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Board Report:  January 28, 2010

Material Loss Review of Community Bank of West Georgia

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Community Bank of West Georgia (West 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). West Georgia was a de novo bank, which Board supervisory guidance defines as a state member bank that has been in operation for five years or less. The State closed West Georgia on June 26, 2009, and the FDIC was named receiver. On July 28, 2009, the FDIC IG notified us that West Georgia's failure would result in an estimated loss to the Deposit Insurance Fund of $85.1 million, or about 42.6 percent of the bank's $200 million in total assets.

West Georgia failed because its Board of Directors and management did not properly manage and control the risk associated with the bank's highly concentrated acquisition, development, and construction (ADC) loan portfolio. West Georgia expanded its ADC lending when the metropolitan Atlanta area was experiencing rapid growth. However, a declining real estate market, coupled with credit administration and loan underwriting weaknesses, led to deteriorating asset quality and significant losses, particularly in the ADC portfolio. Mounting losses eliminated earnings and depleted capital, which ultimately led to the State closing West Georgia.

Our analysis of FRB Atlanta's supervision of West Georgia indicated that emerging problems that became apparent in early 2007 warranted a more forceful supervisory response compelling West Georgia's management to (1) address credit administration and loan underwriting deficiencies and (2) maintain capital commensurate with the bank's high concentration in speculative ADC loans. By early 2007, it was apparent that West Georgia's credit risk was high due to (1) a large concentration in ADC loans, especially speculative construction loans for homes that were not pre-sold; and (2) weaknesses in credit administration and loan underwriting. Although West Georgia received a CAMELS composite 2 (satisfactory) rating, examiners cited credit management problems, including insufficient information contained in memoranda supporting ADC loans and a lack of independent appraisal reviews. In addition, examiners noted a declining trend in capital and expressed concerns about West Georgia's capital in light of the bank's high ADC concentration. Examiners specifically cautioned that West Georgia's capital level might not be sufficient to absorb unexpected losses arising from the bank's ADC concentration.

The case for a stronger supervisory response in early 2007 was supported by the results of an FRB Atlanta November 2007 visitation, when examiners noted that the bank's credit risk analysis and monitoring of commercial real estate loans still needed further improvement and that there were continued weaknesses in credit administration. In addition, Federal Reserve guidance on de novo bank supervision states, "Given the rapid deterioration experienced by some de novo banks, a timely supervisory response to address problem areas is particularly important." The guidance also advises that prompt supervisory action should be taken when weaknesses are first detected.

West Georgia's failure pointed to a valuable lesson learned because it illustrated that de novo banks with a growth strategy that results in a concentration of ADC loans can be highly vulnerable to changes in the real estate market. Accordingly, de novo banks with ADC concentrations require immediate and forceful supervisory action compelling management to (1) correct credit administration and loan underwriting deficiencies as soon as they begin to appear, and (2) maintain capital levels that are commensurate with emerging risks.

During the course of our review, we found that discrete Board guidance pertaining to de novo bank examinations was contained in two separate documents that were not cross-referenced, which could result in the guidance being overlooked or misinterpreted. Our report recommended that the supervisory guidance related to de novo banks be clarified.

The Director of the Division of Banking Supervision and Regulation concurred with our conclusions, lesson learned, and recommendation. The Director said that he planned to implement our recommendation by making certain revisions to supervisory guidance.