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Florida Bank, Used as ATM by Insiders, Won TARP Loan But Now Teeters

U.S. Century Bank had very high rates of insider loans and other red flags, yet got a $50.2 million TARP loan. Now that taxpayer money may be lost as the bank stumbles under heavy losses.

Update (10/22): This story has been updated with a comment from Rubio's spokesperson.

Update (10/26): U.S. Century has responded with a letter to the editor.

U.S. Century Bank rocketed into being in 2002, with investors pouring in $30 million over three months. Four years later, the Miami-based bank boasted assets of more than $1 billion, had consistently shown a profit, and had won plaudits from banking analysts such as BauerFinancial and glowing reviews from The Miami Herald and other local media.

In 2009, as the financial crisis hit, the bank received a vote of confidence from the federal government when it won a $50.2 million loan under the federal Trouble Assets Relief Program -- money earmarked for healthy banks. It was the most TARP money given to a Florida bank. "This represents an important recognition for U.S. Century Bank as it acknowledges our strength, stability and good standing as a strong and healthy financial institution," Ramon Rasco, the bank's chairman, said in a news release announcing the loan.

In fact, U.S. Century was ailing when it received the TARP loan. Today, the bank teeters on the edge of collapse as it operates under an extraordinary consent order, issued in June by the Federal Deposit Insurance Corp. Sweeping in scope, the order demands an overhaul including changes of top executives, a review of all loans, implementation of a program to guard against money laundering, and an increase in the bank's capital.

The rise and fall of U.S. Century, while certainly more extreme than most banks, exemplifies the fast-and-loose banking culture that led to the financial crisis, which continues to drag down the global economy. It also epitomizes both the failure to regulate the banking sector during the pre-crisis boom years and the slipshod approach to the bailout that followed the bust. Above all, it's about losers and winners. The losers are taxpayers and local residents grappling with the ill effects of suburban sprawl. The winners appear to be a group of wealthy and politically connected businessmen who created a bank that served as their own corporate ATM, funneling tens of millions of dollars to ventures in which they had a stake.

"Insider loans" -- loans to directors or officers of the bank -- at their peak exceeded 94 percent of U.S. Century's total equity capital. While high levels of insider lending are not uncommon in the early years of a bank startup, at U.S. Century they continued for years. Many of these loans were for speculative real-estate projects, some of which are now defunct or gravely troubled.

Compared to all commercial banks in the United States, U.S. Century was in the top 7 percent for insider loans as a proportion of total loans, according to an analysis of insider lending from 2005 through June 2011 done for ProPublica by banking analyst Trepp LLC. During 2005, the bank had one of its most prolific periods of insider lending; it was in the top quarter of 1 percent, ranking 20th out of 7,954 commercial banks in the nation at the time.

Year, Quarter Loans to Insiders (in Millions) Insider-Loan Rank Among U.S. Commercial Banks Percentile Rank Among U.S. Commercial Banks
2005, Q1 $67.4 22 0.27%
2005, Q2 $68.9 20 0.25%
2005, Q3 $77.0 58 0.73%
2005, Q4 $90.2 72 0.91%
2006, Q1 $74.3 122 1.55%
2006, Q2 $109.0 68 0.86%
2006, Q3 $111.5 71 0.91%
2006, Q4 $154.4 44 0.56%
2007, Q1 $151.2 54 0.70%
2007, Q2 $144.1 64 0.83%
2007, Q3 $112.1 137 1.78%
2007, Q4 $165.8 76 0.99%
2008, Q1 $166.5 84 1.10%
2008, Q2 $151.6 128 1.69%
2008, Q3 $169.0 116 1.54%
2008, Q4 $94.3 520 6.97%
2009, Q1 $140.3 194 2.62%
2009, Q2 $111.9 400 5.43%
2009, Q3 $115.1 376 5.16%
2009, Q4 $119.4 352 4.88%
2010, Q1 $140.1 224 3.13%
2010, Q2 $139.3 178 2.53%
2010, Q3 $118.4 292 4.18%
2010, Q4 $111.6 319 4.62%
2011, Q1 $104.5 300 4.40%
2011, Q2 $82.8 463 6.83%
Note: In the second quarter of 2005, there were 7,954 commercial banks; in 2011 there were 6,776.
Sources: Call Reports/Trepp LLC

U.S. Century declined to answer specific questions from ProPublica because of their "tenor," which the bank believes indicated a "very negative agenda."

Instead it responded to repeated requests for comment with a statement that read in part:

"Recognized as one of the largest community banks remaining in this region, we are proud to have helped many business owners establish and grow their businesses and have played an important role in fueling South Florida's economy. As with most banks, since the beginning of this economic recession, we have been impacted by declining real estate values. Some of the banks affected by the recession, including the nation's largest banks, were eligible for and received TARP funds. We were one of those institutions and the US Treasury approved our application strictly on the merits."

