The Federal Deposit Insurance Corp. is targeting directors and executives of another failed bank, but this time the agency has a guilty plea to back its claims of mismanagement.
Last week, the FDIC filed a 77-page complaint in the U.S. District Court for the Northern District of Georgia against eight former executives and directors of Integrity Bank in Alpharetta seeking $70 million in damages related to 21 loans.
The lawsuit was filed after two former bank executives in July pled guilty to charges that included conspiracy to commit bank fraud and securities fraud. One of the executives, Douglas Ballard, was also named in the FDIC lawsuit.
The $1.1 billion-asset bank failed in August 2008 and began the ongoing flood of failures in Georgia. Since the fall of Integrity, 51 banks have failed in the state, including one this year.
Integrity also was a microcosm of what brought down many banks in the growth states: excessive expansion, an overconcentration in real estate development and construction loans, and an overreliance on brokered deposits to fund the operations.
Industry experts said an FDIC victory in the Integrity case could be an ominous sign for directors and executives of banks that failed in Georgia and other once-hot markets.
"They were just the poster child for rapid growth," said James C. Wheeler, a lawyer at Morris, Manning & Martin in Atlanta. "If the FDIC wins, it is going to put a big scare in every failed bank here."
Some bankers may already have reason to be frightened as the FDIC aggressively attempts to recoup money. The agency said this month that its board had given it permission to sue 109 former bank directors and officers.
The Integrity litigation follows suits filed against individuals tied to IndyMac Bank in Pasadena, Calif., and Heritage Community Bank in Glenwood, Ill.
In the suit against Integrity, the FDIC alleges the bank, which was founded in 2000, had an unsustainable growth strategy and that directors and officers failed to correct the course even as the market began to show signs of weakness.
The defendants "made little or no effort to diversify the bank's real estate portfolio, enhance oversight of the lending function or otherwise mitigate the increased risk they created by following a growth-at-all cost strategy," the FDIC claimed in the lawsuit. "They continued to choose short-term profits over prudent lending."
The FDIC is alleging gross negligence and breaches of fidicuary responsibility, among other things. The defendants include Steven Skow, the bank's founder and former president and chief executive, and Jack Murphy, a state senator who heads the banking committee in the Georgia Senate.
Efforts to reach the eight defendants were unsuccessful.
Wheeler said that part of what makes the Integrity case important to the industry is the FDIC's assertion that the bank should have known better. A legal victory for the FDIC could set a precedent.
"I think that is an argument that a lot of people are going to be looking at," he said.
Christopher Marinac, an analyst at FIG Partners LLC in Atlanta, said that the individual fraud convictions from last summer make the Integrity case slightly different than other instances where the FDIC may square off against leaders of failed institutions.
"Some banks fail because of stupidity and some banks fail because of fraud," Marinac said. "In Integrity's case, it was both." At the end of 2007, real estate acquistion, construction and development loans made up 77.6% of the bank's loans and were more than 10 times its Tier 1 capital. In the current environment, regulators want that ratio to stay at 1:1 or lower, Marinac said.
"They had an enormous amount of construction. They had all of the things you don't want, but back then it didn't appear to matter," Marinac said. "They had enough problems, but unfortunately for all us, if management is dishonest, all bets are off."
At mid-2008, nonperforming assets at Integrity totaled $352 million, or nearly a third of total assets. Regions Financial Corp.'s Regions Bank in Birmingham, Ala. paid a 1.01% premium for the deposits. The failure predated loss-share deals and the FDIC kept the assets for later disposition. Its failure cost the Deposit Insurance fund $393 million.
Last April, Ballard, a former executive vice president of lending, was indicted on 20 counts of bank fraud and other related charges. According to a July press release from the Department of Justice, Ballard admitted to receiving more than $200,000 in bribes from Guy Mitchell, the bank's largest client, in exchange for helping Mitchell receive millions from loans that were made under false pretenses.
As much as $20 million was transferred from the loans to Mitchell's personal accounts and were used to, among other things, finance the purchase of a private island in the Bahamas.
Joseph Foster, the bank's vice president of risk management also pled guilty to insider trading charges stemming from selling stock in Integrity Bancshares Inc., the bank's parent company, in anticipation of Mitchell defaulting on $80 million of loans.