Small Georgia Bank Fails

State regulators shut down Freedom Bank of Georgia of Commerce, Ga. Friday, bringing to 17 the number of U.S. banks and savings and loans closed during 2009.

The Federal Deposit Insurance Corp. was appointed receiver, and it arranged for Northeast Georgia Bank of Lavonia, Ga. to assume all of the failed institution's deposits and most of its assets.

Freedom Bank's four offices were set to reopen Monday as branches of Northeast Georgia Bank.

TheStreet.com had included Freedom Bank in its updated list of undercapitalized banks (the second list in a recent article on undercapitalized savings and loans).

Please see TheStreet.com's Bank Failure Map for an interactive summary of all bank and S&L failures during 2008 and 2009.

The American Banker reported Thursday that the FDIC would backtrack on the restoration plan for its deposit insurance fund, reducing a planned Sept. 30 special assessment on deposits to 10 basis points from 20 basis points.

Construction Loans Are the Culprit

Of the 42 bank failures in 2008 and 2009, seven were in Georgia. Like banks in other states at the forefront of the real estate boom-and-bust cycle, all of the failed Georgia banks had a heavy concentration of construction loans.

Freedom Bank of Georgia had total assets of $173 million. TheStreet.com Ratings had assigned the institution an E- (Very Weak) financial strength rating in September, which was a downgrade from the June rating of E+. Before that, TheStreet.com Ratings had assigned the bank a D- (Weak) rating in March 2007.

The institution's nonperforming loans spiked in December 2007, and loan quality continued to slide through 2008. Mounting loan charge-offs led to net losses of $9 million for 2008, leaving Freedom Bank significantly undercapitalized under regulatory guidelines. As of Dec. 31, its tier 1 leverage ratio was 2.73% and its total risk-based capital ratio was 4.72%. These ratios need to be at least 5% and 10%, respectively, for an institution to be considered well-capitalized.

While the Georgia Department of Banking and Finance didn't issue a press release Friday discussing Freedom Bank, it had become clear that without a significant injection of new capital -- something that's becoming increasingly difficult for community banks to secure in the current environment -- the bank would be unable to survive.

The FDIC agreed to share losses on about $97 million of the assets acquired by Northeast Georgia Bank and estimated the cost to its deposit insurance fund would be $36.3 million.

Ratings

Depositors of Freedom Bank of Georgia fared well, because the FDIC managed to find a bank willing to acquire all of the failed bank's deposits, including any uninsured balances and brokered deposits. The FDIC said that its arrangement with Northeast Georgia Bank was its "least costly option" for dealing with the failed bank.

However, as we have seen in many bank failures during 2008 and 2009, the least costly option is often quite costly for depositors. In several cases, the FDIC was unable to find an acquirer for uninsured deposits, and depositors faced losses on balances in excess of FDIC insurance limits.

If your personal bank account balances don't exceed the insurance limits, you might assume there's no need to be concerned about potential bank failures. Yet you or someone you know are probably associated with a businesss, organization or government entity (such as school district) that has large deposits in a local bank. In the current environment, it's a very good idea to look into the health of your bank.

The FDIC's basic individual deposit insurance limit has been temporarily increased to $250,000, and the agency has waived its limit on insurance covering non-interest-bearing business checking accounts. But these measures are set to expire on Dec. 31. Considering that the agency's insurance fund is dwindling and that Congress could drag its feet, there's no guarantee that these temporary measures won't expire at the end of the year.

There's another concern for CD depositors, even those with balances that are less than FDIC insurance limits. Sometimes when a bank or thrift fails, the acquiring bank doesn't pick up the failed institution's CD deposits. When this happens, depositors must wait for their brokers to collect their balances (which are no longer earning interest) from the FDIC. These depositors must then shop around for other CDs, possibly at lower rates than the ones their brokers had locked in previously.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans. They 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 Insurers & HMOs Screener.

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Philip W. van Doorn joined TheStreet.com 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.

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