During 2011, Georgia had the largest number of banking failures in the United States, with 23 failed banks that accounted for 25% of all banking failures. As regulators closed the first failed banks of the new year, Georgia was once again on the list of failed banks with the closing of a large community bank.
The First State Bank, Stockbridge, GA, was closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver. The FDIC, acting as receiver, sold the failed bank to Hamilton State Bank, Hoschton, Georgia, which will assume all deposits of The First State Bank.
The First State Bank, formed in 1964, was one of Georgia’s largest community banks with $536.9 million in assets. Locally owned and operated, The First State Bank operated seven branches in Henry County, which served the banking markets of Stockbridge, Fairview, McDonough, Ola and Locust Grove.
A troubled economy along with slumping real estate values resulted in The First State Bank being overwhelmed by defaulted loans. The Bank had one of the highest troubled asset ratios on record at 950% and had been struggling with an exploding level of bad loans since the beginning of 2009. Statistically, problem banks with a troubled asset ratio of over 100% almost always wind up failing.
Regulators have delayed closing problem banks with the hope that the economy would turn around or that new capital could be raised. Unfortunately, the economy has not turned around and investors are not willing to risk capital in the banking sector.
Allowing an under capitalized problem bank to remain open may only increase losses when regulators finally close the bank. The $216.2 million loss to the FDIC Deposit Insurance Fund for the failure of The First State Bank is a substantial 40.2% of total assets. By comparison, the average loss to total asset ratio for all failed banks for 2011 was only 20%.
The First State Bank was by any measure hopelessly insolvent for years and carrying assets that turned out to be overvalued by at least $200 million as indicated by the loss taken by the FDIC. Allowing zombie banks to remain open long after they are past the point of recovery prolongs the banking crisis and is the foundation for a lack of confidence in bank soundness.
At September 30, 2011, The First State Bank had total assets of $536.9 million and total deposits of $527.5 million. The FDIC will receive a premium of 0.50% from Hamilton State Bank for the assumed deposits.
Hamilton State Bank also agreed to purchase all of The First State Bank assets, subject to a loss-share agreement with the FDIC that covers $419.5 million of the asset pool purchased. The FDIC maintains that keeping failed bank assets in the private sector minimizes ultimate losses and reduces disruption to loan customers.
The First State Bank is the second banking failure of 2012 and will cost the FDIC Deposit Insurance Fund $216.2 million. The last bank to fail in Georgia was Community Bank of Rockmart on November 10, 2011.