State shuts down Spring Grove bank

Jennings State Bank, one of Minnesota's most troubled community banks, was shut down Friday by state regulators, making it the fifth bank in the state to fail under the weight of bad loans made during the real estate boom.

The failure of the 119-year-old bank, in Spring Grove in the far southeast corner of the state, is a reminder that risky lending practices were not confined to banks in and around major metro areas. Though Jennings was a tiny, family-owned institution, its problems were big and complicated. In addition to lending heavily in commercial real estate, it got entangled in some messy loan deals and had multiple run-ins with regulators over its lending practices. One of its former vice presidents was sent to prison.

After the close of business Friday, regulators finally revoked the bank's charter and announced its sale to a larger institution, Central Bank of Stillwater, which also recently bought shuttered Mainstreet Bank of Forest Lake. Under the deal, Central Bank will assume all $52.4 million of Jennings' deposits. The two branches of Jennings will reopen today as Central Bank branches. The Federal Deposit Insurance Corp., which guarantees bank deposits, has agreed to guarantee losses on about $37.7 million of Jennings' $56.3 million in assets.

In an unusually detailed, two-page statement released late Friday, Paul Jennings, chief executive of the bank, chronicled the complicated chain of events that led to the bank's demise.

"The decline of the bank is certainly not due to any failure or wrongdoing on the part of anybody currently working at the bank," Jennings wrote. "Rather, it can be attributed to a 'perfect storm' or convergence of at least five deleterious circumstances which taken together in a short time were too much for the institution to endure."

That included the actions of a former Jennings vice president, Anne E. Justesen, who was accused of forging her husband's signature on a mortgage document that had the bank extending her a $200,000 line of credit. In June, the FDIC issued an order that barred Justesen from "participating in any manner in the conduct of the affairs of any financial institution."

In his statement, Jennings wrote, "We were gratified to see her sent to prison. ... However, that did not fully compensate the bank for the losses we incurred as a result of her nefarious activities in breach of our trust."

Regulators began to take notice. In November 2007, the FDIC accused the bank of violating state law by exceeding legal lending limits, operating with inadequate capital for the kind of assets it held and failing to obtain adequate collateral for loans, among other shortcomings. The FDIC ordered the bank to raise more capital and to stop extending credit to borrowers with bad loans.

In March of this year, the holding company of Jennings State was hit with an enforcement action, too. The Federal Reserve Bank of Minneapolis ordered Spring Grove Investments Inc., which owned the bank, to first obtain the Fed's approval before incurring more debt or taking any payments from the bank that would result in a reduction in the bank's capital.

But according to Jennings, the "final and most serious blow" to the bank came in July 2008, when a Stillwater car salesman "stole bank collateral" securing a large auto dealer loan.

Daniel Routson, owner of Routson Automotive, reportedly took out a loan from Jennings State Bank in 2004, using vehicles he would sell as collateral, according to a complaint filed by the Washington County Attorney's office. The complaint alleged that Routson hid the sale of 80 vehicles from the bank to avoid having to repay the money he had borrowed.

Routson has been charged by the Washington County attorney's office with felony theft by swindle and two counts of intent to defraud.