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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.

The Inspector General’s report states that Anthony had a history of trying to aggressively grow banks “without establishing adequate risk management controls.”

Anthony, who retired from Freedom in the spring of last year, also founded the former Coast Bank, which nearly failed in 2007 before selling itself to Missouri-based First Bank. Before that, Anthony founded American Bank in Bradenton, which also suffered loan problems through aggressive lending.

Told of the findings of the Inspector General’s office, Anthony took issue with the report.

Although the report makes brief mention of the decline in real estate values during the period Freedom was operating, Anthony believes that was a primary factor — rather than a side note — in terms of what went wrong at the bank.

“It’s very easy to say it’s rapid growth,” Anthony said. “It does not take into account the experienced staff and the long-term relationships the staff had with the customer base and the service they provided those people over the years that made the institution more attractive than those who didn’t have that kind of relationship. I never thought we were growing too fast. I just thought we were dealing with the customer base I had experience dealing with for 30 years in Manatee County.”

The Inspector General’s report also places some of the blame on regulators.

Although the FDIC reported in 2005 that Anthony was known to have rapidly grown banks in the past “by paying above-market rates and pricing loans below peer banks,” the FDIC did not include conditions to ensure the bank did not grow too rapidly when it granted its final order for deposit insurance.

Instead, the report states, regulators relied on the expectation that board members would be conservative enough to rein in aggressive lending practices Anthony may have engaged in previously.

But that did not happen.

“Ultimately, the president/CEO failed to operate FB (Freedom Bank) in a safe and sound manner,” the report states.

Anthony maintains there was adequate oversight at the bank and the board of directors insisted on conducting internal audits to ensure solvency.

He reiterated the real estate downturn as the primary cause for the bank’s failure.

“We were quite involved with the community and we did a lot of community service and giving back to the community,” Anthony said. “From that standpoint, there was a lot of support for us and that added to our growth. If the downturn in the real estate hadn’t occurred, I have a feeling we’d be doing very well right now.”

That’s a belief shared by Alan Zirkelbach, the developer and Palmetto city commissioner who chaired First Priority’s board of directors.

“It’s basically the FDIC creating a means by which they place blame and they accept no blame themselves,” said Zirkelbach, who had not yet seen the report.

Zirkelbach said regulators continued to give First Priority above-average ratings for its capital through December 2007.

Inspection records contained in the Inspector General’s report show that First Priority received “strong or satisfactory” marks for liquidity from June of 2004 to September of 2007.

Zirkelbach said he relied on regulators’ instincts to gauge whether the bank was performing well.

“We’re not lily white, but equally responsible were the regulators for giving us those great ratings during that time,” Zirkelbach said. “I’m not a banker, I’m a contractor. Did we make any more risky loans than Wachovia or Bank of America? Absolutely not.”

In retrospect, Anthony, who now works for AIM Mortgage in Bradenton, believes that all bankers probably should have been more aware of the age-old premise that everything that goes up must come down.

“I just think maybe it was an economic situation that bankers maybe should have been more aware of,” Anthony said. “But we were being encouraged to lend. They (the government) wanted everyone to own a home, and through regulatory policies, that’s what happened.”

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