NEWS - Banking & Finance

By Lou Phelps

Dec 21, 2011 – The Office of the Inspector General released its report today on what the taxpayers have ultimately lost by the failure of Atlantic Southern Bank of Macon, which was closed back on May 20, 2011. The bank had a branch on Hodgson Memorial Parkway, and was writing loans in the Savannah and Coastal Georgia region. 

When a bank fails, the work behind the scenes by the Georgia Department of Banking and Finance (GDBF) and other state and federal banking and law enforcement entities just begin.   

Banking regulators begin the process of pouring through banking documents to determine whether poor banking practices by the banking company’s leadership and its board of directors are to blame for the failure, or whether there are other illegal activities at play.

It is sometimes a process that takes as long as two years before final decisions are reached, or legal charges are brought. Often, the FDIC seeks to recover losses from the bank’s leadership and board members for incompetence when the government – the taxpayers – have suffered a financial loss at an FDIC-insured institution.

And, the federal governement’s Inspector General has also been in the process of reviewing the job that the FDIC bank regulators have done over the past few years in managing U.S. banks – trying to determine why so many failures have incurred. 

Senator Saxby Chamblis (R-GA) announced today that he is co-sponsoring a bill to look into why so many banks failed in the U.S.  In part, he is asking whether the bank regulation processes and methodologies have caused some of the failures.

The OIG’s Report on Atlantic Southern Bank

On June 17, 2011, the FDIC notified the Office of Inspector General (OIG) that ASB’s total assets at closing were $726 million and the estimated loss to the Deposit Insurance Fund (DIF) was $273.5 million. 

The OIG then conducted a material loss review of the failure of Atlantic Southern Bank to determine the causes of the bank’s failure, and to also evaluate the FDIC’s supervision of the bank – was the FDIC doing an adequate job of overseeing the bank leading up to the failure?

Atlantic Southern Bank was established in December 2001 as a state nonmember institution called New Southern Bank.  In 2005, the bank changed its name to ASB.  The bank was wholly owned by the Atlantic Southern Financial Group, Inc., a publicly-traded, one-bank holding company.  As of June 2010, ASB’s directors owned or controlled 19.5 percent of the holding company’s outstanding stock, with the remainder of the stock widely held.   The only local board member was Donald L. Moore Jr., president of Donald L. Moore, Inc., a commercial contracting firm with headquarters in Savannah since 1973, who also served on the Audit Committee of Atlantic Southern Financial Group, the holding company.

In 2006 and 2007, ASB expanded its geographic presence in central and southern Georgia to the growing markets of coastal Georgia and northern Florida.  The bank’s expansion was facilitated by the acquisition of three institutions:  Sapelo National Bank (with total assets of $64 million), First Community Bank of Georgia (with total assets of $70 million), and CenterState Bank Mid Florida (with total assets of $100 million). 

ASB’s lending strategy focused on acquisition, development, and construction (ADC) and other commercial real estate (CRE) projects.  At the time of its closure, ASB operated a main office in Macon, Georgia, and 15 branches in central, southern, and coastal Georgia.  The bank also operated one branch in Jacksonville, Florida. 

The Causes of the Failure and Material Loss

In the Office of the Inspector General (OIG) report today, they found that the bank failed primarily because its Board of Directors (Board) and management did not effectively manage the risks associated with the institution’s aggressive growth and heavy concentration in commercial real estate loans, particularly construction loans.

 “Notably, ASB (Atlantic Southern Bank) did not maintain capital at levels that were commensurate with the increasing risk in its loan portfolio, reducing the institution’s ability to absorb losses due to unforeseen circumstances.  Lax oversight of the lending function also contributed to the asset quality problems that developed when economic conditions in ASB’s lending markets deteriorated.  Specifically, the bank exhibited weak ADC (commercial) loan underwriting, credit administration, and related monitoring practices.  Further, ASB relied on non-core funding sources, especially brokered deposits, to support its lending activities and maintain adequate liquidity.  These funding sources became restricted when ASB’s credit risk profile deteriorated, straining the institution’s liquidity position,” the OIG states.

Specific Allegations of Poor Management

The OIG’s report lists a number of specific poor practices by the management and/or board, including:

- The bank’s leadership and board failed to do sufficient loan underwriting review of more complex deals.

- Examiners noted instances in which management’s use of interest reserves was not acceptable.  Specifically, examiners identified loans referred to as “working capital” loans or “investment” lines of credit that were used to pay interest on other loans, but were not properly identified as interest reserves.  Examiners also noted that ASB had established interest reserves for some loans that were no longer (or never were) in the development or construction phase.

- Examiners noted instances in which loans were renewed after a significant change in the real estate market, but evaluations or appraisals had not been obtained.

- Examiners reported three lending relationships that exceeded these limitations, two of which were cited at more than one examination by the FDIC.

- At the 2006 and 2009 examinations, examiners identified several loans that collectively exceeded these regulatory guidelines for loan limits to capitalization.

- The February 2010 examination and August 2010 visitation reports stated that ASB’s ‘ALLL’ was underfunded by $15 million and $102,000, respectivel.

No recommendations on penalties or ability to recover the losses were issued by the OIG’s office. They state that their role was to conduct the study.

The report acknowledges that the board’s bank, starting back in November 2008, adopted plans to address concerns identified during the examiners November 2008 visitation.  And, it appears to find the FDIC’s management to be sufficient.

And, the OIG goes on to say that “The perspectives gained from the failure of ASB are not unique.  Like many other institutions that failed in recent years, ASB developed a significant exposure to commercial and real estate loans at a time when the bank’s financial condition and lending markets were generally favorable.”