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Former Gov. Brereton Jones has borrowed heavily from a financially distressed bank that he and several other Democratic Party leaders founded in 2001, according to interviews and bank records.
Federal regulators have criticized the directors of Frankfort-based American Founders Bank, including Jones, for inadequate supervision. The bank was badly managed and suffered "hazardous lending and lax collection practices," which left it with far too many unpaid loans, according to the Federal Deposit Insurance Corp.
Among the specific concerns cited was improper reporting and recordkeeping of insider loans to bank directors and executives.
The FDIC issued a cease-and-desist order to the bank eight months ago to warn it about potential insolvency and try to avoid a taxpayer bailout.
Jones, 68, owner of Airdrie Stud horse farm in Woodford County, is the only insider to borrow enough money that the bank is required by law to identify him, which it did at the Herald-Leader's request. Generally, that threshold is $500,000 or five percent of the bank's capital, whichever is less.
Jones would not say how much of the $11 million in insider loans was his. He said he used the loans to refinance, at a lower interest rate, his 2003 purchase of historic, 495-acre Woodburn Stud farm on Old Frankfort Pike, which originally listed for $7.4 million. According to land records, last July Jones also took $16 million in mortgages on his farm properties from Louisville-based PBI Bank in exchange for various loans and a line of credit.
The former governor, who served from 1991 to 1995, said he is repaying his loans on time and has not contributed to the bank's problems.
Jones said his farms rely on a steady supply of credit, but his assets outweigh his liabilities by $4-to-$1.
"There is no financial difficulty here," Jones said.
"This is a loan (at American Founders) that any bank would be willing to take," he said. "The public can be guaranteed that there's nothing that's improper going on relative to my financing."
Industry pain
While the weak national economy is spreading pain far and wide in the banking industry, only three of Kentucky's more than 160 state-chartered banks are operating under cease-and-desist orders. Other than American Founders, they are First Community Bank of Vanceburg and State Bank and Trust Co. of Harrodsburg, according to the FDIC.
As of Dec. 31, American Founder's capitalization -- its assets minus its liabilities -- was falling. It lost $5 million in 2007, according to the bank's reports to the FDIC. More than 8 percent of its $374 million in loans were at least 90 days past-due, or "non-current," ranking it at the bottom of its national peer group.
Also during 2007, its insider lending soared from four loans valued at $7 million to four loans valued at $11 million.
Jones launched American Founders with a small circle of friends from Democratic politics and the horse industry, including:
• Tracy Farmer, chairman of the board, a former Kentucky Democratic Party chief who chaired Gov. Steve Beshear's inaugural committee last winter. Farmer, whose varied business interests include horses, was the state's top banking regulator and public protection secretary in the 1980s under Gov. John Y. Brown Jr.
• Tommy Preston, a public relations executive who resigned from the bank board last winter to take a $125,000-a-year job as senior adviser to Beshear. Records show that Preston still owns shares in the bank, but he declined in an interview to say what his stake is worth.
• Clayton Patrick, Frankfort lawyer and former Kentucky Democratic Party treasurer.
• Central Kentucky horsemen C. Broussard Hundley and Johnny T.L. Jones.
Brereton Jones was discussed as a possible 2007 gubernatorial candidate, but he instead endorsed Beshear in the crowded Democratic primary. Bank officials and their spouses gave at least $35,800 to Beshear's campaign and inauguration. During this year's General Assembly, Jones lobbied aggressively for Beshear's plan to legalize casino gambling in Kentucky; he ultimately blamed Beshear in part for the proposal's defeat.
Political connections
It's not uncommon for local bank directors to be wealthy people with statehouse political connections that could raise potential conflicts of interest when state regulators need to act, said Donald Mullineaux, banking and finance professor at the University of Kentucky and a director at Farmers Capital Bank in Frankfort.
One hedge against such conflicts is the federal regulation supplied by the FDIC, Mullineaux said. Federal and state regulators typically take turns examining the books at state-chartered banks, so very little should get missed in the long run, he said.
Jones, American Founders and state officials all said the bank has not received preferential treatment from the Kentucky Office of Financial Institutions.
"American Founders Bank is treated no differently than any other bank in the state," said Beshear spokeswoman Vicki Glass.
OFI Executive Director Cordell Lawrence is not actually a Beshear appointee, but a holdover from previous Gov. Ernie Fletcher, a Republican. Lawrence declined to talk about the bank's problems or release his office's records on the bank. He cited an exemption in the state Open Records Act for materials related to bank regulation.
Tighter standards
The FDIC issued two cease-and-desist orders to American Founders last year, citing "unsafe and unsound banking practices." In the longer amended order dated Sept. 6, it criticized the bank for the poor quality of its loan reviews, earnings, funds management, internal controls and reporting and recordkeeping of insider loans. The board of directors failed to provide proper supervision, contributing to the breakdown, the FDIC said.
In response, the board removed top officials at the bank, including chief executive Tim Wesley, who could not be reached for comment. It replaced him with John Taylor, who previously headed PNC Bank's Ohio/Northern Kentucky region. Taylor is filling the executive offices with several new faces.
"There were some personnel involved who were not doing what they ought to have been doing, quite frankly. But that has been remedied," Jones said.
In a recent interview, Taylor said the bank has tightened standards and is getting its affairs in order.
The bank's capitalization fell, yet it's still safely within the average capitalization range for its peer group, Taylor said. He would not discuss the bank's bad loans or other problems, which he said preceded him.
New branches
Taylor said the FDIC authorized American Founders to open branches in Louisville and Lawrenceburg over the last year, adding to its Frankfort, Lexington and Shelbyville locations. Regulators wouldn't allow expansion unless the bank's situation was improving, he said.
"There's a story here -- and the story here is a bank that did have some challenges, which have been well documented. But it has accomplished an awful lot that's positive," Taylor said. "We do have asset quality challenges, not unlike many other banks. I am very comfortable that we are dealing with those."
FDIC spokesman David Barr said he could not discuss American Founders, other than to confirm what's in the public record and note that the FDIC has not terminated its cease-and-desist order, which it does when it closes a case. In the meantime, the bank will continue to get closer scrutiny, he said.
"We keep these orders in place until we're satisfied that the necessary changes have been made," Barr said.
