Georgia Bank Bet Big on One Horse
Now, Regulators
Want to Know Why;
The Capital Drain
By LINGLING WEI
August 29, 2008; Page C3
State and federal regulators are asking why Integrity Bancshares Inc., a Georgia community bank, lent almost all of its available capital to one real-estate developer.
Integrity is one of dozens of small banks throughout the country struggling with rising defaults resulting from their unbridled lending during the heyday of the real-estate frenzy. As of the end of the second quarter, nearly 50% of Integrity's $668.4 million in construction loans was nonperforming, according to research firm Foresight Analytics LLC, up from only 7% in the year-earlier period.
State and federal regulators have been pressing the bank to shore up its capital level since early this year. But so far, it has failed to attract investors. According to Integrity's latest filing with the Federal Deposit Insurance Corp., its Tier 1 capital dropped to about $35.5 million in the second quarter, down from $82.1 million a year ago; Tier 1 capital is a key indicator of a bank's ability to absorb losses.
The deepening financial woes at Integrity comes as the FDIC earlier this week raised to 117 the number of banks it has identified as problematic, the largest number since mid-2003 and up from 90 at the end of the first quarter.
While the agency didn't identify any of the banks on the list, many analysts have singled out Integrity as one of the most troubled local banks because it is rapidly running out of capital.
"Raising capital in this environment is very challenging," said Chief Executive Pat Frawley, a former regulator who was brought in by Integrity's board in September to help save the bank. "But we continue to pursue every reasonable solution vigorously."
Integrity, which is based in Alpharetta, Ga., and has five branches, is an extreme example of a community bank that got caught up in the real-estate boom.
These small state-chartered banks are supposed to focus on serving local communities. But during the housing boom, many of them were muscled out of the business of lending to home buyers by large banks. Many turned to making loans -- ranging from $1 million to $10 million -- to finance office buildings, hotels, housing projects and other commercial real estate.
Integrity has acknowledged that it made 14 loans for a total of $83 million to entities owned by the same guarantor; that amount represented almost all of the bank's available capital early last year. While Integrity didn't disclose the identity of this borrower, people familiar with the matter say it was Guy Mitchell, a Coral Gables, Fla.-based property investor. The money went to five shopping centers, a primary residence for Mr. Mitchell, and a condominium-conversion project.
All of those loans are now in default. Mr. Frawley said the bank has been "trying diligently to collect as much as possible," but he declined to identify the borrower or discuss other specific customers.
Georgia law limits to 25% of available capital the amount of credit secured by real estate that a bank can lend to one borrower. Regulators are trying to figure out whether Integrity might have violated state banking law, according to people familiar with the matter.
A spokesman at the FDIC declined to comment. Rob Braswell, the commissioner of Georgia's Banking and Finance Department, also declined to comment. But he said that, in general, some banks have tried to get around the lending limit by making loans to seemingly different companies that are owned by the same borrower.
The former CEO, Steven Skow, who was in charge when the loans to Mr. Mitchell were made, declined to comment. Mr. Skow, who launched Integrity about eight years ago, said in a news release in June 2007 that "the loan officer that initiated the relationship with the guarantor is no longer employed by the company." In August 2007, Integrity announced the termination of Mr. Skow's employment.
Mr. Mitchell didn't return requests for comment. The developer currently is involved in a legal battle with another real-estate developer over the management of the Royal Palm hotel in Miami. Court documents allege that Mr. Mitchell transferred about $3.8 million from the hotel to his accounts in the Cook Islands.
Mr. Mitchell recently admitted that he had converted some of the hotel funds to his personal account and returned them. "I apologize for that conduct, and acknowledge that I should not have made the transfers" of $1.3 million in hotel revenues, he wrote in a June 30 affidavit. His lawyer didn't return calls seeking comment.
With the need to raise additional capital to stay afloat, Integrity has seen its options limited by the worst U.S. housing and credit markets in decades. "The new management has gained significant credibility with regulators," said Walt Moeling, a senior partner at law firm Powell Goldstein LLP. However, he said, "there are market conditions that go beyond the management's control." |
