Christian County developer goes up against bank

Citizens National Bank of Springfield’s struggles with underperforming real estate loans prompted a cease-and-desist order from federal regulators more than a year ago. Now, its attempts at damage control have a foreclosed-on developer accusing the bank of wrongfully interfering with his business.

Larry and Lena Ballard, owners of Ozark-based Ballard Property Development LLC, filed a lawsuit against Citizens National in September claiming the bank’s dealings with Ballard’s loans were fraudulent and negligent and resulted in “tortious interference with business expectancy.” Boiled down, the case is about Ozark’s Mill Pointe subdivision, a 50-acre, four-year-old residential project Citizens National foreclosed on last year.

The first phase of Mill Pointe consisted of 42 duplex lots and about 30 lots for single-family homes. Only 20 homes have been built, said Larry Ballard, who also developed The Springs – the final phase of which was funded by Citizens – and Butterfield and McGuffey Park in Christian County. “I probably put more families in Christian County than any other developer,” Ballard said, pointing to 660 residential lots to his company’s credit.

According to documents filed in Christian County Circuit Court, Citizens agreed to loan Ballard Property Development roughly $2 million to develop Mill Pointe in July 2006; the loan was to be renewed each year with the expectation that the developer would pay back the bulk of the loan from lot sales.

A petition filed on behalf of Ballard notes that in 2006, the property was appraised at $2.7 million, and the relationship between developer and bank went as planned until the bank called the loan, shortly after Citizens was hit with the cease-and-desist order from the U.S. Department of Treasury’s Office of the Comptroller of Currency in April 2009. Ballard said he made full regular loan payments to Citizens.

“(Citizens said) they called the loan under pressure from federal bank regulators,” Ballard said in a prepared statement. “They were and are in trouble because of gross mismanagement … and because they failed in their fiduciary duty to their investors and customers.”

According to past Springfield Business Journal coverage, the OCC’s order against the bank was due to “unsafe and unsound” banking practices.

The bank’s troubled asset ratio – a method of calculating a bank’s health by comparing its capital to its nonperforming loans created by The Investigative Reporting Workshop at American University – was 122 percent at the end of fourth-quarter 2009, compared to a national median of 14.5 percent.

Federal Deposit Insurance Corp. reports show Citizens’ the value of construction and development property the bank owns through foreclosures increased to $8.2 million as of March 31, 2010, compared to $333,000 during the first quarter of 2009.

Ballard’s suit states that Citizens notified him that a reappraisal of the property valued the development at $2.02 million, and bank officials said Ballard would need to pay down the loan by approximately $400,000, pledge additional collateral and pay an interest increase on the outstanding balance to continue the loan.

Ballard said he already had invested $1 million of his own money to cover the cost of construction overruns.

“We are aware that a bank has the right to call any loan when it is due, but we have a problem when their appraisal is within 1/1000 of a percent of the note and wipes out our $1 million in cash equity,” Ballard said in the statement.

Ballard’s lawsuit accuses Citizens of misrepresenting the value of Mill Pointe for the bank’s own gain and attributes the Ballards’ inability to finance that project with another lender to its troubles with Citizens.

Citizens CEO Frank Hilton referred SBJ to the bank’s attorney, Leland Gannaway of Gannaway & Cummings, who declined to comment on the case.

The Ballards’ attorney, Ryan DeBoef of Husch Blackwell Sanders LLP, also declined to comment.

Pesky regulations
Another Christian County developer has stepped forward with issues similar to Ballard’s.
Jack Isenberger, owner of IDI LLC, is considering filing a lawsuit against Citizens National, claiming that problems with the bank sent IDI into Chapter 11 bankruptcy reorganization in October.

Isenberger has built homes in two Ozark subdivisions, Grand Haven and Rolling Prairie  – financed through Peoples Bank of the Ozarks and Citizens National Bank – and in Highland Springs, also financed by Citizens.

Great Southern Bank financed the development of Grand Haven, and Metropolitan National Bank has financed additional loans for IDI projects in the area. Reappraisals by Citizens, where Isenberger was working under a $5.5 million line of credit, forced him to drain personal investments and refinance his home, which he owned free and clear, to come up with an additional $580,000 to reduce the construction loans.

“Great Southern, Peoples, Metropolitan – they’re all working with me,” Isenberger said.
“What’s happening is (Citizens) has made all these loans and the OCC is coming in and saying they want the lending limit down, so they’re going to everyone sitting here with their loans, and they’re just wiping us off the books.”

Regulators do put pressure on banks to keep a tight rein on loans, said Paul Merski, senior vice president and chief economist for Washington, D.C.-based Independent Community Bankers of America.

“Forcing banks to get new appraisals on properties and not accepting the appraisals banks have for properties, forcing banks to raise more capital and require banks to raise more capital than even what the regulations say on paper … those are some of the constant complaints we hear from bankers,” Merski said.

Another common complaint, he said, is that even when a developer is paying a loan, regulators are forcing banks to write down the development, treating it like a nonperforming loan, and requiring the bank to set aside more money in its loan-loss reserve.

“Community banks don’t want to call in the loans, particularly if developers are making payments on them,” he said.

Waiting for trial
According to court documents, the Ballards are asking for actual and punitive damages from Citizens for an “amount reasonably necessary to punish said defendant and deter it and others from like conduct.”

Ballard said he’s just waiting for the trial, set for April 2011. In the meantime, Ballard Properties continues to operate, managing rental properties it owns in Butterfield, Mill Pointe and The Springs, he said. Another residential development is not in Ballard’s future, he added.

“I’m going to retire,” he said. “I was going to retire after (Mill Pointe), anyway.”[[In-content Ad]]