By Peter Waldman, David Mildenberg and Laurence Viele Davidson Dec. 8 (Bloomberg) — James H. Blanchard and A.W. “Bill” Jones III played golf and hunted turkey, quail and deer together. They were passionate about servant leadership, the idea that corporate executives should emulate Jesus Christ as stewards for their workers, customers and communities. Together they were on the boards of Blanchard’s Synovus Financial Corp. and Jones’s Sea Island Co., a closely held resort on Georgia’s Atlantic coast. Starting in 2001, Synovus loaned Sea Island what eventually totaled $220 million to turn the resort into the “Pebble Beach of the East.” The loan, which has since been restructured and stopped paying interest, provides a window into the role that insider lending and board oversight plays in regional bank stocks’ decline this year and the greatest number of U.S. bank failures since 1992, led by Georgia. At least one larger bank without insider ties rejected the Sea Island deal. “What happens a lot at community banks is they work the crony network, rightly or wrongly,” said Christopher Marinac , a banking analyst with FIG Partners LLC in Atlanta. In Georgia, “you’re seeing a lot of that,” he said. The Federal Deposit Insurance Corp. cited failures of board oversight in 83 percent of its post-mortems of failed banks nationwide this year, based on reports by the agency. Directors failed to “ensure that bank management identified, measured, monitored, and controlled the risk of the institution’s activities,” FDIC investigators wrote in several of the reports , called Material Loss Reviews. Bair ‘Deeply Skeptical’ “Boards have got to do their job,” said Sheila Bair , the chairman of the FDIC, in an interview Dec. 3, speaking of the banks she supervises. When she took over in June 2006, the agency staff pointed out “not just the lack of qualified boards but also managements,” she said. “I’m deeply skeptical of any kind of insider lending.” Bair’s agency regulates 5,000 of the 8,000 U.S. banks, including most of the smaller ones, she said. The 5,000 members of the Independent Community Bankers of America have $1 trillion in assets and $800 billion in deposits and employ 300,000 Americans at 20,000 locations, the organization says. Sea Island has cut 20% of its staff and on Nov. 19 deeded a 3,000-acre development to San Francisco-based Wells Fargo & Co. to avert foreclosure. Shares of Synovus, the Columbus, Georgia-based 34th-largest U.S. commercial bank holding company by assets, have lost 70 percent of their value this year and reached a 17-year low Nov. 24 of $1.45. That was less than half the price of a 2.5-pound (1.1-kilogram) bag of raw peanuts from the Georgia Peanut Commission. ‘Synergy’ Plus ‘Novus’ The stock has since rebounded on increased investor confidence in the bank, FIG’s Marinac said. Synovus closed yesterday at $2.35, up 20 cents, or 9.3 percent, in New York Stock Exchange composite trading. As the biggest banks return to profitability, defaults on commercial property may keep regional lenders including Synovus from repaying U.S. bailout funds until at least 2011, based on data compiled by Bloomberg. Blanchard, now 68, converted Columbus Bank & Trust Co. into a bank holding company and in 1989 renamed it Synovus, a combination of “synergy” with the Latin word “novus,” meaning new, according to the company. Synovus needs to raise $700 million of additional capital, wrote Todd Hagerman , a banking analyst in New York for London- based Collins Stewart LLC, in a Nov. 23 note to clients. He was previously head of U.S. regional bank equity research for Credit Suisse Securities. ‘Dangerously High’ “Management appears reluctant to address the underlying issues: restore its lost credibility and reaffirm expectations that Synovus’s dangerously high level of problem assets will soon decline,” Hagerman wrote. The loan to Sea Island — Jones, 51, has since left the Synovus board — is in addition to almost $1.1 billion in borrowings by current Synovus insiders , defined by the Federal Reserve as executives, directors and principal bank shareholders. That amounts to 34 percent of equity capital, based on data compiled by Bloomberg. Counting the $220 million loan to the former insider Jones’s Sea Island, the ratio would be 41 percent. Fed Insider Limits While there isn’t a national benchmark on insider lending, that compares with less than 1 percent for each of the five largest U.S. commercial banks, based on filings with the FDIC. It also exceeds the ratios of two other Georgia banks that failed this year. “I can’t believe the regulators let them get away with that kind of concentration of insider loans,” said T. Stephen Johnson , a banking consultant and nonexecutive chairman of Bank of Atlanta, a Georgia thrift. The Fed bars banks from loaning any one insider more than 5 percent of capital without board approval. Its regulations allow banks to lend as much as 100 percent of capital to all insiders as a group if