Regulators Close Georgia Bank

Overexposed to Residential Construction

Alpha Bank & Trust was established on May 8, 2006, and quickly focused on residential construction and land-development lending in the Atlanta area. As of June 30, 2008, these loans comprised 61% of the institution's total assets. This was a very high concentration, especially for such a new bank.

Alpha's construction portfolio quickly soured, with the institution's nonperforming-assets ratio rising to 19.78% as of June 30, up from 9.21% in March and 2.35% at the end of 2007. Hand in hand with the explosion of problem loans, the bank's risk-based capital ratio plunged.

The institution slipped below regulatory requirements for a well-capitalized institution in December 2007, slipping further to undercapitalized, with a leverage ratio of 5.27% and a risk-based capital ratio of 6.96%, as of June 30. These ratios need to be at least 5% and 10%, respectively, for a bank or thrift to be considered well capitalized under regulator guidelines.

Alpha Bank & Trust was assigned an E- (very weak) financial strength rating by TheStreet.com Ratings in September, a downgrade from E (very weak) in June and D (weak) before that. The institution had carried the D rating for many quarters, reflecting its inconsistent earnings (not unusual for a bank in its first few years of business) and heavy concentration of construction loans.

Free Bank and Thrift Ratings

This week we saw the House Committee for Oversight and Government Reform grill executives from Moody's, Standard & Poor's and Fitch about how these ratings agencies earn most of their pay by selling their services to securities issuers. It's important for a ratings service to be objective and independent, but the business model for the three major ratings agencies has a built-in conflict of interest, which, during the real estate run-up, provided false comfort to investors with AAA ratings on some dubious paper.