DEL.ICIO.USAnatomy of a bank failure: Why Integrity fell
The Atlanta Journal-Constitution
Sunday, September 07, 2008
Integrity Bank recently became Georgia’s second bank failure in a year and its third-largest ever in terms of assets and deposits. And while the closing of the Alpharetta-based institution on Aug. 29 added to a growing list of banks nationwide that have been shuttered this year by losses on loan defaults, industry insiders say the bank also faced unique issues, including possible fraud.
The FBI, Federal Deposit Insurance Corp. and other agencies are investigating whether state and federal banking regulations were violated when the bank, which had $1.1 billion in assets, lent tens of millions of dollars to a Florida real estate developer.
John Spink/2005 photo
Several agencies, including the FBI, are investigating the downfall of Integrity Bank of Alpharetta, Georgia’s second bank failure in a year and its third-largest ever in deposits and assets.
• U.S., Georgia bank failures
• Alpharetta-based Integrity bank fails
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The FDIC, which regulates banks and guarantees deposits up to certain limits, has estimated that the closing of Integrity will cost the agency $250 million to $350 million.
Here’s a look at some of the factors industry experts say led to Integrity’s downfall.
‘Inadequate’ management
Integrity Bank landed in hot water partly because of poor management, according to the FDIC and state regulators.
The FDIC in February demanded the bank overhaul its leadership team and improve how it made loans and handled its problem loans.
“The bank simply didn’t have a good internal credit culture,” said Walt Moeling, a senior partner at the law firm Powell Goldstein who often represents banks. For instance, he said, the bank sometimes left final loan-closing procedures to borrowers’ lawyers instead of hiring its own attorneys.
Under pressure from federal and state banking regulators, Integrity replaced bank founder Steve Skow and other top management, and it beefed up supervision by its board of directors. A former bank regulator, Patrick Frawley, stepped in a year ago as president and CEO.
But with the real estate and capital markets headed into a meltdown, it apparently proved to be too late.
Loan losses
Like many banks in the metro Atlanta market, many of Integrity’s rising losses stemmed from heavy lending to real estate developers and home builders that went bad along with sinking house prices.
Residential and commercial development loans made up about 80 percent of Integrity’s $849 million portfolio at the end of the second quarter, according to a report filed with the FDIC. The loans, profitable during the real estate boom, became increasingly risky as the local housing market soured over the past year.
The numbers tell a stark story of the depth of the bank’s problems. As of June 30, Integrity had given up hope of collecting $333 million in loans and had an additional $89 million that were at least 30 days past due, the report showed. The bank reported a $33.5 million loss for the second quarter.
“You don’t want to put all of your eggs in one basket,” said Bert Ely, an independent banking consultant. Integrity “got way too heavy into residential construction, and did so without a good customer franchise base. They basically went belly up when home building went belly up.”
Shrinking deposits
The FDIC also wanted Integrity to reduce its reliance on so-called brokered deposits, in which a broker provides money to banks from investors across the nation. Such depositors are often more fickle than local customers and usually demand higher interest rates.
Integrity Bank relied on brokered deposits to bankroll much of its growth from 2005 to mid-2007, when such funds grew from less than a tenth to more than a fourth of its deposits, which topped $1 billion by 2007. The FDIC ordered the bank to reduce its reliance on brokered deposits as part of its cease and desist order in February.
The new management team did partly wean Integrity from brokered deposits, but the bank had to bump up interest rates as much as a percentage point above other Atlanta banks’ rates in recent months to woo local depositors.
No new capital
The FDIC’s February order required Integrity to roughly double its core capital — reserves to cover losses — within six months to improve its financial stability. The agency hoped the bank could raise new capital by selling additional common stock and other securities or assets to boost its cash reserves.
But buyers were scared off by the bank’s likely future losses. For instance, the undeveloped land that serves as collateral on foreclosed real estate development loans in many cases is now worth only 20 percent to 30 percent of the original value of the loans.
Attorney Moeling said Frawley “pursued, I believe, over 40 potential partners,” but without success. “The hole was just too deep.”
As part of the FDIC’s takeover, Birmingham-based Regions Financial agreed to acquire Integrity’s $974 million in deposits and certain assets, and it reopened Integrity’s five branches last week as Regions offices.
The problems for Integrity may not be over. The FBI, which investigates possible financial crimes, is looking into the situation, an agency spokesman said.
The FBI isn’t talking about the case, but The Wall Street Journal has reported that state and federal officials are focused on 14 loans totaling $83 million that Integrity allegedly made to a developer in South Florida, Guy Mitchell. The loans are now in default.
A lawyer for Mitchell declined to comment.
“That’s a lot of money for any bank of that size to lend,” said banking industry analyst Christopher Marinac of Atlanta-based FIG Partners.
Regulators are investigating whether Integrity may have run afoul of Georgia banking laws, which limit a bank from tying up more than 25 percent of its capital with a single borrower.
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