by Mark Friedman on Monday, May. 3, 2010 12:00 am
It's starting to become clearer why Southern Bancorp of Arkadelphia took everything but the loan portfolio when it bought Timberland Bank of El Dorado last year.
A federal lawsuit filed by Timberland in an attempt to enforce a $2 million bonding contract unveils some previously hidden problems allegedly caused by its former chief lending officer, Mark Turner, who was fired in the summer of 2008.
Court filings also reveal that the FBI and federal prosecutors have been investigating Timberland's lending practices.
The bank alleges that Turner lent money to companies in which he had a secret interest and received kickbacks from borrowers, according to documents filed in the lawsuit against BancInsure Inc. of Oklahoma City.
Beginning in 2003, according to the lawsuit filed in U.S. District Court in El Dorado, Turner and other unnamed "third-parties involved in the transactions successfully concealed Turner's dishonest acts and financial benefits until the summer of 2008."
Turner, who recently filed for Chapter 7 bankruptcy protection and listed debts of $1.46 million and assets of $950,000, referred questions to his attorney, Robert Trammell of Little Rock.
"Through today, certain former Timberland Bank board members have waged a whisper campaign of denial, and blame-shifting to Mark Turner," Trammell said in a statement to Arkansas Business. "He was the convenient fall-guy for the bank's failure as 'senior loan officer.'
"Turner has not benefited personally from any loan made to any borrower that he produced," Trammell wrote.
By the time Turner was fired, Timberland was in trouble. On July 31, 2008, the Federal Deposit Insurance Corp. issued a stern 28-page cease-and-desist order that told Timberland to clean up its lending practices. In that year, Timberland lost nearly $3 million after charging off more than $5.6 million worth of loan assets.
Tandy Menefee, who had been Timberland's CEO, said last week that directors thought it was in the shareholders' best interest to sell the bank, which had been chartered in 2000.
In March 2009, Timberland Bank announced the sale to Southern Bancorp. CEO Phil Baldwin said last week that Southern didn't pay anything to buy Timberland, but it allowed the Timberland shareholders to keep the approximately $10 million worth of loans that were still on the books.
"We had concerns about those loans and felt like there might be some in that pool of loans that could not be collected," Baldwin said. "The stockholders felt like they were all good loans, and so we just agreed that their consideration for the transaction will be that pool of loans."
Baldwin also said, "I believe [BancInsure] has an obligation to honor their bonding commitment to the bank." He said Southern decided to sue on behalf of Timberland Bank when BancInsure refused to pay.
Baldwin said if it recovered the $2 million it was seeking, Southern Bancorp would keep the money.
Donald Pratt Jr., an attorney for BancInsure, didn't return a call for comment last week and the company hasn't filed an answer in the case yet.
According to court filings, Timberland officials contacted the FBI in February 2009 and the U.S. Attorney's Office in Fort Smith has been looking into the loans. Assistant U.S. Attorney Tracy Triplett, who was named in the documents as a contact for the investigation, didn't return phone calls from Arkansas Business.
Menefee declined to comment on Turner's actions. But Menefee did say that the loans were being liquidated.
"Over time, we will pay those proceeds to the shareholders," he said.
He said it was too early to tell if the approximately 270 shareholders will receive their investment back.
Baldwin, though, said that Southern Bancorp had made about $1 million so far this year from what was Timberland Bank.
"It has exceeded, by a substantial amount, all of our expectations," he said. "The team from Timberland, most of them are still there, and are doing a fantastic job."
'I Was to Be the Hunter'
In September 2000, Timberland Bank started in a 9,000-SF office in the Entergy building in El Dorado.
The bank raised $4.5 million in startup capital, Menefee told Arkansas Business in 2000. One of the early investors was Turner, who along with Joyce Vaughn (relationship unknown), bought 4,000 shares for $100,000. (In his recent bankruptcy petition, Turner maintains that the shares are still worth $100,000.)
Turner, who received a bachelor's degree in management from Henderson State University at Arkadelphia in 1986, also became the bank's loan officer.
"Back in those early days, our strategy was we wanted to be viewed as a locally owned, community bank, which is what we were," Menefee said last week. "We opened the doors and the business just funneled in."
Turner's job was to bring borrowers to the bank, according to the statement issued to Arkansas Business by Trammell.
"They told me there were 'hunters' and there were 'skinners,'" Turner said in the statement. "I was to be the hunter. I was to bring borrowers through the door."
But as the number of loans grew, the organizational capacity to manage the loans didn't, Trammell said.
Still, within 16 months, Menefee said, the bank was profitable.
"We grew very rapidly," he said. The bank "probably took some loans that in hindsight we wish we hadn't. But it took awhile before they became problems."
Turner said in his statement that bank directors sat on the loan committee that approved the loans.
"More than one loan which defaulted has now been blamed on Mark Turner, rather than on the aggressive Timberland policies that approved those loans," Trammell wrote. "High risk loans of course create failed loans. The director's fingerprints are on the loan portfolio that brought down the bank."
Between 2002 and 2006, times were good at Timberland. It had a positive net income each of those five years. Its total assets swelled from $84.6 million in 2002 to $161.8 million in 2006. Then, at the end of 2007, Timberland reported a loss of $34,000 and cracks started to show even as its assets reached a high of $162.9 million.