Insider loans constituted only one red flag visible by 2009. By August of that year, when the first TARP disbursement landed at the bank, U.S. Century had higher nonperforming and delinquent loans compared to a peer group of banks with only domestic offices and assets of $1 billion or more. U.S. Century had set aside less for loan losses than its peers. Its concentration in construction and commercial real-estate loans -- key sources of problems for small banks -- was particularly high.

"It is hard to imagine a more obviously reckless and foolish use of TARP funds than U.S. Century in 2009," said Richard Newsom, a former FDIC bank examiner who has looked at the bank's public financials. "Contrary to TARP guidelines, this bank was in deep, likely fatal, trouble when it received TARP funds. It should have been subject to an enforcement action in mid-2009, not awarded $50 million in taxpayer dollars."

Indeed, almost as soon as U.S. Century received the TARP money, its financials plummeted. Net income plunged to negative $44 million by the end of the 2009. Loan losses went up to $186 million from $108 million in September. Capital set aside as reserves also dropped, while the bank's reliance on risky brokered deposits -- called "hot money" because it is short-term and flighty -- grew. Within three months of U.S. Century receiving the TARP funds in August 2009, Treasury officials were exchanging emails discussing the likelihood that the bank would not make its first dividend payment. The bank paid a dividend of $745,312 to the Treasury Department that November, but as of June 2011 it had missed more than $4 million in payments to Treasury, according to a report from the TARP inspector general.

U.S. Century is based in Miami-Dade County, an area with a rich history of real-estate bubbles and financial excesses. Six Miami-Dade-based banks have failed since the most recent financial crisis began, according to the FDIC's failed bank list.

The FDIC, as the primary federal regulator of U.S. Century, performed a viability study on the bank and approved its application to receive the $50.2 million TARP loan. The FDIC wouldn't release information about its examination of U.S. Century, making it hard to know whether the agency had concerns about the bank's health of U.S. Century or to evaluate the merits of granting the TARP loan. The Treasury Department released some documents relating to the loan, and they do not indicate any concerns.

The FDIC also wouldn't say whether any enforcement agreement existed with the bank before the June 2011 consent order.

The FDIC does not comment on an "open and operating" bank nor on TARP deliberations, spokesman David Barr said. As for U.S. Century's TARP loan, he said, "it is Treasury that makes the ultimate decision on TARP funding."

A spokesman for the Treasury Department said, "As a matter of practice, we don't comment on specific institutions."

Tangled Web of Insider Loans

The men behind U.S. Century were not new to banking. Though primarily real-estate developers, they had founded a previous bank in Miami called Ready State. They built the bank through the 1990s until it had assets of about $600 million. Then the group sold it to Union Planters Bank, now Regions Financial Corp., in 1998 for an undisclosed sum.

In 2002, when about 400 investors cobbled together the initial $22 million to launch U.S. Century, the offering went so quickly that the bank rapidly raised another $8 million, making it one of the most successful efforts at raising capital for a startup bank in Florida history. A second stock offering in 2003 raised an additional $37.2 million. By the end of 2006, the bank had more than $1 billion in assets and net income of $13 million.

One of the driving forces behind the meteoric early growth of U.S. Century was Sergio Pino, who served as vice chairman of the board of directors. Pino owns the shiny seven-floor office building that houses U.S. Century. The building, which Pino built for about $15 million and completed in 2007, also serves as the headquarters for his real-estate development company Century Homebuilders of South Florida. A search of Florida corporate records reveals more than 100 companies in which Pino is listed as an officer. Among them: Century Prestige I, Century Prestige II, Century Prestige III, Century Five, Century Six, Century Park II, Century Land Development Corp., Century Shopping Centers and Century 77 Acres. While not all of the company names include the word "century," most do.

Pino did not respond to numerous requests to comment.

His companies have often received insider loans from U.S. Century. Unraveling how much money his companies have received is virtually impossible through a search of public records, but the outlines of some loans can be reconstructed.

In January 2010, Pino and his wife signed an agreement with U.S. Century that lists previous loans they got from the bank -- one for $1.63 million and another for $6.45 million -- both for a development called Century Laguna on a commercial block in Coral Gables. The bank also executed what the agreement calls a "future advance, consolidation, mortgage modification and spreader agreement" in December 2006 worth $15.73 million. Separately, the bank made a $500,000 personal loan to Pino related to the property.

In other examples, the bank director's role is not as clear-cut.

In 2005, a company called 46 Acres acquired a property at the edge of Miami-Dade County with plans to turn it into a thriving subdivision. An affidavit filed with the county lists Pino as a member of the company's management committee. It's the only record publicly available online in which Pino's name appears associated with the transaction. In March 2007, U.S. Century issued a $26.2 million loan to 46 Acres, with $209.8 million available. The property was used as collateral for the loan.