the loans meet the Fed’s safety and soundness guidelines. Synovus says it complied with banking rules. The FDIC’s Bair declined to comment last week on whether the limit should be revised but did say, “the lower the better.” C. Edward Floyd , a Florence, South Carolina, surgeon who served on Synovus’s board from 1995 until 2006, was the only one of 18 current and former Synovus directors contacted for this article who agreed to be interviewed. ‘I Didn’t Know’ “I didn’t know about the size of the loan when it was made,” Floyd said. When the board did talk about the Sea Island loan, Jones would leave the room, Floyd said. The interlocking directorships of Blanchard and Jones were never discussed, he said. Academic researchers have found a strong correlation between insider lending and bank failure, said Edward C. Lawrence, a finance professor at the University of Missouri, St. Louis. He was an author of a 1989 study that found “a very high rate of failed banks had high rates of insider lending,” Lawrence said. “When directors are borrowers, nobody’s standing back and saying ‘it doesn’t make sense to do this loan,’” Lawrence said. This year’s 130 U.S. bank failures have cost the FDIC, the Washington-based agency that steps in to protect depositors, more than $30 billion. Georgia’s 24 bank seizures, the highest for any state, account for about 15 percent of the losses. The government’s deposit insurance fund is in a deficit for the first time since the 1992 collapse of the savings and loan industry. FDIC Governance Review “When the dust settles, one area that I’m sure we’ll look at is governance, including managements and boards of directors” nationwide, said Fred Gibson , the FDIC’s Deputy Inspector General. At the end of September, Synovus reported that $1.75 billion of loans, or 6.6 percent of its total of $26.3 billion, had stopped accruing interest or had been converted into real estate through foreclosures. That compares with a median of 3.8 percent among large U.S. banks, according to an October report by Jason Goldberg , a Barclays Capital analyst in New York. He called ratios of 6 percent or more “alarming.” Synovus says concerns about the insider loans are unwarranted because its financial condition is sound. The company projects a decline in the amount of new nonperforming assets. Synovus borrowed $968 million from the U.S. Troubled Asset Relief Program last December and in September sold $600 million of shares. It cut 800 employees, or 11 percent of the staff, in the past year. Stress Test The bank holding company has enough capital to pass a government stress test, Synovus said Nov. 20 in a statement. Its ratio of Tier 1 capital to risk-weighted assets will probably be 6.4 percent at the end of 2010, exceeding the 4 percent requirement in the U.S. Supervisory Capital Assessment program, the bank said. Its $3.2 billion in capital compares favorably with that of peer banks, spokesman Gregory Hudgison said in an e-mail. Executives of Synovus and Sea Island, including Blanchard and Jones, declined to discuss the loan. Blanchard retired as CEO of Synovus in July 2005 and as chairman 15 months later. He remains on the company’s board. Synovus named Blanchard’s son, William R. “Billy” Blanchard, 38, president of its flagship Columbus Bank & Trust in October, the Blanchards’ third generation to run the bank. “I know Jimmy Blanchard well, and I can’t imagine he would do anything unethical,” said the former Synovus director Floyd, 75, who was a member of the board’s governance committee and was listed in Synovus’s SEC filings as an independent director. Synovus should be more forthcoming about the loan and corporate governance, he said. ‘Something to Hide’ “I think it makes the bank look like it has something to hide,” Floyd said. Synovus declined to answer specific questions about the Sea Island loan in an e-mail from spokesman Hudgison, who cited litigation and privacy concerns. Synovus approaches all lending decisions “in the same, prudent fashion,” Hudgison wrote. “As chairman of the board of Columbus Bank & Trust, I was ultimately responsible for the decision to extend a loan to Sea Island Co.,” James D. Yancey , a Synovus director and Synovus’s retired chairman, wrote in a statement e-mailed to Bloomberg by Synovus. At the time the loans were made, Yancey was also president of Synovus. “The decision was based upon the economic environment at the time, an independent review of Sea Island’s risk profile, our own risk management standards and compliance with federal regulations,” Yancey said. “Our lending relationship with the Sea Island Co. predated Mr. Jones’s involvement as a member of the Synovus board.” Synovus Loan Review The Sea Island loan “underwent independent assessments by the two banks that partnered with Synovus in the transaction,” Hudgison said. The loan faced additional scrutiny under the Fed’s so-called Regulation O, he said, which requires that loans to bank insiders be priced at