Atlanta Business Chronicle

Integrity Bank's skyrocket run as the fastest-growing bank in Georgia history, fueled by housing construction, has ended in failure.

Birmingham, Ala.-based Regions Financial Corp. (NYSE: RF) late Friday acquired the deposits for the Alpharetta, Ga.-based community bank in the 10th bank U.S. bank failure this year, according to a late Friday press release from the Federal Deposit Insurance Corp.

Integrity Bank operates five branches in metro Atlanta, primarily in the city's affluent north suburbs. All of those branches will be acquired by Regions.

Regions Financial acquired all of Integrity’s $962 million in total deposits, including uninsured deposits, paying $9.7 million for them. The deal does not include Integrity Bank's branches. However, Integrity Bank branches will temporarily open as Regions Financial branches early Tuesday. The FDIC said all customer deposits at the bank will be available for customer use over the weekend through checks, debit cards and ATM withdrawals.

Regions Financial is also buying $34.4 million in cash and other assets from the failed bank.

The FDIC estimates the cost to liquidate bad assets it assumes from Integrity Bank will be $250 million to $350 million.

Integrity Bank CEO Pat Frawley was not immediately available for comment. Regions Financial North Georgia area executive Bill Linginfelter said his bank was excited to add customers and employees, despite taking over a failed bank.

In a recent previous interview with Atlanta Business Chronicle, Frawley -- hired to turn the bank around in fall 2007 -- described the bank as a plane slowly crashing to earth, and himself as the pilot at the controls.

"I don't know when we're going to hit the earth, if we'll hit sooner than I expect or someone else will make that decision for me," said Frawley. "But I'm at the controls and I know we're descending."

Rob Braswell, Georgia Department of Banking & Finance commissioner, said Integrity Bank “solvency was in question” and regulators were forced to close the bank the day before Labor Day holiday weekend.

Integrity Bank had been searching to raise as much as $50 million from private investors throughout the last year, people close to the bank said.

Just one day before it failed, Integrity Bank said in an Aug. 28 Securities and Exchange Commission filing it did not expect to be profitable during any reasonable future period, and wrote-down a series of deferred tax assets worth as much as $10.6 million. Those assets count towards a bank’s capital base -- a measure of a bank’s ability to weather loan losses.

The failure indicates the bank had run out of options for raising additional cash from outside investors or arranging a private-sale to a competitor, said John Douglas, Atlanta-based banking attorney with Paul, Hastings, Janofsky & Walker LLP.

Douglas previously served as general counsel at the FDIC during the Savings & Loan Crisis of the late 1980's.

Douglas said that while Integrity Bank was rumored to be the first Atlanta bank that would fail throughout the past year, the FDIC likely began looking at taking over the bank only after June 30, when second quarter financial reports showed the bank's capital was rapidly shrinking.

"The problem was the bank was well-capitalized for much of last year and actively discussing capital infusions with investors," he said. "You don't want to take over a bank that has private sector solutions available. This is a recognition there was no private sector solution left. At that point, any Friday after June 30 would have worked, to my knowledge."

Experts added that Integrity's loan woes were an extreme example of what commonly took place across metro Atlanta: rapid loan growth by new banks focused on housing and residential real estate development coupled with lax lending standards.

Many of those banks were created to sell to larger competitors within five years for two to three times the organizing group's initial investment.

Those plans were dashed for many banks by the housing market's collapse, and are now left sifting through problem loans.

"There are a number of institutions that don't look that dis-similar, and this isn't the only failure we'll see here," Douglas said. "But in a sense, nobody knows the long-term impact of this failure."

Integrity Bank's failure trails only NetBank’s failure in 2007 and the collapse of Fulton Federal Savings Bank in 1991.

Atlanta-based NetBank Inc. had $2.2 billion in deposits, but operated as an online bank gathering deposits nationwide.

Fulton Federal Savings Bank had $1.3 billion in deposits.

It is the fourth bank failure in Georgia since 2000 and 43 banks have failed in Georgia since the FDIC's creation in 1934. Four the last five Georgia bank failures have been in the metro area.

Centered around a Christian faith-based business model, Integrity Bank was a high-flying star of metro Atlanta's housing boom, but industry experts said Integrity quickly became the poster-child for lending and compensation excesses. The bank was the fastest in Georgia history to $1 billion in assets.

From Dec. 31, 2000 to June 30, 2008, the bank's loan portfolio grew 14,826 percent from $5.6 million to $834.8 million. That growth was fueled by loans for housing construction and land lot development, which increased 15,727 percent during that same period, from $4.2 million to $668 million.

Executives at the bank were some of the highest paid in the metro area. The bank’s top two executives earned $2.8 million combined in 2006, according to Integrity Bank’s 2007 proxy statement. Senior executive salaries, the bank’s compensation discussion and analysis section states, relied heavily on lenders and executives growing the total loan portfolio, with few incentives for credit quality.

CEO Steve Skow earned $1.8 million that year, while senior lender and executive vice president Doug Ballard earned $847,222. A typical community bank CEO, banking consultants said, earn roughly $300,000 per year.

Loan problems first emerged in spring 2007, when the bank's parent company disclosed in a Securities and Exchange Commission filing that losses were mounting in a series of $83 million loans to one borrower, the bank had inadequate loan review processes and a federal regulatory inquiry into the matter had begun.

By the end of the summer, Skow had been ousted along with senior lender Ballard. Turnaround specialist Frawley was hired soon after.

A call to Skow was not immediately returned for comment.

Frawley proceeded to shrink the bank's balance sheet -- particularly the troubled loan portfolio -- from $1.1 billion in total assets in second quarter 2007 to $880 million in second quarter 2008.

Bank executives also courted customers' deposits to fund the bank, offering certificate of deposit rates and shedding brokered deposits or so-called "hot money."

In the weeks before the bank's failure, Frawley said he remained confident the bank could continue to operate and eventually turn itself around. The only concern, he said, was how quickly federal and state regulators would push the bank to shed bad assets.

"If they ask me to sell it all tomorrow, we'll have to close our doors," he said. "But if you give me eight to ten quarters and some time to slowly work the pig through the python, we have a chance."

But the bank's losses from its rapid growth during the first half of the decade overwhelmed Frawley's turnaround efforts.

The bank's loan problems at the time of its closing were $353 million. That figure alone is 10 times the size of the bank's Tier 1 capital -- a key statistic comprised of shareholder equity and other internal assets that shows a bank's ability to weather loan losses.

The bank had also struggled to file quarterly and annual reports because of deterioration in its overall loan portfolio, and independent auditors have been unable to complete their review of the company's 2007 financial statements.

"Pat and his team did everything possible to try to save this bank," said Walt Moeling, Powell Goldstein banking attorney and senior counsel to the board. "It just wasn't recoverable."

Regions Financial operates 62 branches in metro Atlanta, with the bulk of those branches in the northern suburbs.

The bank has $2.5 billion in local deposits and 2.27 percent market share, according to the 2007 FDIC Summary of Deposits report, the most recent data available.

Its acquisition of Integrity Bank adds deposits high-growth suburbs, experts said, and is the first major move by Regions local executive Bill Linginfelter since he joined the bank in July.

At the time, Linginfelter said the bank would be a selective player in acquiring distressed or failing banks in Atlanta to add branches to a bank that has struggled to gain a firm Atlanta foothold.