“Troubled loans” were at the heart of the decision by Benton Bancshares to sell Benton Banking Company, according to information provided to shareholders. Benton Bancshares, which owns 100% of Benton Banking Company and its affiliates, has agreed to sell to First Volunteer Corporation, pending final approval by shareholders and regulatory agencies.

The Board of Directors, which owns 47% of the stock, is recommending the transaction, which is expected to be approved at a Dec. 27 meeting. Board members said the stock purchase will enable shareholders to realize the greatest value on their investment based on the financial condition of the bank.

The announcement of the pending sale, to take effect Jan. 1,  was made last week, with First Volunteer Bank President Patti W. Steele emphasizing that all accounts are secure, that Benton Banking Company has been a good, solid bank for a long time, and that the sale will allow for additional services to customers.

Board members stated in a package sent to shareholders that they were faced with the need to sell the bank on an expedited basis due to recent events at the bank and the related rapid deterioration in the bank’s financial condition and standing with regulatory authorities. “Specifically, we recently discovered underwriting and other problems related to approximately $17.5 million of loans originated by a former officer of Benton Banking Company.”

The information notes that “in late November 2007 it was brought to the attention of the management and Board of Directors that a large number of loans made over the past three years possibly had been made to fictitious persons or for purposes other than as described in the loan documents.” Upon further investigation and review, the discrepancies in the loan documents and the ability of the bank to recover the principal or interest that might become due on these “troubled loans” led the Board of Directors to estimate that the losses could result in an expense of approximately $17.5 million.

As of Sept. 30, the total equity capital of the Bank was approximately $11 million, so there could be a negative balance. The Board explained that under federal and state banking laws, a negative capital account is not deemed a safe and sound situation, and “as a result, the Board had to take action immediately to restore the Bank to appropriate capital levels while at the same time continuing to investigate the cause of, and attempt to recover, these losses.”

Under FDIC laws, if a banking institution is deemed to be insufficiently capitalized, the regulators are required to take certain actions designed to improve the capitalization. If these actions are not successful, the bank might be closed. Information to shareholders noted that, once they became aware of the problem, the Bancshares Board and the management of Benton Banking Company implemented a plan of action, including a full scale investigations of the causes of the troubled loans, preliminary steps to recover funds and collateral, and, most important a Capital Plan.

 After looking at various possibilities, the Board decided it would be in the best interests of the shareholders, as well as the bank’s depositors and the community, to enter into detailed negotiations with First Volunteer. The first meeting was held Dec. 4, a Letter of Intent was signed Dec. 7 and the stock purchase agreement was announced Dec. 10, with the final agreement signed on Dec. 11.

Both shareholder and regulatory approval are expected to be obtained in sufficient time to finalize the stock purchase by Dec. 31 and to allow First Volunteer to recapitalize the Bank to appropriate levels by that time. Financial information included in the sales package notes that Benton Banking Company is in sound condition “except in respect of the troubled loans.”

In recommending the sale, Board members noted that First Volunteer has made a commitment for an immediate capital contribution to the bank to meet regulatory requirements following the closing of the stock purchase. In addition, there will be enhanced opportunities for operating efficiencies, enhanced opportunities for growth, and the sale will preserve the safety and soundness of the bank and work to protect the bank’s customers and their deposits.

Under the broad terms of the agreement, First Volunteer will pay $7 million, minus the amount by which the bank’s tangible capital is less than zero. Money recovered by Benton Bancshares from the troubled loans will be added to the account. A final accounting will be made June 30.

Benton Bancshares has around 120 shareholders owning 112,717 shares.