Mainstreet Bank of Forest Lake, one of Minnesota's largest and oldest community banks, has received a cease-and-desist order from the Federal Deposit Insurance Corp., alleging "hazardous lending and lax collection practices."
Like many community banks, Mainstreet is getting stung by loans it made to developers and builders during the real estate boom, when property prices were going nowhere but up. Now, those loans are souring at an alarming rate, and banks that hold the loans are being ordered by state and federal regulators to clean up their lending practices.
The FDIC claims Mainstreet operated with policies and practices that "jeopardize the safety of its deposits." The 105-year-old bank, which has nine branches in the Twin Cities area, operated with an excessive level of delinquent loans and did not keep an adequate allowance for loan and lease losses, according to a 23-page order, issued Dec. 12 and made public Friday. In addition, Mainstreet's board of directors was cited for failing to adequately supervise the bank.
The FDIC ordered the bank to raise more capital and reduce its concentration of construction and land development loans. A cease-and-desist order, which usually spells out a list of corrective measures, is one of the most common enforcement actions of bank regulators. It does not mean that a bank is in danger of failing or that its deposits aren't safe.
Out of commercial real estate
A Mainstreet spokeswoman said Friday that the bank is moving quickly to address the FDIC's concerns. It has temporarily stopped making loans to real estate developers, and will focus instead on consumer and business loans.
"It's back to our core, which is community banking," said Karen Greisinger, chief marketing officer. "All of our products are still in place. We're still making loans. But we're just moving away from that segment -- commercial real estate."
Until recently, Minnesota's community banks appeared to be holding up relatively well during the economic downturn. By and large, they did not originate the exotic mortgages to risky borrowers that created much of the housing bubble and ensuing financial crisis.
However, community banks did finance local builders, developers and contractors that constructed many of the housing projects that are now struggling. And there is increasing evidence that businesses -- not just homeowners -- overpaid for properties based on income projections that have proven overly optimistic as the recession deepens.
