Commercial Real Estate Woes Spur Integrity Failure

WASHINGTON — Integrity Bank in Alpharetta, Ga., on Friday became the tenth institution to fail this year.

The Federal Deposit Insurance Corp.'s takeover of the $1.1 billion-asset subsidiary of Integrity Bancshares Inc. was the third failure in August, and the second in two weeks.

Integrity closed awash in bad loans from its commercial real estate portfolio, which had been tied largely to one guarantor, and which had resulted in steady losses since the second quarter of last year.

In the first six months of the year, the bank lost $33.6 million, and finished the second quarter with a Tier 1 risk-based capital ratio of 3.8%, making it undercapitalized.

The FDIC said all of Integrity's $974 million in deposits would be assumed by Regions Financial Corp. in Birmingham, Ala. Integrity's five branches will reopen as branches of Regions on Tuesday, the agency said. Regions agreed to pay a 1.012% premium for the failed bank's deposits, as well as buy $34.4 million in Integrity's assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimated that the failure will cost the Deposit Insurance Fund between $250 million to $350 million.

The failure came despite a cease-and-desist order in April from the FDIC and state regulators, requiring a Tier 1 capital ratio at or above 8% and restricting ties with certain borrowers, and despite efforts by the institution to correct itself.

Last September, Integrity hired Patrick M. Frawley, a former Office of the Comptroller of the Currency supervisor with a track record of rehabilitating distressed banks, as its chief executive.

As early as the spring, it was actively seeking capital from investors or a buyer, but its losses kept mounting. Last quarter, it lost $24 million, compared with $45 million lost all of last year.

"The board and management did everything they could under the circumstances, but the level of problems that the new management team inherited was just too large to overcome," said Walter G. Moeling 4th, a partner at Powell Goldstein LLP in Atlanta, who had advised the institution.

The recent streak of failed institutions amid persistent credit problems does not appear to be waning, increasing the FDIC's insurance demand and the likelihood of higher premiums next year. Integrity's failure comes just days after the FDIC announced that the "problem" bank list had increased from 90 to 117 institutions, and assets on the list tripled to $78.3 billion.

The ten institutions that have failed this year are the most since 2002. Moreover, the FDIC revised its estimate of the cost of IndyMac's failure — originally between $4 billion and $8 billion — $8.9 billion.

The agency also revealed this week that IndyMac's failure had helped drive the agency's ratio of reserves to insured deposits down to 1.01%.

Integrity's failure comes nearly a year after NetBank, another Alpharetta institution, failed in September 2007.

In a press release, Georgia Gov. Sonny Perdue urged bank customers in the state to be calm.

"I want to reassure Georgians that our state's banking industry remains on solid footing, and two-thirds of banks in our state have been profitable year to date," he said. "While there is concern about many of our industries given the national economic climate, Georgians should not overreact to the news of one bank closing."

At the beginning of the month, the FDIC closed $259 million-asset First Priority Bank in Bradenton, Fla., and on Aug. 22 closed $752 million-asset Columbian Bank and Trust Co. in Topeka, Kan.

On July 25, the Office of the Comptroller of the Currency closed $3.4 billion-asset First National Bank of Nevada, in Reno, and $254 million-asset First Heritage Bank in Newport Beach, Calif. Both were owned by First National Bank Holding Co. in Scottsdale, Ariz.

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