Integrity Bank was based in Florida but its fortunes were tied to Georgia.
The bank had a sister institution in Alpharetta, Ga., that was older and larger and seemed to steer decisions made in Florida.
Two former loan officers at the Georgia bank pleaded guilty to conspiring to commit bank fraud, while the FDIC sued officers and directors — including the chief executive of the Jupiter-based Integrity — for gross negligence.
Lawyers for the group denied the charges in court; the case remains pending.
The two banks were so intertwined
that by March 2006, one of every four loans at the Florida bank originated in Georgia, where the lender took the unusual step of loaning vast sums to a small group of borrowers.
Companies belonging to businessman Lee Najjar — who appeared on the reality TV program "Real Housewives of Atlanta" — received $40.6 million. The bank's legal lending limit was $22.75 million.
Instead of cutting back to comply with Georgia law, Integrity increased its loans to Najjar by another $20 million six months later, according to the FDIC's lawsuit.
Regulators say the Georgia bank took these risks because top executives earned commissions based on loan volume, not quality.
Douglas Ballard, the bank's senior lender, lied to justify these risky deals and misled the board of directors about some of the loans, federal regulators said in their suit. Ballard told the board in January 2005 that an unnamed Florida developer had paid $1.5 million for 302 acres of land — when he only paid $1.08 million.
The developer later received an additional $1 million loan from Integrity after presenting an appraisal showing the property was worth $8.8 million.
"Conspicuously absent from Ballard's loan presentation, however, was an explanation for the astonishing $7 million increase in value in just 12 months," the FDIC suit says.
Ballard needed to justify a higher loan to the developer's company, which meant a bigger commission for the bank's executives, the FDIC says.
Ballard, who received 10 percent of the commissions earned by members of his loan team, also told the Georgia bank's board in 2005 that a $10.3 million loan was justified because the developer had already sold 85 percent of the units he planned to build. The FDIC found that the builder had sold just 30 percent by that time.
In July 2010, Ballard pleaded guilty to conspiracy to commit bank fraud, bribery and tax evasion in connection with $80 million in loans that Integrity made to developer Guy Mitchell from 2004 through 2006.
Mitchell also was indicted in the case and has pleaded guilty to conspiring to defraud a federally insured lender. Both men are scheduled to be sentenced in October.
In its suit, the FDIC said the Georgia bank had an opportunity to mend its ways when the economy began to weaken.
"But rather than restricting high-risk lending, working out existing troubled loans and preserving the bank's capital, the defendants instead took actions that masked the bank's mounting problems," the FDIC wrote.
Members of the Georgia bank's board did not return calls seeking comment. In court, they accused regulators of overreacting and failing to prepare banks for the unprecedented downturn.
In Florida, regulatory filings show that the Jupiter-based bank built its loan portfolio by participating in loans originated by its Georgia sister. By June 2006, 24 percent of the $70 million in loans on Intergity's books had been made in Georgia.
Two years later, those loans were weighing heavily on the Florida bank. Regulators classified six of them, totaling $11.4 million, as nonperforming and noted that the loans represented 44 percent of all bad loans on Integrity's books at the time.
"Management largely accepted the Georgia bank's underwriting without adequate review," Florida examiners wrote in their July 2008 report
But bad loans from Georgia were not Integrity's only problem.
From the beginning, the bank was marked by infighting among its board of directors and turnover among senior executives.
The bank had five presidents in its first four years. It also went for an entire year without a chief executive and ultimately promoted its chief lending officer, who had no experience managing a bank.
In December 2007, state examiners found dissent among board members was clearly "exacerbating" the bank's financial health.
That month, six of the board's 10 members left, regulatory records show.