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Weekend reading: Georgia Bank Failures Explained

Documents produced by the Federal Deposit Insurance Corporation are not, generally speaking, gripping page-turners. One genre of regulatory report, however, does make for fairly interesting reading: “Material Loss Reviews” prepared by the FDIC’s Office of the Inspector General.

These are required after any bank failure that has cost the FDIC’s depository insurance fund a significant amount of money, The reports are available at the FDIC OIG’s website They constitute a literary genre with significant growth prospects as the FDIC and other regulators continue their round of Friday evening bank closures around the country.

One Material Loss Review released today, for example, describes the death throes of FirstCity Bank, which had $297 million in assets and was based in Stockbridge, Georgia, a town not far southeast of Atlanta. FirstCity, like many other banks in the metro Atlanta area, partook of the state's late, lamented enormous real estate boom, making a large number of loans to local builders. When the boom turned into a crash in 2007, those loans turned bad. The bank failed on March 20.

That's a common story in Georgia, which has had more bank failures (20) in the last two years than any other state. What makes FirstCity a bit unusual is the fact that its base of local deposits was so small and its book of real estate loans so ugly, that no healthy bank was willing to buy it -- even on the generous terms usually offered by regulators. (Only one other failed Georgia has proven as unappetizing, Community Bank of West Georgia.) Instead the FDIC had to write checks totalling $102 million to cover the FirstCity deposits it insured.

FirstCity also stands out for its unusual reliance on "brokered deposits." These are CDs or other time deposits from out-of-state depositors seeking a better yield than they can get a home (and an FDIC guarantee.) The potential trouble with them is that they have a way of leaving at the first sign of trouble or of a better deal elsewhere. The easy availability of brokered deposits made it possible for some Georgia banks to make a lot of loans and grow very fast without having a lot of local savings accounts, ATMs and tellers. FirstCity grew from $18 million in assets at the end of 2001 to $285 million in assets at the end of 2008. At the end of '08 fully 67 percent of its deposits were brokered deposits, according to the FDIC OIG's report. The report contains a few mild rebukes to regulators for not having acted more aggressively to keep the bank out of trouble.

A more pointed Material Loss Review was issued about another Georgia bank --Haven Trust of Duluth GA --back in August. That one cost the FDIC deposit insurance fund $207 million. Among the interesting items in the FDIC OIG's Material Loss Review for $576 million Haven are dubious multi-million dollar loans to the school age children of one of the bank's owners. The review also contains a photo of a planned 238 townhouse project that the bank financed for $5.6 million in 2007 even as the real estate market was softening. By September 2008 about three quarters of the loan had been disbursed. The photo taken in 2009 shows an empty lot with no construction on it. The FDIC now appraises the property's value at $1 million.

A memo from the FDIC's Director of Supervision and Consumer Protection, attached as an appendix to the review, meekly agrees with the OIG's conclusion that "earlier enforcement actions . . . could have been used to address the persistant risk management weakness."

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