Regulators Friday closed Alpha Bank & Trust of Alpharetta, Ga., in what was the 16th U.S. bank or thrift failure this year and the second in Alpharetta.

The Georgia Department of Banking and Finance closed the institution, and the Federal Deposit Insurance Corporation was appointed receiver.

The FDIC announced Alpha Bank & Trust's two offices would reopen as branches of Stearns Bank, NA, a $1 billion institution with headquarters in St. Cloud, Minn.

Stearns Bank was set to take all of Alpha's insured deposits and approximately $39 million of the failed institution's $346 million in total assets, paying the FDIC no premium for the privilege.

The FDIC estimated the loss to its deposit insurance fund would be $158.1 million, a very large amount when considering the size of the failed bank.

Uninsured deposits totaled an estimated $3.1 million in 59 customer accounts. When a bank fails and uninsured deposits are not taken over by another institution, the depositors with uninsured balances become creditors to the FDIC receivership. These creditors usually receive some of their money back, in the form of "dividends," as the receivership disposes the failed bank's assets. In some cases, the uninsured depositors receive an immediate payment, known as an "advance dividend." In its press release on Alpha Bank & Trust's failure, the FDIC didn't announce any advance dividends.

Alpha Bank & Trust was the second bank or thrift to fail in Alpharetta, Ga. this year. Georgia regulators closed the $1.1 billion Integrity Bank on Aug. 29, with all deposits taken over by Regions Bank (held by

Regions Financial

(RF) - Get Regions Financial Corporation Report

). Of course, that failure had a happier ending for some depositors, because even uninsured balances were taken over by Regions.

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.

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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 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. Ratings receives no payment from any rated common stock issuer, mutual fund, ETF, insurance company, bank or thrift. Ratings provides objective, conservative financial strength ratings for all U.S. banks and thrifts. While depositors can take some comfort in the FDIC's temporary increase in deposit insurance limits, it is still a good idea to check out your institution's rating, and ask some questions if the rating is below a C- (Fair Financial Strength).

It is also important to consider that you or someone you know may be affiliated with a business or municipal depositor (such as a school district) that keeps large uninsured balances in a local institution.

Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available at no charge on the

Banks & Thrifts Screener

. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the

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Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.