In February 2008, the FDIC examined Timberland and found the bank had engaged "in hazardous lending and ineffective or lax collection practices," according to the order signed on July 31, 2008.
It accused the bank of failing to obtain proper loan documentation and adequate collateral.
Menefee said last week that bank officials were "surprised and shocked" to receive the order, which "made it very, very difficult to compete once that happened."
In addition, the nation was in the middle of its worst recession in decades.
The court documents don't explain how Turner's alleged misdeeds came to light, but Timberland claims he cost the bank more than the $2 million bond maximum.
"While multiple loan transactions and people were involved, the losses can be categorized by reference to three main participants: Richmark Services, LLC; Invest Four of AR, LLC; and Wilson's Camper & RV Country Inc.," according to Timberland's court documents, which contained several redactions.
Ÿ Little is known about Invest Four of Arkansas or what it does, according to a Feb. 10 letter written by Southern's attorney, Rodney Moore of Arkadelphia, to BancInsure's attorney.
Records of the Arkansas Secretary of State's Office show that Invest Four was incorporated on March 10, 2005. Its registered agent is Jim Taylor of Bryant, and the company is listed in good standing. Taylor couldn't be reached for comment.
In March 2005, Turner approved a loan to Invest Four for $230,000.
"On the same day the loan was funded, Turner received a check from Invest Four for one-third of the loan proceeds," Moore wrote. "No collateral has been recovered."
The bank's loss was listed as $213,000.
Ÿ Richmark Services LLC of El Dorado was a trucking company that was formed on Sept. 10, 2001, according to the Secretary of State's Office. Its registered agent is Richard Nesbit of Junction City. He couldn't be reached for comment.
Richmark received two loans from Timberland: a $500,000 line of credit in June 2004 and a $600,000 loan in July 2006.
Turner "submitted false information to the Bank during the application process which concealed Turner's ownership interest in Richmark," Moore said in the letter. Moore said Turner was one of two members of the company - Richmark appears to be a combination of the first names of Richard Nesbit and Mark Turner. Moore also wrote that Turner, through another of his companies, Banded Drake LLC, received a monthly payment from Richmark.
In March 2007, Richmark filed for Chapter 7 bankruptcy protection and listed $890,000 in assets and $167,400 in debts.
Neither Turner's name nor Banded Drake is mentioned in Richmark's bankruptcy schedules. Richmark's bankruptcy lawyer, James Hunt of El Dorado, didn't return a call for comment.
Timberland said its loss was $939,288.
While not commenting on Turner specifically, Baldwin said it was a violation of bank regulations for a loan officer to lend money to a company where his interest isn't revealed.
"What it does is create a conflict of interest," Baldwin said. "You're sitting on both sides of the transaction. ... If the company's having trouble, you might be tempted to do things that you shouldn't do."
Ÿ The principal owner of Wilson's Camper & RV Country of Hot Springs, identified as Rick Wilson, and Turner "have a long-standing relationship involving several partnerships and business enterprises which was concealed from the Bank," Moore wrote. (Rick Wilson's name was redacted from Moore's letter, but he is identified as the company's owner elsewhere in court documents.)
Timberland financed Wilson's floor plan loan.
"Turner used this relationship in several ways to benefit himself to the detriment of the Bank and others," Moore wrote: Turner received a finder's fee of $15,000 in 2003, although the reason isn't explained in the letter; a $55,000 payment in May 2003 related to a motor home sale, and a $25,000 finder's fee in 2007 related to the sale of the RV business. (Other court documents show Wilson sold the company for $600,000 on Dec. 31, 2006, to Snider's Camping World of AR Inc., led by Carroll Snider and Janet Snider, for $600,000.)
"As a result of this series of dishonest acts by Turner, the Bank endured a loss on several loans," Moore wrote.
Timberland said it expected to have a loss of $616,657 after Wilson's collateral was recovered and sold.
In 2008, Rick Wilson sued Timberland Bank in an attempt to avoid paying a $467,000 loan tied to Wilson's Camper & RV Country that was in default.
Wilson maintains in his lawsuit, filed in Garland County Circuit Court, that he didn't sign the loan documents, that they were the "product of fraud and/or forgery, and should not be held enforceable by this Court."
The lawsuit doesn't blame any individual for the alleged forgery, and neither Wilson nor his lawyer, Ralph Ohm of Hot Springs, returned calls seeking comment.
But in the court documents, he asked that the loan document be declared invalid.
Timberland denied in its court documents that the loan documents were forged. The bank filed a counterclaim against Wilson and maintained that he owed $477,879 because he had personally guaranteed the loan.
That case is pending.
Turner Still Unemployed
Turner has had a difficult time finding a job after being fired as chief lending officer for Timberland Bank in the summer of 2008.
On April 15, he filed for Chapter 7 bankruptcy protection in the Western District of Arkansas.
Turner's bankruptcy filing shows total income of $13,200 each year in 2008 and 2009 from what is described as "spouse support," and he is still described as unemployed.
Turner also was in the process of surrendering his El Dorado home to Billy Neal, who is not otherwise identified. Neal holds a $750,000 mortgage on the house, which is valued at $574,000 in Turner's bankruptcy filing.
Turner's 4,000 shares of Timberland stock have been handed over to First National Bank of Crossett, the filing shows. He listed the value of the shares at $100,000, which is what he bought them for in 2000.
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