In September 2010, 46 Acres was dissolved, according to corporate records. Today, the property the failed company once owned is an enormous empty lot surrounded by chain-link fences. Across the street are low-income neighborhoods. On the property sits a rusting, open-sided warehouse. Outside the fence stands a for-sale sign. According to a real-estate agent associated with it and an adjacent property owner, U.S. Century owns the land -- part of the bank's growing portfolio of troubled real-estate assets.

Calls to Jose Boschetti, the only person listed in corporate records as an officer of 46 Acres, were not returned.

These transactions are typical of those that can be found in public records. Pino or other bank officers are often connected to companies that receive loans from U.S. Century. Public records show the bank loaned millions of dollars to bank officers, their family members and companies associated with both.

In March 2011, Pino resigned from the board. He told the South Florida Business Journal, "My company needs me," referring to his real-estate development firm. He also said that his loans from U.S. Century were being paid on time.

Development v. the Environment

Many of U.S. Century's insider loans appear to be for real-estate development projects, placing the bank and its officers smack in the middle of one of Florida's hottest controversies: suburban development versus conservation of one of America's preeminent natural resources, the Everglades.

At least six of the bank's current or past directors have pushed to expand Miami's urban development boundary, and several own sizable tracts outside the boundary. Put in place to safeguard the Everglades and to funnel growth to the urban core, the boundary has been steadily eroded by the county commission, to the chagrin of environmentalists. Two U.S. Century directors won approval in 1999 to build up to the boundary as part of a development. A few years later, several of the bank's directors, including Pino, were also involved in a proposed 961-acre residential development in western Miami-Dade County called Parkland that would have required moving the boundary line. Amid the housing bust the Parkland proposal seems stalled.

Alan Farago, conservation chair of the environmental advocacy group Friends of the Everglades, said U.S. Century's executives "figured out how to mesh the large gears of finance to the smaller gears of local zoning and permitting, in other words creating an entire apparatus to gin up growth at the expense of the Everglades."

Many of U.S. Century's officers have been prolific political donors. In the bank's 10 years, the directors have given more than $350,000 for federal races alone, with most of the money going to Republicans. No U.S. Century director has ever been charged with legal wrongdoing related to campaign financing, but the bank itself was involved in a controversial transaction with Marco Rubio before he became Florida's junior senator.

Rubio received a 2006 loan from the bank while serving as Florida's state house speaker. A story broken by The Miami Herald in April 2008 revealed that the bank gave Rubio a home equity loan of $135,000 shortly after he bought his house for $550,000. But a month after the purchase, the house was appraised at $735,000. The $185,000 gain in equity in just 37 days paved the way for the U.S. Century loan. Rubio initially failed to disclose the loan on his public financials. He and U.S. Century have consistently denied wrongdoing.

According to a spokesman for the senator, the Rubios locked in a pre-construction price of $550,000 a year before the closing on the house, making the time between appraisals 13 months and not 37 days. ProPublica asked the senator's office for documentation of the transaction but has not yet received it. We will update again if his office provides it.

Struggling to Survive

Since receiving the TARP loan in 2009, U.S. Century has been sliding sharply downward.

A bank spokesman said CEO Octavio Hernández is scouring U.S. and international sources for capital. The June consent order lays out timetables by which the bank must comply with the various demands, such as four months to raise capital, two months to implement a conflict-of-interest policy and two months to establish new procedures to monitor money laundering. Those deadlines have arrived. "We have complied with many of the requirements of our consent order and we will continue to comply with and satisfy all of its requirements," the bank said in its statement to ProPublica.

In June, BauerFinancial gave U.S. Century its lowest rating, a zero, the last step before failure.

The BauerFinancial report paints a grim picture. Commercial real-estate represents more than half of the bank's portfolio, compared to less than 14 percent for similar banks. Nonperforming assets as a percentage of total assets is almost 14 percent for U.S. Century, compared to less than 3 percent for peers. At the end of June, the bank reported almost $373 million in loans that were either nonperforming or 30 days past due. The Texas ratio, a formula that measures nonperforming assets against capital and reserves, is 237 percent, compared to 26 percent for the bank's peer group.

"When the Texas ratio substantially exceeds 100 percent, there is a high correlation with future failure," said Newsom, the former FDIC bank examiner.

The FDIC consent order mandates that U.S. Century increase its total capital by a little more than $57 million, according to a review by banking analyst Trepp. This does not include the $50.2 million it also owes TARP.

The bank is trying to sell off its foreclosed property but is taking considerable losses. U.S. Century recently sold a half-acre site on trendy Fisher Island for $2.4 million, 40 percent less than the mortgage it foreclosed, according to the South Florida Business Journal. If the bank does not comply with the FDIC mandates or is unable to raise capital, it could be pushed into a forced sale or taken over by the FDIC. Either way, the agency would probably end up taking losses on the bad loans in addition to the $50.2 million in TARP money that taxpayers would lose.

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