Material Loss Review of First Georgia Community Bank

First Georgia Community Bank (First Georgia) was supervised by the Federal Reserve Bank of Atlanta (FRB Atlanta), under delegated authority from the Board, and by the Georgia Department of Banking and Finance (State). The State closed First Georgia in December 2008, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. The FDIC estimated that the bank's failure would result in a $72.2 million loss to the DIF, or 31.5 percent of the bank's $229 million in total assets.

First Georgia failed because its Board of Directors and management did not adequately control the risks associated with its (1) high concentration of acquisition, development, and construction loans made to home builders and developers and (2) reliance on non-core funding, particularly brokered deposits. Weakening demand for housing in the local real estate market led to significant loan losses that eroded the bank's capital. The bank's deteriorating capital position triggered regulatory restrictions on renewing brokered deposits, which significantly impeded liquidity and ultimately led to First Georgia's insolvency.

Our review of FRB Atlanta's supervision of First Georgia found that an asset concentration in speculative acquisition, development, and construction loans contributed to the bank's failure. In our view, the significant and growing risk associated with this sizable concentration in speculative construction loans, coupled with deficiencies in credit administration and risk management identified by FRB Atlanta, warranted a more forceful supervisory response during the Reserve Bank's 2006 safety and soundness examination. While it was not possible to determine the degree to which a stronger regulatory response in 2006 would have altered First Georgia's subsequent decline, we concluded that an earlier decrease in the speculative construction loan portfolio could have reduced the loss to the DIF.

We believe the lesson learned from the First Georgia failure was that a forceful supervisory response is warranted, even in the presence of strong financial performance, when community banks with weaknesses in risk management, credit administration, and loan underwriting accumulate a high concentration in a risky asset class.

During the course of our review, we found that FRB Atlanta did not fully comply with supervisory guidance that addressed disagreements with CAMELS ratings assigned by State regulators. FRB Atlanta disagreed with the CAMELS composite upgrade assigned after a 2007 examination conducted by the State. FRB Atlanta discussed its disagreement with the State and informed the bank's Board of Directors that the institution would continue to be monitored as though it had not been upgraded. Nevertheless, FRB Atlanta did not follow supervisory guidance that required Reserve Banks to formally assign and record a separate CAMELS rating. Our report contained a recommendation designed to address this issue.

The Director of the Division of Banking Supervision and Regulation agreed with our recommendation and said that he planned to send a reminder to ensure that Reserve Banks follow supervisory guidance pertaining to formally assigning and recording a separate CAMELS composite rating when the Reserve Bank disagrees with a rating assigned by a state supervisory agency.