Peoples First Community Bank collapsed because it made risky bets on real estate developers and did not follow basic rules to protect against bad loans, according to the Federal Deposit Insurance Corp
Instead of restraining itself when the real estate market began to show signs of weakness, Peoples First lent good money after bad.
"The defendants knew or should have known of the decline in key economic indicators, including the slowing of housing sales and peaking of home prices by early 2006," the FDIC said in a December 2012 lawsuit
against bank officers and directors. "But the defendants continued to encourage and approve high-risk and speculative transactions."
The result was Florida's fourth-largest failure of the Great Recession — involving a $1.8 billion bank that had made loans across the Panhandle to Jacksonville and down to Orlando.
Top executives at Peoples First maintain that it was the economic downturn, not their own actions, that caused the bank to fail. In their response to the FDIC's lawsuit, they note that regulators continued to give Peoples First high marks for safety and soundness from 2005 through 2007.
David Chapman, the son of Peoples First's founder, added that the federal government is fundamentally to blame.
It was the federal government's goal of increasing homeownership that led to an explosion in exotic subprime mortgages during the boom, Chapman said. And it was the federal government's policy of "Too Big to Fail" that sheltered large banks while allowing small lenders to go under.
"The federal government decided which banks would stay in business and which ones wouldn't," Chapman said. "They created the environment and then did nothing to help you get out of it."
Founded in 1983 by prominent Panama City businessman Joseph F. Chapman III, Peoples First was part of a conglomerate of companies that developed condominiums and commercial projects, sold insurance and brokered stocks and bonds.
A developer, the elder Chapman ran the bank as a funding vehicle for similar businesspeople.
"For over 20 years, prior to the crisis, the defendants oversaw a well-capitalized and highly profitable bank," officers and directors said in their response to the FDIC suit. "Only beginning in the first quarter of the 2008, which coincided with the economic downturn and collapse of the Florida real estate market, did the bank first sustain net losses."
According to FDIC documents, however, the seeds of the bank's destruction were sewn long before the onset of the Great Recession.
The FDIC said regulators at the Office of Thrift Supervision began warning officers and directors about the risk of lending so much money to developers as early as 2005.
Examiners also criticized top executives for failing to properly analyze whether some borrowers could repay their loans, and for obtaining what amounted to worthless appraisals on real estate.
Sometimes, regulators found, Peoples First broke its own policies by lending more to customers than was allowed, and by helping people stay current on their loans by giving them additional funds to make payments.
"Some loans originated in 2000 have been renewed five times or more using bank-funded interest reserves to keep loans current," the FDIC said in its August 2011 report.
In its suit, the government pointed to 11 loans totaling $77 million as being particularly careless.
Two of those loans, for nearly $20 million, went to Paramount Quality Homes, a Port St. Lucie company managed by Martin Schaffer.
Paramount received its first $12.2 million loan in November 2005 to develop 239 single-family homes in Polk County.
Under the bank's own lending guidelines, Peoples First should have lent Paramount no more than $8.3 million.
The FDIC argues in its lawsuit that Paramount could not afford the loan at the time because its net worth consisted mostly of assets such as real estate — assets that were quickly losing value.
Meanwhile, loan files were missing important documents — a credit report, tax returns and other financial records.
To help Paramount, the bank set up an $800,000 interest reserve that allowed the company to cover interest payments for 18 months.
"The defendant's reliance on a large interest reserve was imprudent in a declining real estate market and was discouraged by the bank's own policy," the FDIC said in its suit.
Still, the bank did business with Paramount. Four months after the original loan, it lent the company another $7.5 million.
Officers and directors "failed to exercise even the slightest care in their review" of these loans, the FDIC suit says.
Paramount ultimately defaulted on both loans and Peoples First collapsed in December 2009.
Telephone numbers for Schaffer and his company have been disconnected.