Lack of Integrity: 10th Bank Failure of 2008 on Poor Risk Management

Integrity Bank was closed by the FDIC on Friday due to the usual culprits of real estate loans and bad risk management:

(From Bloomberg):"Aug. 29 (Bloomberg) -- Integrity Bank of Alpharetta, Georgia, was closed by U.S. regulators today, the 10th bank to collapse this year amid a surge in soured real-estate loans stemming from the worst housing slump since the Great Depression.

Integrity Bank, with $1.1 billion in assets and $974 million in deposits, was shuttered by the Georgia Department of Banking and Finance and the Federal Deposit Insurance Corp. Regions Financial Corp., Alabama's biggest bank, will assume all deposits from Integrity, which was run by Integrity Bancshares Inc. The failed bank's five offices will open on Sept. 2 as branches of Regions, the FDIC said...

...`Banks are being closed at the fastest pace in 14 years as financial companies report more than $505 billion in writedowns and credit losses since 2007. California lender IndyMac Bancorp Inc., which had $32 billion in assets, was closed July 11 in the third-largest bank seizure, contributing to a 14 percent drop in the U.S. deposit insurance fund that had $45.2 billion at the end of the in the second quarter.

Regions will buy about $34.4 million in assets and will pay the FDIC a premium of 1.01 percent to assume the failed bank's deposits, the FDIC said. The FDIC estimates the cost of the Integrity failure to its deposit-insurance fund will be $250 million to $300 million. ..

...Integrity was ordered by federal and state regulators in May to present a capital-raising plan within 60 days. At the time, the company had been trying without success for at least eight months to raise $40 million after loans to residential and commercial developers were hurt by the collapse of the real estate market…

...Integrity Bancshares, which sold for more than $14 a share in January 2007, closed today at 4 cents in over-the-counter trading. "

(From the Washington Post):"Integrity Bank, which opened in November 2000, specialized in real estate lending in the Atlanta area with a self-described "faith-based culture." Throughout the early part of the decade, when the housing market was booming, Integrity grew into a billion-dollar, publicly traded company. But when the real estate market started faltering, the bank found itself in trouble.

The bank replaced its chief executive in August 2007 and hired a turnaround expert in September, only to voluntarily delist its shares from the Nasdaq Global Market in March. Nasdaq had threatened to delist the company for failing to comply with reporting standards.

Rickey McCullough, an FDIC spokesman, said late Friday that the bank failed due to its aggressive pursuit of construction loans, coupled with falling real estate values and "inadequate risk management."

Construction loans made up 76 percent of the bank's total loan portfolio. For the quarter ended June 30, the bank posted a loss of $33.56 million."

A couple of  things jumped out at me when I first read about this:

Since '07 the banks have reported about 1/2 a trillion worth of credit losses and write downs, so much for the Pollyannas that were adamantly insisting that the total amount would be a fraction of that amount.

We're barely 3/4 of the way through the year and we've already had 3X as many bank failures as last year, the FDIC's insurance fund has been depleted by 14% and it stands to reason that we'll see more before the end of the year. Let's not forget that banking failures tend to be lagging indicators, as in: today's failures are often the result of yesterday's problems. In other words: even if the banking environment starts to improve it may turn out to be too little, too late for many of the nation's struggling banks.

Look at how things have changed in past year: in September of '07 the $2.5 billion failure of Net Bank (another Alpharetta, GA based bank) was the largest since the S & L crisis, today a $2.5 billion bank failure would be around 1/13th the size of the recent failure of IndyMac.

You can read the Bloomberg article here, and the Washington Post article here.

Sources:

Bloomberg: "Integrity Bank Becomes 10th U.S. Failure This Year" -- Alison Vekshin and Ari Levy, August 29, 2008 .

The Washington Post:"Georgia Bank Closes in 10th Failure This Year" -- Madlen Read, August 30, 2008. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[Tim Plaehn:]

10 bank failures this year vs. over 120 per year during the S&L crisis. Not quite crisis level yet.

2008 Sep 03 08:47 AM

[venividivici:]

Yeh Tim but the Fed has made an artform out of propping up everyone that is too big to fail. Look at Lehman. More shocking news today. A hedge fund they have a 20% interest in, closing their biggest fund with huge losses. And guess what, Lehman is rising this morning. This is a market driven by gamblers who don't give a toss about the real world.

2008 Sep 03 10:44 AM

[johnhaskell:]

It's nice to know that Integrity management spent a lot of time praying to Jesus. Too bad Jesus forgot to tell them not to make high LTV loans in the Atlanta area.

2008 Sep 03 10:54 AM

[8-Alpha-Zulu:]

Haskell is right, the whole developer-lender-appra... industry there in Atlanta revolves around who prays the hardest. Integrity isn't the only one exposed in the ATL; more to follow I predict. Wanna see something to pray about, look at the Jesus network of appraisers and their appraisals that supported so many of these loans! Jesus forgot to warn the bank's BoD's of the ridiculous exposure that they created for their equity stakeholders. Lord Help Them.

2008 Sep 03 04:05 PM

[Big Al45:]

Maybe Integrity was talking to the same deity that told Bush to invade Iraq.
Or maybe Jesus is a just lousy with numbers.

2008 Sep 03 04:45 PM

[User 265205:]

Alot of bankers for hire

2008 Sep 18 12:13 PM

[Robb:]

The bail out has not proven to open the credit market yet maybe too new to rate. I want to know what the Bail out prgram can offer my family. I have been in my home 20+ yrs and facing foreclosure. I am in retail sales
worst I've seen in 20 yrs. Wachovia says they can't help me until my "hardship" is over???what about their hardship ??? are we WFB or Citi or Wachovia. C'mon play by the same rules after all I aam footing the bill with every other American !!!
Thanks,
Robb.

2008 Oct 09 01:02 AM