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Sanctioned banks feeling recession's pull
Published 3/4/2010 in Local News
By Amy Bickel
Special to The Telegram
Security State Bank of Scott City and Pilsen State Bank in Lincolnville — are part of a growing list of U.S. banks recently sanctioned by regulators during a tough economy.
In the past two months, The Scott and Marion county banks were issued a "stipulation to the Issuance of a Consent Order" — meaning the bank leadership neither admits nor denies any unsound practices but agrees to follow orders issued by the FDIC and the Kansas State Banking Board.
One other bank in Kansas, First Security Bank & Trust Company, Norton, received a similar order.
The announcements come at a time when small to mid-sized banks are coming under stress as the recession continues, with more than 50 of the state's nearly 325 banks suffering low ratings.
"That's up considerably from good economic times," said Chuck Stones, president of the Kansas Bankers Association who has been watching the trend for quite some time. "Commercial real estate loans are being devalued all over the country, property values are decreasing, and the banks with these kinds of loans are being affected."
The number of the state's problem banks has since stabilized, he said. However, how soon the economy will recover is anyone's guess.
Security State Bank signed a consent order in January that requires it to raise capital, not pay dividends without prior approval, reduce concentrations of credit, and improve liquidity and funds management.
The bank also is required to have qualified management, including an appropriate number of senior officers to operate the bank in a sound manner, as well as appoint two new members to the bank's board of directors who are not connected to the bank.
Security State Bank wrote off more than $16 million in uncollected loans in the past two years, which includes about $14 million in commercial and industrial loans.
In its December 2008 end-of-year report to the FDIC, Security State Bank showed a pre-tax net operating loss of $11 million. Then in its September 2009 filing, the bank had a net operating loss of $1 million for the year.
One of the bad loans was to Jim and Kathy Shafer of Greeley County, which helped them purchase Sunbelt Grain, a small family elevator group with sites in Greeley and Wallace counties. In December 2008, the bank foreclosed on the elevator group claiming the Shafers were in default on a $4.9 million loan the couple used to purchase the facilities in 2006.
The bank, along with two farmer creditors, then forced the group into bankruptcy.
In a separate case filed Feb. 13, the bank alleged the Shafers and Shafer Farms owed another $3.43 million that the couple borrowed between 2006 and 2007.
The action spurred discontent from several of the 33 farmers owed about $2 million for their 2007 crops that they deferred payment for to 2008. Meanwhile, owners of Whitham Farms Feedyard also sought $2.2 million for 524,000 bushels of grain it paid for in November 2007 but never received.
The bank was allowed assets from the sale of machinery, Sunbelt's elevators and some of the land to offset the liabilities. However, that wasn't enough to cover the bad loan, and the bank is still battling for more money. The bank claims it should receive about $3.2 million of the $3.785 million netted from the sale of Sunbelt's grain.
In August 2008, a bankruptcy court judge awarded the bank $1.1 million toward its bill.
In a June 30 report, Bankrate.com — an online bank rating service — gave the bank a 2-star rating, which is below its peer group.
The service found the bank's return on equity substantially below average, its net interest margin in the mid-range, and its level of non-interest income below normal. The service also noted a nonperforming asset ratio of 62 percent, substantially higher than standard.
Bankrate.com's report showed the bank had about $98 million in loans, with equity of roughly $16 million.
Like many banks, Security State Bank has shifted its portfolio in recent years. In 2000, about 64 percent of its loans and leases were farm-related. Last year, only 33 percent were farm-related. Real estate loans, however, have increased, from 17 percent in 2000 to 42 percent in 2009.
Agriculture has been a bright spot for most bank lenders, according to Stones, and Security didn't show it had uncollected debt regarding farming in 2009.
The News was unable to reach Bank President James Arnold.
Pilsen State Bank
The Marion County bank was ordered to hire a consultant to help analyze and assess the bank's management performance and board of directors. Similar to Scott City, the bank must raise capital, not pay dividends without prior approval, reduce concentrations of credit and improve liquidity and funds management.
Pilsen State Bank also must develop a written program to review loans, including problem ones, as well as revise its loan policy.
The bank lost more than $600,000 in 2009, and charged-off more than $300,000. Assets totaled $13.5 million. Liabilities totaled $12.5 million.
Bankrate.com gave the bank a one-star rating, stating nonperforming asset ratio at substantially higher than standard. Balance sheet liquidity and return on equity was rated as below normal, and net worth to total assets was sigfnicantly below the norm.
Stones said since the recession started, only three Kansas banks have closed, calling the number small compared to other states.
"In general, the majority of the banks are in good condition," Stones said. "They are making money, but just the economy is making things difficult."
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