Monday, April 23, 2018

When lending hurts till it kills

Remember the plan to build a luxury resort anchored by the down-at-the-heels Oak Hills Golf Club?

Remember developer Jimmy DeMaria saying he was sure there was a market for hotel rooms and guest houses and a banquet hall big enough for 800 people, that he'd be able to charge more than $3,000 (meals included) for a family to spend a week in Spring Hill?

Even at the height of the real estate boom, in 2006, this all might have struck you as farfetched. You might have even wondered what lender would finance such a scheme.

The answer — Brooksville-based Cortez Community Bank — also helps answer another question that has been floating around for the past year: Why did the bank fail last April 29?

We'll never know all the reasons because the Federal Deposit Insurance Corp. no longer investigates the failures of banks the size of Cortez. With so many bigger banks going under in recent years, its $72.2 million in assets and the $18.6 million the FDIC dumped into it to make it marketable to a buyer looks like pocket change in Washington.

Not in Hernando, where the opening of Cortez in early 2004 was a big deal.

It boasted an impressive list of board members — business leaders, doctors and lawyers — many who invested more than $50,000 in the bank's initial stock offering.

It was the county's chance to move up the economic food chain, to be not just a place where dirt is turned and houses are built, but a community capable of financing this kind of work.

That's why I think it was fitting that the former board chairman, Brooksville lawyer Tom Hogan, agreed to be interviewed the day after the one-year anniversary of the bank's collapse, and after it was clear the failure would not be investigated by the FDIC.

Yes, Hogan said, just as it appears from public records and from an analyst's report on the bank, Cortez failed mostly because of too many risky construction and development loans. And, yes, some of the worst ones went to friends or business associates of board members.

No, the bank didn't cut corners or make these loans without adequate documentation.

"I don't think I did anything wrong," Hogan said. "I think I could have been smarter, but I didn't do anything wrong."

Hogan, who founded the bank with retired Lykes Bros. executive Derrill McAteer, said the idea was to start a local bank with good customer service, to capture a share of the financing business that was leaving Hernando — and to take advantage of his many business contacts.

"What you learn (from the state Division of Banking) is, bring your friends into the bank," he said. "As a director it is your job to bring in the opportunities to the bank, not just the depositors but the lending opportunities."

He and other board members expected those opportunities to come from mortgages for houses in new developments such as Southern Hills Plantation Club and Hernando Oaks.

Neither project grew as fast as expected, and the bank found it couldn't compete with discount rates offered by out-of-town lenders.

So Cortez turned to riskier development loans, which shortly before its failure made up 31.8 percent of its loan portfolio, compared with a 5.67 percent average for banks its size, according to an analysis by Bauer Financial Inc. of Coral Gables.

With the economy booming, these loans quickly made the bank profitable, which is unusual for a startup.

"Looking back on it, our early success is what kind of killed us," Hogan said. "We got praise from the state Division of Banking, we had shareholder meetings and everybody was happy, and it gave us confidence to go ahead with our aggressive plan."

That included the $3 million loan for the Oak Hill project, in October 2006, to for two of developer DeMaria's companies, though Hogan said some of the risk was shared by another bank.

DeMaria — a longtime client of Hogan's who filed for bankruptcy protection in 2008 — also pops up in the transactions leading to another bad loan, for a project called Laurel Oaks that was planned for 40 acres in Spring Hill north of County Line Road.

DeMaria's company, Blue Stone Real Estate, Construction and Development Corp., bought most of this land in May 2006 with a $1.49 million loan from Cortez. He then sold it to another of his companies on the same day and, in October, to Laurel Oaks Acquisitions, a company that included officers in EPAC Custom Builders, Andrew Columbino and Mark Kundrat.

Laurel Oaks took out a $3.7 million loan for the development as well as the land, Hogan said. DeMaria didn't retuurn a call from the Tampa Bay Times, and Hogan doesn't remember for sure that DeMaria was the one who brought the deal to the bank. But "it makes sense that he was," Hogan said.

The property has since fallen into foreclosure. So has an unrelated proposed development in Spring Hill — a 60-acre project called Plantation Palms, financed with a $2.9 million loan from Cortez.

Cortez did not foreclose on the Oak Hills property, nor on Southern Pines Condominium, on the west side of Brooksville, a partly built and mostly vacant development that was financed in part by a $2 million loan from Cortez.

But they still cost the bank, Hogan said.

Every time the appraised value of its properties dropped, the bank was forced to reduce the value of the loans on its books, shrinking its assets. Because it was a new bank, it hadn't had time to build a base of solid loans to absorb the impact of the bad ones.

"After a while, we realized we're on a path we can't recover from unless we get someone in here to buy the bank," Hogan said.

But, he said, independent appraisals justified the loans at the time they were issued. If it now seems obvious that some of them were issued well after the market had turned — in 2007 for both Southern Pines and Plantation Palms — it wasn't clear at the time, he said.

And DeMaria seemed like a successful entrepreneur to Hogan, just as, judging from the creditors listed in his bankruptcy case, he did to a lot of other bankers.

"I introduced Jimmy to the bank because he had the potential to bring a lot of business to the bank," Hogan said.

He said he excused himself from voting on loans to DeMaria, or on those of anyone he'd done business with — as did other board members.

But Hogan, who says his family lost about $700,000 it had invested in the bank, lives with the knowledge that he cost other investors.

And though his bank's rush to profit from the overheated market certainly wasn't unusual, considering his influence and the amount of public work his firm does — for the city of Brooksville, the Sheriff's Office, the clerk of court — I don't think it should be forgotten.

It won't be, Hogan said.

"It's kind of like a scar on my face. There's nothing I can do about it."

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Published: 04/23/18