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Board Report: January 28, 2010
Neighborhood Community Bank (Neighborhood) 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 Neighborhood on June 26, 2009, and the FDIC was named receiver. On July 28, 2009, the FDIC IG notified us that Neighborhood's failure would result in an estimated loss to the Deposit Insurance Fund of $66.6 million, or about 31.7 percent of the bank's $210.4 million in total assets.
Neighborhood failed because its Board of Directors and management did not properly manage the risks associated with the bank's concentration in acquistion, development, and construction (ADC) loans tied to the residential real estate market. Neighborhood expanded its ADC loan portfolio when the areas served by the bank experienced rapid growth. A declining residential real estate market, coupled with management's failure to recognize and act upon weakening market conditions, led to deteriorating asset quality and significant losses, particularly in the ADC loan portfolio. Mounting losses eliminated earnings and depleted capital, which ultimately caused the State to close Neighborhood.
In our opinion, the conditions examiners observed during a 2007 examination provided FRB Atlanta with an opportunity to be more aggressive in addressing Neighborhood's high ADC loan concentration as part of its October 2007 informal enforcement action (Board Resolution). FRB Atlanta accelerated the start of its 2007 examination by three months because ongoing surveillance revealed an increased inventory of completed but unsold homes in the bank's market area. Examiners downgraded Neighborhood to a CAMELS composite 3 (fair) rating and noted that staff turnover at Neighborhood during the prior 6 to 12 months had a negative effect on the bank's ability to manage its loan portfolio.
The 2007 examination report stressed the importance of effective Board of Directors and senior management oversight given the lending staff's inexperience and the "uncertain outlook for residential real estate." Examiners noted an increase in classified assets and commented that most of the loans downgraded during the examination were tied to residential land development and construction. Bank management was criticized for being slow to recognize loan deterioration. In addition, examiners stated that the signs of a potential housing oversupply were evident 12 to 15 months earlier. Separately, examiners noted that management had continued to originate new ADC loans after other local banks had begun to reduce their CRE exposure.
Accordingly, we believe that the conditions observed during the 2007 examination that led to a Board Resolution also warranted compelling Neighborhood to reduce its ADC loan concentration. However, in light of the subsequent rapid deterioration in the local real estate market, it was not possible to determine the degree to which any such action would have affected the bank's subsequent decline or the failure's cost to the DIF.
We believe that Neighborhood's failure offered a lesson learned. In our opinion, Neighborhood's failure demonstrated that an aggressive and immediate supervisory response-including an enforcement action compelling a bank to reduce its concentration in ADC loans-may be warranted when a financial institution experiences significant staff turnover and management is slow to recognize or act upon early signs of loan portfolio deterioration and weakening market conditions.
The Director of the Division of Banking Supervision and Regulation agreed with our conclusion and lesson learned.