Once one of Florida's most prominent bankers, Vernon D. Smith founded four state banks.
Two of them — Riverside National and Riverside Bank of the Gulf Coast — failed to make it through the Great Recession.
At Riverside National in Fort Pierce, Smith participated in insider loans that are the subject of a federal investigation, and he was sued by angry shareholders who say he sold stock on bogus information.
By March 2006, Riverside had 172 loans totaling $24.1 million on its books; these were secured by stock in Riverside National or its sister companies,
the FDIC said.
Some of these loans were to board members and their families. The interest on them was paid when the bank issued dividends.
When Riverside National began to struggle and its stock fell, the bank wrote off "substantially all" of these loans — essentially allowing insiders to keep the money without ever paying it back.
This cost the bank millions.
In April of this year, the FDIC sued Smith and seven Riverside executives, demanding $8 million in damages for permitting "an excessive number of poorly underwritten loans" secured by stock in Riverside and its affiliates.
Among these: a $2.5 million loan to Smith's daughter, and three loans totaling $1.3 million to his son. Both adult children defaulted on those sums but never faced foreclosure suits. The FDIC estimated that the bank lost $3.5 million when the siblings failed to repay.
Smith could not be reached for comment and has not yet responded to the FDIC's suit.
Meanwhile, two former investors sued Smith. William and Mary Ann Becker say in court papers they paid $1 million for 4,000 shares of Riverside National's stock in the late spring and summer of 2008 based on assurances from Smith that the bank was in good financial shape.
Their investment became worthless when the bank failed two years later. The case was dismissed in 2012.
Smith also was in hot water over another questionable deal. In that case, he was an executive at an insurance company and convinced it to buy his shares of bank stock in February 2009 — basically allowing him to walk away from a failing investment and leaving the insurer with worthless stock.
The state Office of Insurance Regulation investigated the purchase and ordered Smith to repay $600,000 in March 2010.
Besides claims of insider lending, the FDIC cited Smith for investing depositor money in exotic financial instruments that initially paid handsome returns but involved major risk.
Riverside National bought collateralized debt obligations, or CDOs. These are individual mortgages that have been grouped together and sold to investors, with a rating that lets investors know the odds that borrowers will ultimately repay.
Riverside National did a "minimal evaluation" of these odds, the FDIC found.
From 2006 through 2008, rating agencies downgraded the bank's CDOs an average of 11 levels.
By 2008, half of Riverside National's $139 million in losses came from its investment portfolio — particularly a type of complicated CDO called "trust preferred securities."
Trust preferred securities are usually issued when investors need capital to get a bank up and running. Investors borrow through a bank holding company and use the proceeds to capitalize the bank. They then repay the money over time.
Believing in the future of banking — a belief that would prove unwise — Riverside National started making these investments all across the country. In essence, that made it an investor in other banks.
So when hundreds of lenders began to fail all across America, Riverside National was in serious trouble.
By March 2008, the bank had $300 million worth of these securities, representing 20 percent of its investment portfolio. It would eventually write off those losses.
The FDIC said Riverside National's collection of CDOs was so large that it equaled the number held by every other failed bank in the country at that time.
Officers and directors of Riverside National did not return calls seeking comment.