The Federal Deposit Insurance Corp. has issued a cease-and-desist order against State Bank of Park Rapids, citing unsafe banking practices the institution must take steps to remediate.
Many are already under way and began when the bank received notice in June 2008 that it had some structural deficiencies.
The bank remains open while management works to bring those deficient areas into compliance with sounder banking procedures, said FDIC spokesperson LaJuan Williams-Dickerson.
"We issue orders like this every month against different institutions, states, different actions," she said.
"Other than that, we can't comment on open and operating institutions."
"The order itself is far from anything that would even remotely suggest any kind of closing," said State Bank executive vice-president Tom Ogaard.
"It is an order that the bank needed to change some of its practices and the bank has always supported the business community and individuals in and around the Park Rapids area and given the economic downturn, it's been difficult for those people to maintain all their obligations.
"That, in and of itself, really impacted the bank," he added. "So we've been involved with a number of businesses and real estate development and it's just become very difficult for a lot of those folks to make payment."
The 22-page order, signed Nov. 17, places the bank under various time frames ranging from 30 to 120 days to enact stricter lending policies, to bolster capital levels and to ensure qualified professionals are at key positions in the bank's hierarchy and to notify the FDIC of any resignations on the board or within the bank's management, among other measures.
"The bank was examined in 2007 and we've been working on this for the last 10 months," said bank owner Jack Smythe. "Therein lies a certain amount of frustration. The examiners left in February (2008) and they haven't even been back."
The bank entered into a stipulation with the FDIC without admitting or denying any of the allegations.
"The FDIC considered the matter and determined that it has reason to believe that the Bank has engaged in unsafe and unsound banking practices and violations of law and regulation," the FDIC stated in its order.
Among the allegedly unsafe practices, State Bank:
-Operated with a board that "failed to provide adequate supervision over" management;
-Operated with management policies and practices "detrimental to the bank;"
-Operated with an "inadequate level of capital protection for the kind and quality of assets held and the risk inherent in the bank's activities;"
-Operated with an "inappropriate allowance for loan and lease losses for the volume, kind and quality of loans and leases held;"
-Engaged in "hazardous lending and lax collection practices" including "failing to obtain proper loan documentation, failing to obtain adequate collateral... failing to keep accurate books and records" and other identified lending areas.
The bank, within 120 days, must verify that its chief executive officer, chief lending officer and other senior officers be adequately qualified to operate the bank.
It must enact a management plan within 90 days for approval by the FDIC and notify the FDIC of any changes in the board of directors or senior management.
Ogaard said these measures have already been taken.
"We obviously are working with all of our borrowers to come to a reasonable remedy that works for both them and the bank," he said. "The last thing we want is to impair somebody's livelihood or their ability to get around, if it's a vehicle, or that kind of thing.
"The order pretty much, from our perspective, we've addressed all of the issues," he said. "I would guess we're well on our way to overcoming the majority of the findings in the exam and I guess from there we just move forward.
"The capital position of the bank is very strong," Ogaard said. "It's very strong and I think if you were to go out and look within the industry and in this area, we're very strong relative to our peer group.
"So, from that perspective, nothing has changed from the customer perspective. It's pretty much the internal practices that we have that we're making changes and amendments to in providing more oversight and additional management practices.
"And that's pretty standard," he said. "The customers' deposits remain insured."
"A cease-and-desist order is just one of the tools that the FDIC has at its disposal," Williams-Dickerson said. Orders issued are publicly released one month after issuance "so the December orders will come out in January, January will come out in February so there's a month lag time," she said.
"All regulators have the authority to issue an enforcement action to a bank for a particular incident or whatever. If the bank is doing something discovered in an examination, all regulators have the ability to issue an enforcement action."
Although a cease-and-desist order is among the harsher forms of enforcement action, "it's not the worst of the actions that can be taken, it's just one of them," Williams-Dickerson said. "It just depends on the situation. They are case-by-case."
"There's a number of banks every month that are receiving these and a number of them are having the orders removed on a monthly basis," Ogaard said. "So we anticipate that to be where we'll be at, at some point down the road.
Ogaard reiterated that the bank's deposits are safe, and customers have nothing to worry about.
The FDIC insures a variety of accounts - checking, savings, trusts, certificates of deposit and IRA retirement accounts - up to $250,000. State Bank is no different, Ogaard said.
"We offer that same amount of protection," he said.
Outgoing chief executive officer Smythe is the fourth generation in his family to work at the bank. He plans to retire in March.
Jerry Janz assumed the role of president and CEO in September 2008 and hired Ogaard as chief lending officer.
The bank was chartered in 1902. FDIC filings, for the quarter ending Sept. 30, 2008, indicate it has $111.6 million in assets, $102.4 million in liabilities, total deposits of $84 million and 29 employees at its sole branch.
Jack Smythe's comments:
"For State Bank of Park Rapids, 2008 was a year of uncertainty and stress. Looking back on it I can't remember any year in my banking career that was filled with so much uncertainty and stress.
Change is not a bad thing, however, when you get older, change is harder to accept so you become slower to accept it. In my case, we needed to address procrastination on change, which led to an order by our primary bank regulator (the C&D order) that put an end to procrastination.
For most of 2008 State Bank has been implementing change to address concerns by the FDIC. By the end of the year (last week) we had over 90 percent of the changes in place, but we had not yet arrived at 100 percent. In retrospect, what the FDIC has had us doing makes us much stronger to deal with uncertainty.
From a personal perspective - am I still going to retire in March 2009? That's the plan, but I'm still going to be involved. I want to see us get to that 100 percent target FDIC wants.
To State Bank's customer family - from our family to yours -Happy New Year and God Bless."