Saturday, June 26, 2010

Former regulator looks to capitalize on an industry’s struggles

From bank regulator to buyer

By Russell Grant

The Atlanta Journal-Constitution

1:55 p.m. Saturday, June 26, 2010

For years, Patrick Frawley has been on the short list of turnaround artists that troubled banks call for help.

Along the way, the 59-year-old former bank regulator and CEO-for-hire built a reputation for taking on tough turnaround jobs, and gathered a strong team of managers to help him fix struggling banks.

Now Frawley has drawn up his own short list — of acquisition targets. Frawley is buying Georgia banks seized by the Federal Deposit Insurance Corp., joining other buyers that experts say are hoping to cash in big by retooling the state’s struggling banking industry.

With backing from individual and private equity investors, his firm, Community & Southern Bank, has bought two banks so far this year in Carrollton and Ellijay, totaling 425 employees and $2 billion in assets. Frawley’s firm has since taken a break to clean up some of the messes that come with failed banks, but it could be hunting for new deals later this year.

“We’re not in this thing to make a quick buck,” said Frawley, who splits his time between Smyrna and Huntsville, Ala. “At the end of the day, we want to have a real franchise.”

That said, Frawley and other players are clearly hoping to profit from buying crippled banks at potentially steep discounts with the help of the FDIC, which often agrees to shoulder some of the risk.

When the banking industry does recover someday, “the returns to investors will be very, very, very strong,” predicted Jeffrey Adams, managing director in Atlanta for investment banker Carson Medlin Co.

The deal has “definite upside potential,” countered Frawley, but profits aren’t guaranteed. “There’s a lot of uncertainty.”

A multi-phase career

Frawley will be “incredible” in his new venture, predicted former bank director Neal Reynolds, because “he doesn’t panic” and the FDIC trusts him.

Reynolds hired Frawley in 2007 for a doomed attempt to keep Alpharetta-based Integrity Bank from failing. Frawley’s venture could make him millions when the banking industry recovers, said Reynolds, now owner of an Atlanta marketing firm.

“Rightly so. He’s been biding his time doing a great job,” said Reynolds.

Indeed, the slow-burning wildfire rolling through Georgia’s banking industry seems to be just the kind of situation that Frawley has been preparing for his entire 37-year career.

He is best known locally for his effort to rescue severely damaged Integrity Bank, which sank almost two years ago in a sea of bad real estate loans allegedly created by the bank’s previous management. Two former executives and a Florida developer were indicted on federal conspiracy, bank fraud and bribery charges last month.

But long before Frawley again rolled into metro Atlanta to take on the Integrity job, he was laying the foundation in a multi-phase career, in which he built ties to scores of bank regulators, bankers and money managers.

A fast starter

Frawley grew up in the Washington, D.C., area, third of six sons and daughters of a homemaker and the owner of a commercial paint sales business.

The family’s income was “middle class at best,” said Frawley. He started working in sixth grade and worked his way through college at Campbell University in Buie’s Creek, N.C.

He continued the same focus as he began Career One — bank regulator — landing his first job out of college as a bank examiner with the federal Office of the Comptroller of the Currency.

Frawley was soon promoted to national bank examiner, and more promotions followed. “I went anywhere there was an opportunity, and I told them I would move tomorrow,” he said.

By 1983, after 10 years and six moves, Frawley was in Atlanta, where he headed bank supervision for the comptroller’s Southeastern region, covering nine states.

After three years, Frawley, having hit the agency’s pay ceiling, jumped to the private sector. In 1986, he began Career Two: senior credit officer at what was then Atlanta’s Citizens & Southern bank.

While the bank eventually became part of Bank of America, Frawley rose through the ranks to treasurer and then head of regulatory affairs.

“That was a very pleasant job because several of the examiners used to work for me or with me at the OCC,” said Frawley.

By 2002, Frawley was ready to try something else.

Turnaround expert

Career Three — bank troubleshooter — began when he got a call from a lawyer friend representing a troubled bank near Birmingham. Community Bancshares’ longtime CEO, Ken Patterson, was close to being indicted for fraud; the bank needed someone to step in and fix the bank, Frawley’s friend said.

Frawley wasn’t sure he wanted the job, but he paid a visit. Within months he was its CEO.

Frawley said the bank faced “the typical kinds of things that I had seen in problem bank after problem bank, all of which were fixable.”

He replaced the bank’s managers, smoothed things over with regulators, raised capital and settled more than two dozen lawsuits. By 2006, he had reached a deal to sell the bank for more than $100 million.

Soon, he got a call from Integrity Bank’s board. They wanted Frawley to do the same thing there, said Reynolds, the former Integrity director.

The bank was struggling from losses on soured real estate development loans, and the board had been shopping for someone to replace bank founder and CEO Steve Skow.

By then, Reynolds said, he was talking almost daily to bank regulators. After meeting Frawley, he ran the CEO candidates’ names by them.

“When I mentioned his name, they said: ‘Yes, we know Pat Frawley.’ ... They were very impressed,” said Reynolds.

Surprises at Integrity

When Frawley came on board in September 2007, soon bringing his management team with him, he did “an incredible job,” said Reynolds. He sent daily reports to the FDIC and confidently put together a rescue plan “when bombs are falling all over the place.”

Frawley said he worked with the same FDIC case manager who monitored his turnaround efforts in Alabama. “It was like old times,” he said.

But the Integrity turnaround didn’t work. The FDIC seized the bank a year later — the first of more than three dozen Georgia banks the agency has since closed.

Frawley said he knew within a few weeks that Integrity’s problems were much worse than he had expected.

The bank’s directors “were stand-up guys and totally truthful,” he said, but “they didn’t know the total condition of the bank because management wasn’t giving them the kind of information they needed.”

Because of a loophole in state banking law — since closed — Integrity Bank had exceeded its $25 million legal lending limit with more than a dozen borrowers. One borrower owed $85 million.

“I was just blown away by that,” said Frawley.

The bank also was masking its problem loans.

“It was a lot worse than what I” expected, he said. “I thought about leaving but I decided to hang in there ... because I didn’t create the problems. ... I wasn’t worried about it damaging my reputation.”

From fixer to owner

After Integrity Bank failed, Frawley continued to get calls from other struggling banks. He consulted with the ones he thought he could help, but turned aside those he didn’t think would make it.

“Life’s too short to do that when you know you’re not going to be successful,” he said.

After about six months, Frawley was ready for Career Four: bank owner. As more of Georgia’s banks began failing, “I started seeing these banks being acquired by out-of-state banks,” said Frawley.

He gathered some of his former colleagues, got approval from regulators to charter a new bank, and raised $255 million from investors such as New York private equity fund Lightyear Capital. Then he waited to see what soon-to-fail banks the FDIC put out for bid.

Community & Southern Bank, Frawley’s venture, bought the former First National Bank of Carrollton in January and Ellijay’s Appalachian Community Bank in March.

Following the two deals, Community & Southern landed on a recent list of Georgia banks with high Texas ratios, an informal measure of the financial strains a bank faces.

“The Texas ratio is meaningless for us,” said Frawley, because the FDIC, as it has with numerous banks, assumed much of the risk for potential losses on the failed banks’ loans and foreclosed properties.

Adams, the investment banker, thinks Frawley’s group is one of only a handful of firms in Georgia that is well situated to capitalize on such deals as the state’s flock of nearly 300 banks continues to shrink. He’s in the right place, has access to capital, a bank charter and experience fixing broken banks.

“I think he’s clearly setting up his bank to be one of the consolidators,” said Adams.