Georgia's failed banks are multiplying, but very few homegrown institutions without private-equity backing are buying them.
On Friday, Community and Southern Bank in Carrollton, Ga., reinvigorated by a private equity group and bank turnaround expert Patrick Frawley, acquired three failed banks in the state with a combined $603 million of assets.
Regulators tend to prefer that existing banks, not groups of private investors, acquire failed banks, yet Community and Southern, along with State Bank and Trust Co. in Macon, Ga., has been able to put private-equity money to use in FDIC-assisted deals. Friday's pickups are among five such deals Frawley's bank has completed since a private-equity group revived it in January with an initial investment of $255 million.
Analysts say it will be some time before Georgia banks without outside funding will be in the running for failures.
"There won't be a whole lot of [local banks making deals] because if you're banking in Georgia, you've got a loan portfolio that has temporarily melted down," said Walter Moeling 4th, a partner at the Bryan Cave law firm in Atlanta.
The banks Community and Southern acquired Friday turned it into a $2.5 billion-asset state powerhouse, nearly doubling its prior total of 21 branches with 18 more offices in the greater Atlanta area and northern Georgia.
The bank's parent company, Community and Southern Holdings Inc., raised an additional $115 million in capital from existing shareholders to support its most recent deals and future acquisitions.
"Since they got the money, they've just been solid as a rock," Moeling said. "You're looking at a remarkably strong community bank franchise."
Analysts say Community and Southern and State Bank and Trust, led by Georgia banking veteran Joe Evans, are among only a handful of banks financially and managerially strong enough to win regulatory approval to buy failed banks in Georgia.
Meanwhile, the state is expected to continue to have an ample supply of failures in coming months, analysts said.
"The capital has not been available to reposition banks in Georgia," said Chris Marinac, a banking analyst at FIG Partners LLC. The private-equity-backed institutions "are a needed backstop" for the Federal Deposit Insurance Corp.
While Georgia no longer leads the nation in bank failures — so far this year that distinction goes to neighboring Florida, which has had 23 — it is third for the year (after Illinois), with 14 as of Friday. Georgia has maintained its No. 1 status in the number of bank failures that have occurred in this down cycle, 45 since Jan. 1, 2007, according to SNL Financial LC.
And increasingly those failed banks will be absorbed by groups like Community and Southern and State Bank and Trust, which were capitalized at just the right time to take advantage of the supply of failed-bank deals, analysts predicted.
Along with capital, regulators also want failed-bank bidders to have significant banking experience. Analysts say Community and Southern has succeeded because Frawley has worked both sides of the table — as a veteran supervisor at the Office of the Comptroller of the Currency and then as a bank turnaround expert.
One of Frawley's most famed takeovers was of the struggling Community Bank in Blountsville, Ala., in 2002, which he sold for two times book value four years later to Superior Bank in Birmingham, Ala.
His most recent experience produced quite the opposite results, though enhanced his reputation. Regulators asked him to run the ailing Integrity Bank in Alpharetta, Ga., in late 2007.
Though the bank failed in August 2009, Marinac said Frawley was "shepherding it to the grave," and likely reduced the size of the loss the FDIC had to take when Integrity closed.
"After Integrity, we started getting a lot of phone calls from bankers who were distressed and needing help," Frawley said in an interview Monday. "Every one of those have failed."
Frawley took a team of about a dozen Integrity bankers with him to start a consulting group. They got a front-row look at the state of banks in Georgia and began pursuing the capital it would take to resuscitate some of them.
Frawley's group entered the market by acquiring the $833 million-asset First National Bank of Georgia from the FDIC in January. In March, it picked up the $1 billion-asset Appalachian Community Bank from the FDIC.
On Friday, it acquired Bank of Ellijay, First Commerce Community Bank in Douglasville and Peoples Bank in Winder.
In less than eight months, Community and Southern has broken into some of what were considered the fastest-growing markets surrounding the Atlanta area before the real estate collapse. "They're building in markets where the most growth is likely to occur," Moeling said.
Still, it hasn't been easy for the bank to reach this point, and analysts said they don't expect it to get any easier for other investor groups, mainly because of the regulatory environment. "The capital was not the problem, it was all the compliance with regulation and vetting of investors," Frawley said.
Because of this, the company lowered its initial capital raising target from $400 million to about $200 million before it could get started, though it has since raised more capital.
Frawley said he wants to continue focusing on the northern Georgia area and suburban markets outside of Atlanta, home to many of the state's struggling banks, and to stick with failed-bank deals.
Community and Southern plans to integrate its latest acquisitions before making more bids, however. The bank has developed a bifurcated structure, with one team working on what Frawley calls the "good bank" of performing loans and organic growth, and another focusing on the "bad bank" of nonperforming loans and assets tied to the loss-share agreements.