PREVIOUS COVERAGE | Reports: Bad loans doomed 2 Bradenton banks

Two Bradenton banks that made national headlines last year when they were closed by regulators each owe their demise to poor oversight by management and overly aggressive pursuit of commercial real estate loans.

Those were the findings contained in two reports recently released by the Federal Deposit Insurance Corp.’s Office of Inspector General detailing the downfalls of Freedom and First Priority banks.

First Priority was shut down by regulators in August. At the time, First Priority had $43 million in nonperforming loans and only had $1.5 million in total equity capital.

On Oct. 31, Freedom Bank also was shut down for its loan losses and poor capital position. Freedom had lost $18 million for the year and was saddled with $35 million in nonperforming loans.

According to the Inspector General’s report, both banks tried to grow their loans and branches too aggressively and did not have adequate measures in place to govern risk.

In the case of First Priority Bank, the institution’s commercial real estate loans totaled 65 percent of the bank’s total loan portfolio as of December 2004, according to regulators. By June of 2007, First Priority’s commercial real estate loans represented 338 percent of total capital, according to the report.

During a May 2008 examination, regulators determined First Priority’s “aggressive loan growth strategy” included “poorly structured and underwritten real-estate-dependent loans in a highly competitive market,” according to the Inspector General.

The decline in real estate values compounded the problem and resulted in many of the projects that received loans being abandoned.

“Nevertheless,” the Inspector General report states, “because the bank’s risk management and loan administration practices were inadequate, the (board of directors) was slow to recognize the increasing risk in FPB’s loan portfolio and lending program as residential real estate values started to decline.”

First Priority also deviated from the original business plan it submitted to regulators in December 2003 during its startup by embarking on aggressive branch expansion, according to regulators. At the time First Priority was shuttered, it had opened five branches in the area.

The rapid branch expansion “increased the bank’s overhead costs; placed additional strain on earnings, which had been historically weak; and contributed to the bank’s increasing reliance on non-core deposits to fund its asset growth,” the report states.

Freedom Bank, which had grown to four branches since being chartered in May of 2005, also tried to increase its footprint too rapidly, regulators determined.

The bank also used an “aggressive, high-risk business strategy” and used “high-cost/volatile liquidity sources” to fund its asset growth.

Regulators placed much of the blame on the bank’s founding president and chief executive officer, Gerry Anthony.