And the winner is…Georgian Bancorporation
When Ken Barber and a group of seasoned bank investors launched suburban Atlanta-based Sweetwater Financial in 2001, they knew it would take guile and creativity to create the shareholder value they envisioned. Barber had headed Citizens & Merchants State Bank in the 1980s and early ’90s, before selling for a nice premium to Synovus Financial in 1996. But the same build-and-sell strategy no longer seemed adequate for the times. Atlanta boasts more than 100 smaller community banks, many with roughly the same thing in mind. “From the very beginning, the board knew we needed to do something different to create shareholder wealth,” Barber recalls.
Even so, none of the directors could have envisioned the events that transformed what two years ago was an undistinguished $70 million business bank into one of the fastest-growing financial institutions in the country. Today, the companyu00e2u20ac”now known as Georgian Bancorp.u00e2u20ac”boasts $700 million in assets and more than $600 million in deposits. Its presence has swelled from one small office in Powder Springs, a western suburb, to a five-branch arch stretching like a canopy over the top of booming Atlanta. A push to buy out smaller shareholders has fueled an active market in the once-thinly traded shares, providing a handsome 50% payoff for some original investors.
Directors made some significant sacrifices in getting to here from there, and not all were happy about it. Only two original outside board members now sit on the holding company board. While four more got slots on a new bank board, others were relegated to “advisory” positions, ceding some of the status that comes with being a bank director. “The vote was unanimous” in support of the change, says L. Charles Watts, a lobbyist for the Community Bankers Association of Georgia and a director who remains on the holding company board. “Some of the directors didn’t get what they wanted, and had to hold their noses to vote that way. But they realized what a fantastic opportunity it was for shareholders.”
The story begins in 1993 when Gordon Teel, a former accountant turned banker, lined up some investors and bought $80 million Cherokee Federal Bank in Atlanta. “The idea was to find an existing, operating financial institution, inject a new management and business planu00e2u20ac”and, if necessary, new capitalu00e2u20ac”and use it as a platform for a quick start,” explains Teel, 61. Doing this “saves a year or more of time from a traditional de novo opening, because you already have an operating environment and some momentum.”
Teel transformed Cherokee into $348 million Bank of North Georgia in less than five years. In 1997, the company reported net income of $4.9 million and a return on equity of 22.45%, according to FDIC call report figures. A year later, it was sold to Columbus, Georgia-based superregional Synovus, because “we couldn’t generate enough capital to support the growth that was obviously available to us,” Teel explains.
After serving as a Synovus regional manager for five years, Teel left in 2003, lining up another group of investors intent on duplicating the success of Bank of North Georgia. Past experience brought one significant change: “We started with $4 million last time and ran out of capital,” Teel says. “So this time we built into the strategy that we’d have a minimum of $50 million in capital.” Such an amount would provide a $15 million lending limitu00e2u20ac”enough, Teel figured, to make it a lender of choice for middle-market companies that didn’t like dealing with giants such as SunTrust Banks and Wachovia Corp. that dominate that niche in Atlanta.
Teel, who had $40 million in commitments from key investors, shopped his idea to more than a dozen banks. Most listened respectfully, but passed. The plan required that the investing bank’s shareholders pony up about $10 million in additional capital themselves. It also called for Teel and his supporters to take operational control of the organization. “There was a lot of ego involved. Most of the boards and CEOs didn’t want to subordinate their roles unless there was a liquidity event involved,” he says. “We wanted a solid platform, not an acquisition with a big premium and people cashing in their chips and bolting for the door.”
When Teel approached Barber, he got a different response. Barber, 50, had worked closely with Teel at Synovus. “I was comfortable with Gordon, and I understood his philosophies,” not to mention his past successes, Barber recalls. “The biggest con from my standpoint was giving up control. I would have to give up being CEO, and, as the largest shareholder, my stake would go from 10% to 3%.” It was a difficult decision, but Barber decided the plan would provide a better long-term payoff, because banks in the $1 billion to $2 billion range fetch higher multiples. “I’ve seen ego kill so many good deals,” explains Barber, who today is vice chairman and a director. “I concluded my investmentu00e2u20ac”and the investments of other shareholdersu00e2u20ac”would be enhanced by doing this.”
