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Ankeny-based Community State Bank N.A. could be forced to divest itself of its insurance subsidiary, CSB Insurance Group Inc.

In mid-May, the Ankeny-based bank entered into a written agreement with its federal regulator, the Office of the Comptroller of the Currency (OCC), that gives the bank until Oct. 19 to take corrective actions or possibly have to sell CSB Insurance Group, which is based in Johnston.

“The insurance agency is a very profitable part of our company, and there is no intent to divest ourselves,” said Mark Degner, the bank’s president. If necessary, the bank will seek an extension of the agreement until it comes back into compliance, he said.

According to the agreement, the bank is “no longer in compliance with the qualification requirements to control or hold an interest in a financial subsidiary because it is not well managed,” as the term is defined in federal banking regulations. The agreement stated the bank must also achieve satisfactory “CAMELS” composite and management ratings by Oct. 19.

The CAMELS ratings measure the capital, assets, management, earnings, liquidity and sensitivity to market risk of banks; a rating of 1 or 2 is considered satisfactory, and ratings of 3, 4 or 5 require corrective actions.

Federal banking regulators have raised the number of struggling banks to which they have issued such notices. According to a recent analysis by The Wall Street Journal, federal regulators have issued at least 285 memorandums of understanding to banks this year, compared with 399 issued in all of 2008. At least four Iowa banks, including Community State Bank, entered into such agreements last year.

Iowa Banking Superintendent Tom Gronstal said a number of Iowa-chartered banks own insurance agencies, primarily rural banks with agencies that focus on crop insurance. No state-chartered banks face divestiture of their agencies, he said.

“We look at both (the financial condition of the subsidiary and the bank),” Gronstal said.

“If the bank is in serious trouble, we would want to make sure the customers of the insurance agency weren’t at any additional risk. We don’t have anything like that going on at this point.”

However, the number of Iowa banks subject to greater scrutiny by state bank examiners has tripled from a year ago. In July 2008, all but 10 of the 335 state-chartered banks carried either a 1 or a 2 CAMELS rating; currently, 31 banks have unsatisfactory ratings of 3 or higher, Gronstal said.

“It definitely increases the (bank examiners’) workload,” he said. “It’s just more to do. But you just can’t have these kinds of economic problems and have all of the banks sail through without issues.” However, most banks still carry good levels of reserves, he said.

Community State Bank, which for the second quarter reported a net loss of $4.4 million, is still subject to an earlier compliance agreement reached in July 2008 with the OCC that ordered it to take corrective actions to improve its CAMELS ratings.

“We are in compliance with the (July 2008) agreement as far as capital requirements,” Degner said.

“Like most banks (that have such agreements), that agreement is going to stay in place until problem loan levels are back down to normal levels, and we hope that happens sooner rather than later.”

Degner said he expects Community State Bank to return to profitability in the second half of 2009.