Sundquist, other politicians tied to East Tennessee bank that failed

Friday, February 3, 2012, Vol. 36, No. 5

NASHVILLE (AP) - A former Tennessee governor and the state's current comptroller have ties to an East Tennessee bank that was closed by regulators in one of the state's first bank failures in nearly a decade.

The Tennessean reported Monday that former Gov. Don Sundquist sat on the board of Knoxville-based BankEast and both he and Comptroller Justin Wilson owned shares in the bank's holding company ( ).

Sundquist, who was governor from 1995 to 2003, declined to comment to the newspaper about his ties to the bank. The bank's lead founder and chairman, Fred Lawson, was banking commissioner during the Sundquist administration.

State Rep. Joe Armstrong, a Democrat from Knoxville, also served on BankEast's board and listed the bank as a source of income on his filings with the Tennessee Ethics Commission. He also received a business loan from the bank.

After regulators closed Te nnessee Commerce Bank in Franklin and BankEast last month, both were purchased immediately by other banks and were reopened.

BankEast's 10 branches will now be branches of U.S. Bank after the Minneapolis-based company bought much of the bank's assets, including $272 million in loans and $268 million in deposits.

But BankEast's holding company that Sundquist and Wilson owned stock in wasn't part of the U.S. Bank purchase. Sundquist held 2 percent of voting shares in BankEast's holding company at year-end 2010, according to BankEast Corp.'s most recent annual report filing with a regulator.

Wilson said he invested in the bank at the recommendation of Lawson, but kept his stock in a blind trust run by a trustee.

"I don't know if the trustee sold it or kept it or what," Wilson said, noting he assumes he would have lost money if the trustee kept the stock.

A review of the bank's filings show that BankEast failed because it had more than $30 million in bad loans in real estate, construction and land development deals and only $9.3 million set aside for loan losses and $1 million in equity capital.

"Basically they ran out of gas," said John Spence, who runs a bank investment fund focused on smaller banks. "Ideally, they had a whole lot of reserves, but that wasn't enough because of how many problem loans they had."

T.K. Kerstetter is president of Corporate Board Member, publisher of a quarterly magazine of the same name for corporate leaders. He said a bank failure doesn't necessarily reflect poorly on the reputations of its board members.

"Because of the financial crisis, if there wasn't a fraud that occurred in the bank, it's hard to give a director a black mark that would follow him through the rest of his career for serving on the board," Kerstetter said.