old Habersham County banks heavily invested in ADC loans (acquisition, development and construction, specifically as relates to the residential real estate market) – like almost every other struggling bank – were about to relinquish local control.
 

Cornelia-based Community Bank & Trust (CB&T) went down in January 2009. Its rival for 100 years, Habersham Bank, went down in February 2010. South Carolina Bank & Trust Co. (SCBT), based in Orangeburg, S.C., acquired both banks in FDIC-assisted deals.
 

“We’ve been a very financially sound company, profitable throughout the economic downturn,” explains Jeff Fulp, SCBT’s Georgia market president.
 

Basically, SCBT – which has its eyes on resurrecting more failed banks along the I-85 corridor and in northeast Georgia – never got fully sucked into the risky real estate loan business, focusing much of its attention on the safer owner-occupied commercial real estate, the same sort of strategy that’s worked well for Georgia Commerce Bank.
 

“It’s income-producing real estate,” says Georgia Commerce Bank CEO Tipton. It lends to small local businesses with wide-ranging pocketbooks, businesses like Advance Auto Parts, Walgreens and Dollar General.
 

“We’re also very focused on the medical community, privately held professional practices,” says Tipton, whose bank now has about $420 million in assets and managed to raise about $21 million late last year to more than cover its TARP tab. “With a hundred thousand companies in a $100-billion banking market, we feel like we can afford to be selective.”
 

That’s a good thing for Tipton and his company, but this is the era of one-eyed clarity. Yes, there is the occasional hopeful sign – more than three in five Georgia banks were profitable in the first quarter of 2011, says CBAG’s Carolyn Brown, who adds, “The majority of the banks are stabilizing.”
 

But Joe Evans, even as he grows a giant from the rubble of destroyed banks, wonders what the future will be like for community banks. Bad assets lurk like land mines, especially at smaller banks with a heavy reliance on residential real estate.
 

“The housing boom was a huge revenue source for the community banking sector, and most of the banks that were the beneficiaries of the boom are struggling right now,” Evans says. “Where is the revenue source that will replace that big piece of the revenue stream that came from housing-related finance?
 

“The principle of sticking to your knitting is inevitably going to lead to concentrations, and how to manage that is a forever challenge to small banks. It’s not new. It certainly came to a head with the housing collapse, because we’d all been led to believe that housing only appreciates.
 

“Well, there are two principles that are always butting heads, the natural conflict of being a small bank, “ he says. “One is don’t put all of your eggs in one basket. The other is sticking to what you know.
 

“It’s the great dichotomy of the banking industry right now.”
 

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