Report sheds light on failure of Argonia bank

By Sam Jack

A Federal Deposit Insurance Corporation (FDIC) report dated Feb. 14 sheds some additional light on what led to the failure of Farmers & Merchants State Bank of Argonia last October.

The report, written by FDIC assistant inspector general E. Marshall Gentry, was critical of “inadequate oversight of management’s operations, coupled with poor lending and loan administration practices.”

In particular, the report said, “the Chairman and President promoted over-lending to a large relationship, which violated the state legal lending limit and contributed to the bank’s losses. Examiners deemed the bank to be critically deficient … primarily because of a deterioration in this relationship.”

Under Kansas banking law, loans to a single borrower, including any bank officer or employee, generally may not exceed 25 percent of a bank’s capital. Farmers & Merchants was a $34.9 million institution at the time of its failure, according to the FDIC.

The bank’s chairman was Leon Drouhard. Drouhard also served as president of the bank until 2015, when his daughter, S. René Drouhard Brozovich, took over that role. The Drouhard family had run the bank since 1949, when Leo F. Drouhard became president.

In its final quarterly filing, Farmers & Merchants reported a net operating loss of $2.74 million for the period of July 1 to Sept. 30, 2017.

According to the FDIC report, the bank’s regulatory troubles started in March 2016, when the FDIC downgraded its overall health score to 3 on a five-point scale, indicating a moderate degree of concern. In June 2016, the FDIC and state banking regulators imposed a memorandum of understanding to address management, staffing, capital levels and loans to problem borrowers, among other concerns.

A February 2017 FDIC examination led to Farmers & Merchants being downgraded to an overall health rating of 5: “critically deficient.”

In July 2017, examiners replaced the memorandum of understanding with a consent order, reiterating their concerns about staffing, management and lending practices.

The following month, the FDIC told Farmers & Merchants that it was out of compliance with the consent order, and told the bank that it was “Significantly Undercapitalized.” In September 2017, the bank was downgraded to “Critically Undercapitalized.”

“The lack of proper oversight and inaction by the Board to address prior examination criticisms prompted (the FDIC Division of Risk Management Supervision’s Kansas City office) to consider civil monetary penalties against the bank… and a removal action against the bank’s President,” the report states. The bank apparently went into receivership before either of those actions could be taken.

Brozovich did not respond to phone and Facebook messages requesting comment.

Transition process nearly complete

After taking ownership of Farmers & Merchants, the FDIC paid about $2.6 million to protect insured depositors, then sold the bank to Conway Bank.

Conway Bank president Joe Rottinghaus said that he was happy to help Farmers & Merchants customers continue banking with a local institution.

“We are a community bank, and we thought with Argonia so close, it just made a lot of sense for us,” Rottinghaus said.

Farmers & Merchants’ Argonia location remains open as a branch of Conway Bank. The Schulte branch closed down Dec. 20.

“Our bid didn’t really include that facility, so we just operated it for a period of time,” Rottinghaus said. “For our Wichita customers, we already have a branch that’s located at Kellogg and Main.”

Employees have been working hard over the last few months to integrate Argonia customers into the Conway Bank system.

“On the weekend prior to May 14, we are going to convert all of those Farmers & Merchants customers. Basically we’ve had two processing systems in this interim, so they will all be consolidated into one,” Rottinghaus said. “Starting that Monday, May 14, everything will be on one platform.”

Farmers & Merchants customers will continue to have access to online banking functions, but will need to manually log in and sign up for the new system.

“We’re trying to make it as painless as possible. If (former Farmers & Merchants customers) have any questions at all, just come in and visit any of the locations that are close to you,” Rottinghaus said.