Barber brought Teel’s plan to the Sweetwater board in May 2003. With several former politicians and other connected business leaders, it was a strong group in its own right. Those directors had pledged their allegiance to Barber, whose profitability track record wasn’t too badu00e2u20ac”in 2000, his last full year running Citizens & Merchants for Synovus, the bank had a 27.66% ROEu00e2u20ac”and were willing to listen because of his support. “We were working under Ken’s leadership,” says Fred Bentley, Jr., a local attorney and member of the Sweetwater board. “If it had just been his job, Ken might have taken a different view. Because he was an investor, he had a long-term perspective.”
What they heard was breathtaking in its scope and had an ambitious timetable, so directors rightly had questions. Teel already had hired a stable of top-notch bankers. While they had been booking loans, warehousing them with various institutions, the compensation costs were mounting. The goal was to raise the capital via a private placementu00e2u20ac”by far the most capital ever solicited that way in Georgia bank historyu00e2u20ac”and to overhaul the business plan in just three months. “The board’s biggest concern was understanding the business proposition. How will this differentiate the bank? What will happen to create greater value?” recalls Walter Moeling, a partner with law firm Powell, Goldstein, Frazier & Murphy LLP in Atlanta, who represented Teel in the negotiations.
“When someone says, ‘We’re going to raise $50 million, and we’re going to do it in a matter of weeks,’ it raises some red flags: How would he raise so much? What’s the hurry?” Moeling adds. “In this case, it made perfect sense. [Teel] had a payroll he was supporting, and he needed to move rapidly to implement his plan. But it raised some questions.”
Teel, known to most Sweetwater directors by reputation only, wasn’t exactly forthcoming about his funding sources, they recall. That gave some pause. “We weren’t quite sure how he would accomplish his [fundraising] goal, or how he would market the offering,” says Bentley, who is on the Georgian holding company board. But Teel did soothe board member concerns about another key worry: the fate of existing employees. “Gordon assured us that, if they did their jobs, they’d stay in place,” Watts says.
By September 2003, the funds had been raised and Teel and a new hybrid board were in charge. Because the deal didn’t technically involve a change-in-control, regulators were only required to sign off on a new business plan, rather than approve a merger. While the exercise felt, to some, like a leap of faith, the proposition’s allure wound up being too powerful to turn down. “This was like taking a small community bank and putting rocket boosters on it,” Bentley explains. “We think we have an excellent chance for success. You don’t get many opportunities like that.”
A year later, Georgian is a work in progress. Net income for the first half was just $197,000, according to FDIC filings, and ROE was an anemic 0.69%. Chalk it up to growing pains. Under Teel, the chairman and CEO, assets have been increasing at a rate of $40 million per month, an outlandish pace for a community bank; deposits are close behind. Total equity capital is $57 million, and no loans are more than 30 days past due.
Such figures indicate a bright future. Assuming all goes as planned, the primary benefits will accrue to the 235 shareholders with enough money or gumption to stay on board. This summer, Teel began buying out smaller investors to halve the shareholder base, bringing it to below the SEC cutoff of 300 in order to take the company private. “We brought in $50 million in capital, and those [larger] investors have a right to know how things are going. But right now, I can’t tell them anything without filing an 8K, because we have to treat all investors equally,” Teel complains. “It’s very frustrating.”
Board members say they wholeheartedly back the move. Indeed, Watts increased his investment threefold when Teel came on board, to $1 million. “If we hadn’t signed on with Gordon, we’d be maybe a $110 million bank now,” he says. Once that figure was considered respectable; today it seems paltry compared to the ambitions of a board that rolled the dice on a new vision.