St. Stephen State Bank, a 90-year-old community bank founded by farmers that bet big on real estate development, was shut down by government regulators late Friday after running out of money.
It is the eighth bank failure in Minnesota since the economic crisis began two years ago, and the first this year. The bank has offices in St. Cloud and in St. Stephen, a small town about 13 miles northwest of St. Cloud.
The Federal Deposit Insurance Corp. (FDIC), which insures bank deposits, was named receiver and has arranged for all of St. Stephen's assets and deposits to be sold to First State Bank of St. Joseph. The offices are scheduled to reopen for normal business hours as branches of First State Bank of St. Joseph. The St. Cloud branch will reopen Saturday and the St. Stephen branch on Tuesday.
Though tiny in size, St. Stephen State Bank was heavily invested in commercial real estate. The bank had the highest concentration of commercial real estate loans, such as construction-related lending and mortgages on commercial projects, of any bank in the state. Losses on those loans steadily ate away at the bank's capital, the money it keeps on hand to cushion itself against losses.
Robert Olson, the outgoing St. Stephen chairman, said in a written statement that the bank "made mistakes," including relying too much on "floating interest-rate loans" and "making too many loans to small businesses that were subsequently hurt by the economic downturn."
Olson blamed the federal government for not allocating enough federal bailout money to smaller community banks, as opposed to large banks and investment firms. He said funds given to community banks would "be used to fund small businesses, generate new jobs and ultimately be repaid with interest."
The bank's demise has been predicted for months, but became all but certain in the fourth quarter when its Tier 1 capital -- considered the most basic measure of a bank's health -- fell to negative $1.2 million, meaning it was technically insolvent. It is rare for a bank to have negative equity, which means the value of its assets had fallen below the value of its liabilities.
Of the 445 banks that have reported their fourth-quarter results to the FDIC, St. Stephen was the only one to have negative equity, according to Foresight Analytics, a California research firm.
