Audit: Regulators moved too slowly on Integrity Bank

Regulators should have moved more aggressively to address problems at Alpharetta-based Integrity Bank, which failed last August, according to a recently released federal audit.

The audit said regulators found problems with Integrity’s lending practices as far back as 2005 and 2006 that “should have warranted greater concern.”

“In the case of Integrity, however, supervisory actions were not timely and effective in addressing the bank’s most significant problems,” the audit said.

The audit, required under federal law, was conducted by the Federal Deposit Insurance Corp.’s Office of Inspector General. The report covers both the cause of the failure and whether regulators provided adequate supervision.

The auditors said regulators were too slow to rein in Integrity, which by 2006 had taken on a great deal of risk by loading up on real estate construction loans.

Georgia and federal regulators oversaw Integrity, but the FDIC was the primary focus of the report and took issue with the audit’s findings. In a memo to auditors included in the report, FDIC officials said the most serious of Integrity’s problems didn’t come to light until the 2007 examination.

Integrity was the first of nine Georgia banks that have failed during the current economic crisis. The bank raked in outsized profits earlier this decade by lending to real estate developers and homebuilders, but big losses piled up when the housing market turned in 2007.

The bank was one of Georgia’s largest community banks with $1.1 billion in assets.

The bulk of the 32-page audit explores the roots of Integrity’s collapse. The audit blasts the bank’s management and board of directors for a range of missteps and oversights, including:

• Failure to follow sound loan underwriting standards.

• An over-reliance on volatile sources of funding such as “brokered deposits” from third-party sources and Federal Home Loan Bank advances.

• Failure of the board of directors to ensure that bank management took proper steps to control risk.

The audit revealed the previously secret scores that examiners gave the bank during visits between 2004 and 2008. The fall was steep.

In May 2006, examiners rated the bank a “2” on a scale of 1-5, with 5 being the most risk of failure. The bank’s rating was downgraded to a “4” in June 2007 and a “5” in March 2008.

Walt Moeling, a lawyer with Bryan Cave Powell Goldstein in Atlanta who represented Integrity, said regulators shouldn’t shoulder too much blame.

“We’ve been through the worst financial meltdown in 70 years, and a lot of what looked like gold in 2006 really looks very risky and speculative today,” he said. “In retrospect, [Integrity’s] loans were much riskier than anybody thought, but nobody thought we’d have a complete meltdown in residential real estate.”