Out $40 Million, an Investor Reflects on a Rare Miss

As FSI Group LLC prepared to pour $40 million into Security Bank Corp. last year, it considered what it thought would be the worst-case scenario.

Things turned out far worse than anything the investment firm had imagined.

Last month regulators seized Security's six banks, wiping out the Macon, Ga., company's equity, including the money FSI had injected in April 2008.

"We planned for your typical recession," said Gerald R. Francis, a managing director of the Cincinnati investment firm, who served on Security's board after the infusion. "No amount of due diligence, though, could have predicted the macroeconomic environment. We didn't expect the complete collapse of the housing market, a complete closing of the capital markets, a complete changing of the landscape."

Francis led the turnarounds of First National Bank and Trust of Kokomo, Ind., and City Holding Co. of Charleston, W.Va., and was named American Banker's Community Banker of the Year in 2002.

However, he said, none of his turnaround experience could have helped him save Security.

"There was nothing that could have been done. The losses were there and the capital couldn't be replenished," Francis said. "This is a Great Recession and it has made it impossible to do turnarounds."

In the first quarter, Security's nonperforming assets soared 75% from a year earlier, to $390.9 million, or 14% of total assets.

Francis said the board and management team tried to be as proactive as possible in dealing with the problems.

"We kept doing deep-dive loan reviews to find the bottom, but it kept moving on us," he said. "Things kept getting worse and worse."

Loan losses left four of Security's six bank units undercapitalized by the end of last year. As the company searched for more capital, it never asked for more money from FSI — which never offered it, either.

"There was never even a thought of us putting more money into it," Francis said. "That would have been throwing good money after bad."

Francis said he felt Security was doomed after the financial market meltdown last fall, but it became apparent in the weeks leading up to the July 24 failure.

Still, Francis said that right up to the end the company was looking at every conceivable option for survival.

"They did everything humanly possible to save this company," he said. "There was nothing more we could or should have done … there were far, far too many substandard loans, too little capital and no access to capital."

Francis said the company also did its best to minimize the cost to the Federal Deposit Insurance Corp. by trying to keep deposit pricing in line. On March 31, brokered deposits at the company totaled $748 million, up roughly 5% from a year earlier.

When FSI announced its infusion last year, it said it would look for additional strugglers to invest in, but Francis said that Security has served as a cautionary tale. Instead, his firm may use the method that Joe Evans and his team used to buy Security's assets from the FDIC — partnering with a small community bank.

"I think it is a good model," Francis said. "It is certainly on the table for us."