Benton Banking Company management in December felt the bank came within days of being closed by the FDIC, according to a letter from attorney David S. Humberd to shareholders. That was averted by the sale of the bank.

Benton Bancshares, which owned Benton Banking Company, and First Volunteer Corporation, which bought it, came to a final settlement on June 30. Humberd’s letter provides details of the events leading up to the near-closing of the 101-year-old bank as well as information regarding the settlement and efforts to recoup funds from bad loans that First Volunteer did not accept.

The 120 shareholders of Benton Bancshares have not received any funds from the sale.

In explaining the events that took place late in 2007, the letter said then-bank President Jimmy Goddard left the bank on Nov. 27, immediately after an FDIC examiner had asked for specific loan files, and was not heard from for several days. Bank management met with the FDIC examiners and learned the examiners had issues with Goddard’s loan portfolio. FDIC had done a computer sort of all notes in the bank by loan officer, amount and street address. For Goddard’s loans, numerous notes in different names appeared to have identical addresses, mostly post office boxes.

The FDIC identified around 300 of Goddard’s unsecured loans in amounts less than $100,000, totaling more than $17.6 million. FDIC found that most of these notes were to fictitious persons or appeared to be fraudulent in some other manner, Humberd told the shareholders.

FDIC officials advised bank management that deleting these loans would result in a negative capital position for the bank. Bank managers spent a week searching for financing but learned the FDIC would not accept a loan from Bancshares to solve the problem. At that point, the only option was to arrange the sale of Benton Banking Company almost immediately. Three different groups showed an interest and First Volunteer signed a letter of intent. Humberd noted that First Volunteer did not have the time to review all loans in the bank and make other determinations that would be normal in a bank sale,

He said FDIC would not allow time for a comprehensive search for possible purchasers and sent notice to a list of banks in the area stating that the deposits of Benton Banking Company would be offered on a bid basis. None of the banks receiving the notice offered to buy the bank, but there was interest in acquiring the assets through the FDIC auction process, he said.

At this point, bank managers felt sure the FDIC was within days of closing the bank. The purchase by First Volunteer Corporation, the letter said, prevented any depositor from taking a loss on any amount, although the shareholders were impacted by the sale, which went into effect Jan. 1, 2008.

The shareholders were left with more than $18.7 million in loans identified as fraudulent or non-bankable, which Benton Bancshares is attempting to recover and/or liquidate. The letter said collection action is being pursued against the notes which have value “and appear to be collectible to some extent.” It said the number of individuals involved is small and will result in less than 10-15 suits. In addition, settlements have been entered into involving $456,000 of these obligations, which is being paid on a monthly basis. Humberd said he hoped there would be additional settlements in order to avoid legal costs.

Other sources of revenue for shareholders are claims on the bank’s surety bond and refunds of overpayments to IRS for the years from 2004 forward when the bank’s income was overstated. Those claims have been filed and Bancshares is awaiting word on what will be paid.

On the other hand, the terms of the sale agreement allowed First Volunteer to analyze the bank’s remaining loans for creditworthiness. On June 19, Bancshares received a list representing nearly $1.6 million of possibly bad loans and agreed to pay First Volunteer $400,000 from the reserve account. Humberd said Benton Bancshares now has no further responsibility or liability for any note that was sold to First Volunteer. If collections exceed expectations, he said, Bancshares could receive a reimbursement.

Through July 3, Bancshares has taken in $217,795.11 in loan recoveries and refunds, but there have been expenses of $88,790.40 in legal fees, accounting fees, office expenses and personnel costs. After the June 30 settlement, he said, Bancshares received $239,472. Adjustments made in the settlement included recapitalization of TB Isbell Insurance Agency, the mortgage company, reserves for continent liabilities and additional fraudulent or non performing loans and the payment of $400,000 for First Volunteer.

At the end, Bancshares had $368,476 on hand. Humberd said additional funds will come in as the assets are collected. He said he hoped the surety bond claim and IRS refunds will be resolved and received by the end of the year but the other collection processes will likely extend in 2009 and possibly beyond.