TO: Stephen M. Beard
Deputy Inspector General for Audits and Evaluations
FROM: Sandra L. Thompson /Signed/
SUBJECT: FDIC Response to the Draft Audit Report Entitled, Material Loss Review of Atlantic Southern Bank, Macon, Georgia (Assignment No. 2011-081)
Pursuant to Section 38(k) of the Federal Deposit Insurance Act, and as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Deposit Insurance Corporation's (FDIC) Office of Inspector General (OIG) conducted a Material Loss Review of Atlantic Southern Bank (ASB), which failed on May 20, 2011. This memorandum is the response of the Division of Risk Management Supervision (RMS) to the OIG's Draft Report received on November 15, 2011.
ASB failed due to the Board's and management's inability to manage risks associated with its growth strategy centered on high concentrations of commercial real estate (CRE) and acquisition, development and construction (ADC) loans. ASB's weak CRE/ADC underwriting and lax credit administration practices and monitoring also contributed to the deterioration in the quality of its loan portfolio resulting in substantial losses, negative earnings and depleted capital. ASB was unable to raise additional capital to maintain operations.
From 2006 to 2010, the FDIC and the Georgia Department of Banking and Finance conducted four onsite risk management examinations, three onsite visitations and ongoing offsite monitoring. At the 2008 onsite visitation, examiners informed ASB Board members and executives that the increased level of classified loans and deficient earnings weakened ASB's liquidity position. The visitation also revealed deterioration in all component ratings and ASB was downgraded. The 2009 examination noted further deterioration of CRE and ADC loans, and ASB's heavy reliance on non-core funding, including brokered deposits and Federal Home Loan Bank borrowings. Examiners downgraded ASB and issued a Cease and Desist Order. In 2010 examiners noted continued deteriorating conditions characterized by critically deficient asset quality, significant losses and an erosion of capital and further downgraded ASB.
RMS has recognized the threat that institutions with high risk profiles, such as ASB, pose to the Deposit Insurance Fund and issued to FDIC-supervised institutions in 2008 Financial Institution Letter (FIL)-22-2008 entitled, Managing Commercial Real Estate Concentrations in a Challenging Environment. This FIL re-emphasized the importance of robust credit risk-management practices for institutions with concentrated CRE exposures and set forth broad supervisory expectations. Additionally, RMS issued in 2009 FIL-13-2009 entitled, The Use of Volatile or Special Funding Sources by Financial Institutions That Are in a Weakened Condition. This FIL heightened our supervision of institutions with aggressive growth strategies or excessive reliance on volatile funding sources. With respect to our responsibilities under Prompt Corrective Action (PCA), RMS is committed to ensuring that institutions meet all PCA requirements.
Thank you for the opportunity to review and comment on the Report.