R. Steven Aaron is largely responsible for making Integrity Financial Corp. in Hickory, N.C., what it is today.
Mr. Aaron founded it as Catawba Valley Bank in 1995, took it public in 1999, and engineered two acquisitions. Assets rose from $12 million in 1995 to about $675 million today.
But after nine years at the helm, Mr. Aaron, 57, is out of a job. He stepped down as president and chief executive on Nov. 19, after an internal audit led the company to restate third-quarter earnings. That review, which continues, discovered nearly $4 million of loans that were not properly classified as to risk of noncollection.
According to the executive who is filling in as president and chief executive, Mr. Aaron approved all of the loans highlighted by the review.
Now it is up to that interim CEO, W. Alex Hall Jr., to resolve the loan troubles so Integrity's next CEO can start with a clean slate.
At the end of October, during a normal loan review, Integrity's internal auditor came across an atypical loan, said Mr. Hall, the company's interim president and CEO. (Mr. Hall is also the CEO of one of Integrity's subsidiary banks.) With the help of outside accountants the auditor then started a more thorough loan review, he said.
Mr. Aaron was also the president and CEO of Catawba Valley Bank. Integrity said it removed him from those jobs Nov. 2; he resigned from the holding company two weeks later.
He left the same day the Nasdaq stock exchange threatened to delist Integrity if it failed to file its quarterly report with the Securities and Exchange Commission by Nov. 24.
The company filed it on that date - and said the day before that it was adding $4 million to its third-quarter loan-loss provision, turning what it had initially reported as a $1.4 million profit into a $1.1 million loss.
All these events apparently spooked investors. The thinly traded stock plunged 15% from Nov. 19 through Friday, when it closed at $14.05. It rose 6.3% on Monday, closing at $14.93.
Mr. Hall, 67, whose regular job is CEO of Integrity's other banking subsidiary, First Gaston Bank of North Carolina in Gastonia, predicted that the company's troubles would soon be over.
"This is a lot of activity for just one month, but we have had good results other than this, and I think we will be able to recover and go about our regular business," he said.
Mr. Aaron founded Catawba Valley Bank soon after leaving Southern National Corp. of Lumberton, which BB&T Corp. bought later that year.
Integrity is the holding company's third name. It was founded in 1999 as Catawba Valley Bancshares Inc.; renamed United Community Bancorp. in 2001, when it acquired First Gaston; and dubbed Integrity in April of last year. (The board said then that it had sought a distinctive name that "portrayed the company's commitment to doing business with honor and integrity.")
Mr. Hall said that Mr. Aaron's lending decisions went unnoticed because of deficiencies in internal controls. Integrity has now developed extensive procedures to identify changes to loan terms and conditions on a monthly basis, according to its earnings report.
As for the misclassified loans disclosed so far, "I think we are adequately reserved for them," Mr. Hall said. "We hope this is behind us, and we hope to collect on as much as you can."
He added that though Integrity's auditors are still uncovering problem loans, he does not expect future net losses, since it added $4.1 million in loan-loss reserves for the third quarter. Those reserves totaled only $385,000 at midyear.
Once the new procedures are running smoothly and most of the problem loans are charged off or collected, Integrity plans to start searching for a new CEO and someone to fill the newly created job of chief operating officer, Mr. Hall said. In the meantime he will remain CEO and executive vice president Ronald S. Shoemaker will be interim chief operating officer.