market rates, among other conditions. The bulk of its insider loans were made to the more than 500 directors of its 30 community banks in Alabama, Georgia, Florida, South Carolina and Tennessee, Synovus said. “Performance is better among this group,” the company said. The FDIC closed three more Georgia banks on Dec. 4. In two of them — Buckhead Community Bank of Atlanta and Tattnall Bank of Reidsville, Georgia — insider loans exceeded equity capital, according to FDIC data. In the third, First Security National Bank of Norcross, Georgia, the insider loan ratio was 68 percent, the FDIC reported. At Georgian Bank, based in Atlanta, the second-largest Georgia bank ever seized by the FDIC behind Silverton Bank of Atlanta , the ratio was 19 percent. Haven Trust Bank of Duluth, Georgia, taken over by the FDIC in December 2008, had a ratio of 24 percent. Blanchard and Jones began converting Sea Island in 2001 from a regional family resort into a golfing destination for the jet set, according to Peter Capone, the architect who oversaw the makeover, and Sea Island deed documents. Swore Off Debt For most of its history, Sea Island grew slowly, dependent on cash flow from the Cloister resort and land sales, longtime Sea Islanders say. Jones’s grandfather, A.W. “Bill” Jones, swore off debt after pulling the company through the Great Depression, according to Blaine Kelley Jr., an Atlanta developer who held business discussions with the elder Jones. Jones’s father, A.W. “Bill” Jones Jr., who ran the company from 1966 to 1992, followed suit, Kelley said. When Bill Jones III took over in 1992, he decided Sea Island needed to expand and upgrade to compete with luxury hotels and golf communities popping up all along the coastal South, Capone said. Jones laid out a strategy to rebuild the Cloister Hotel, beach club and spa to lure rich vacationers, who would see the area’s charms and plunk down millions for lots in subdivisions the company would build. “The whole model was, ‘This is a land company,’” Capone said. SunTrust Declines Deal Sea Island’s longtime bank, SunTrust Banks Inc. of Atlanta, rejected the resort’s proposed overhaul as too risky, say two former SunTrust executives who asked not to be identified because they weren’t authorized to discuss decisions of the bank’s lending committee. SunTrust spokesman Barry Koling declined to comment. Today, SunTrust’s largest commercial real estate loan is $54 million for an office building largely occupied by the bank itself, CEO James Wells III said in October. SunTrust, five times larger than Synovus by assets, has $98 million of insider loans, or less than 1 percent of equity capital, compared with Synovus’s 34 percent. “Synovus was never in the market for $250 million loans; it did this one to win Sea Island away from SunTrust,” said Marinac, the FIG Partners banking analyst. “It was a bizarre circumstance: Synovus was so excited to have Sea Island. SunTrust was certainly excited to let it go.” ‘Culture of Heart’ After law school and stint in the army, Blanchard in 1971 took over Columbus Bank & Trust Co. from his late father. The institution had about $100 million of assets. He converted it to a bank-holding company and acquired about 40 community banks across the Southeast. After mergers and divestitures, Synovus today has 30 bank units and $34 billion in total assets. Fortune magazine in 1998 named Synovus the best employer in America, citing Blanchard’s “culture of the heart” philosophy. “Synovus promotes a sense of community both inside and outside the office,” according to the article. Both Blanchard and Sea Island’s Jones espouse servant leadership, popularized in the 1970s by Robert Greenleaf. It says corporate executives, if they treat their workers and customers right, will also do right by their shareholders in terms of higher profits. “I’ve seen Blanchard read from the Bible at a meeting without being really annoying,” said Paul Lapides , director of Georgia’s Kennesaw State University Center for Corporate Governance. “When most business leaders do that, I think it’s a bunch of crap. But he’s completely credible.” ‘World-Class Service’ Synovus celebrated its Sea Island ties with a spread on Jones and the resort in its 2003 annual report: “Synovus has the same commitment to world-class service that we do,” the report quoted Jones as saying, beneath a photo of the scion with two of his resort workers. Sea Island’s cash generator was meant to be a new 3,000- acre community at the north end of St. Simons Island called Frederica, a forested enclave with a 400-acre manmade lake, a Tom Fazio golf course, deep-water river frontage and sites for 600 homes. Wachovia Corp., based in Charlotte, North Carolina, financed Frederica’s development with a $140 million to $150 million loan, according to an Oct. 29 letter from Reg Murphy , chairman of a committee of Frederica property owners that is in talks with Sea Island and lenders. ‘Finest Resort Company’ “Our vision is to