Community Security Bank of New Prague became the seventh Minnesota bank to fail this year after the small bank was shut down by state regulators Friday and sold to a larger nearby rival.

In a deal brokered by the Federal Deposit Insurance Corp., Community Security's $99.7 million in deposits and most of its assets were taken over by Roundbank, which is about twice Community Security's size and is based in Waseca, about 35 miles south of New Prague.

The bank's one location will reopen Saturday as a branch of Roundbank.

Community Security got its start in 1997 primarily as a response to concerns among New Prague business owners that they couldn't get loans from area banks.

The bank, which touted itself as New Prague's "only locally owned financial institution," once boasted more than 100 investors. When it shut down Friday, it had assets of $108 million.

In New Prague, a small city about 45 miles southwest of the Twin Cities, the bank's demise has been rumored since May. Community Security made loans to a number of residential builders and developers who transformed acres of corn and soybean fields near New Prague into large subdivisions. The construction accelerated in late 2005, just as soaring gas prices added to the cost of commuting from New Prague and local job cutbacks reduced demand for the new houses.

A large mortgage fraud conspiracy also played a factor in the boom and bust of New Prague's housing market.

In 2005, just as homebuilders across the nation were slamming on the brakes because of declining housing prices, an Eagan builder constructed more than 100 upscale houses in and near New Prague. The firm, Parish Marketing and Development, was later accused of using so-called straw buyers, often relatives, to purchase multiple homes at inflated prices.

Investigators claimed the scheme led to an estimated $50 million in losses on nearly 200 homes, and its unraveling contributed to the decline in New Prague's housing prices.

Like many banks stuck in a downward real estate spiral, Community Security was hurt in two ways: It had to write off souring construction loans for losses and add more to its reserves to offset the declining value of the real estate it held as collateral.

The bank's capital gradually eroded. By March of this year, it had less equity as a percentage of its assets than any other bank in Minnesota.

Borrowers kept defaulting

Community Security has been operating under tighter regulatory scrutiny since August, when it received a cease-and-desist order from the FDIC and was ordered to raise more capital. However, many of the original bank investors were unwilling or unable to put more of their own money into the bank.

The bank tried to shrink itself by selling off loans, but borrowers continued to default. Community Security's noncurrent loans reached $20.4 million as of March, up from $11.4 million a year earlier.

The bank's executives did not return telephone calls seeking comment Friday.

Community Security's closing late Friday came during a busy evening of bank failures across the country, as a weak housing market and souring commercial real estate loans continue to erode capital at many small and midsized banks.

Seven bank seizures Friday

Regulators shut down banks in Florida, Georgia, Kansas, Nevada, Oregon and South Carolina. The seven bank seizures Friday bring to 103 the failures so far in 2010, well ahead of the pace in 2009, which saw a total of 140 banks shuttered.

Though the pace of bank failures in Minnesota has slowed in recent months, they could start to pick up in the latter half of the year.

The Minnesota Department of Commerce said its watch list of problem banks at greater risk of failure has grown to 98 institutions, up from about 50 a year ago.

The FDIC said in a statement Friday that the estimated cost to the federal insurance fund of the Community Security failure will be $18.6 million. It is the 14th bank in Minnesota to fail since September 2007, when the banking crisis began.

Chris Serres • 612-673-4308