be the finest resort company in the world,” Jones told Cigar Aficionado magazine in 2003, at the start of construction on the new Cloister. “We don’t want to be No. 2 or No. 3. We want to be No. 1 in everything.” Money was cheap to Jones. “The banks almost pay you to borrow money today,” Jones said in the interview. The plan worked in 2005 and 2006, with lots at Frederica pre-selling for more than $2 million, according to Frederica property owners. The rebuilt Cloister resort opened in March 2006 and soon earned five-star ratings in the travel press. The first public hint of financial stress at Sea Island came in July 2008 when Blanchard and Jones resigned from each other’s boards, said Marinac of FIG Partners. Richard Anthony , Synovus’s chairman and CEO, disclosed to analysts on a conference call at the time that Synovus and Sea Island had “a large relationship that really is easier to manage without Bill being on our board,” according to a transcript of the call. When asked by one analyst whether “deteriorating credit was a major factor” in the resignations, Anthony said “no.” Sea Island Cutbacks Ten days later, Sea Island said it was eliminating as many as 400 jobs, or 20 percent of its workforce, because of the “national economic downturn,” according to a local press report. After overruns from rebuilding Sea Island’s hotel, beach club and spa, the cost of the remake had exceeded $1.2 million a hotel room, at least triple what chains usually pay for five- star resorts, according to former Sea Island Co. executives. When lots stopped selling at Frederica, Sea Island faced a cash crisis, these people say. “In a more normal economic time, the ability to dream would have been tempered by more thoughtful analysis,” said Jim Root, who ran the Cloister’s $65 million spa. That facility, measuring 65,000 square feet, had a wooded atrium, rivulets and Koi ponds, plus 26 treatment rooms, carved mesquite furniture, stained glass, organic food, nutritional counseling and three squash courts, Root said. In April, Synovus disclosed it was restructuring the $220 million loan to its largest customer and designated the asset as nonperforming, according to an audio tape of Synovus’s first- quarter conference call with analysts. Large-Borrower Limit “This is a much higher exposure than we think is appropriate for our company,” Anthony said. “Going forward, we have a large-borrower policy limit that will be well below this.” Now Jones must make a $35 million payment on the restructured debt by year end, according to Sea Island residents familiar with the company’s finances. To raise the money, Sea Island is negotiating to sell the gated Ocean Forest Golf Club to the subdivision’s 360 members, according to residents involved in the talks. The company said Oct. 30 it was trying to sell 18,000 acres in three other southern Georgia tracts, Jones said in a statement. Jones is also in talks with potential equity partners in the Cloister resort to help repay bank debt, say residents familiar with Sea Island’s finances. Total Debt Sea Island’s total restructured debt on the resort renovation is $431 million, according to deed documents filed in Glynn County, Georgia, Superior Court. Roughly $231 million of the debt, including accrued interest, is owed to Synovus and $100 million each to Bank of America, based in Charlotte, North Carolina, and Bank of Scotland PLC , an Edinburgh-based unit of Lloyds Banking Group PLC, said a person familiar with Sea Island’s finances. Phil Whitby, manager of Bank of Scotland’s U.S. operations, didn’t return a call for a comment. Christina Beyer, a Bank of America spokeswoman, said the bank won’t “discuss client relationships at all.” Jones transferred ownership of the Frederica development, including the club property, to its creditor Wachovia, now a unit of Wells Fargo, according to spokeswoman Elise Wilkinson , in an e-mail. Jones also deeded to Wells Fargo Cannon’s Point, a 400-acre parcel of undeveloped land on St. Simons Island, according to deed documents obtained at the Glynn County courthouse. End of Dream Losing the two prime properties all but extinguishes Jones’s dream of luring well-heeled vacationers to buy real estate, said Capone, the Sea Island architect. “It’s the most unbelievable reversal of fortune,” Capone said. Blanchard at Synovus has posterity to worry about, said Richard Hyatt, a Columbus, Georgia, journalist and longtime Blanchard watcher. “Handshake deals aren’t unusual in the world of small- town banking, where the bank’s CEO, the car dealer and the furniture-store owner all sit on the board,” Hyatt said. “But the question I would ask is how appropriate was this in the arena they were playing in with Sea Island? Now I think we’ve seen the answer.” To contact the reporters on this story: Peter Waldman in San Francisco at pwaldman@bloomberg.net ; David Mildenberg in Charlotte at dmildenberg@bloomberg.net ; Laurence Viele Davidson in Atlanta at lviele@bloomberg.net .
