Priority Bank plays defense with regulators

Priority Bank, based in Ozark with its largest branch and lending office in Fayetteville, was put on notice by federal regulators last month for “unsafe and unsound banking practices” with a detailed list of infractions in its mortgage lending operations.

The notice of charges call for a “Cease and Desist” order to be placed on the local thrift citing the deterioration in the bank’s financial status following a comprehensive 2011 audit.

Priority CEO Trevor Lavy said the bank is appealing the notice and did not sign the order.

“Priority Bank will defend itself in due course before an Administrative Law Judge, who has already been assigned to hear the case,” Lavy said.

An appeal was made last month to the Office of Comptroller of the Currency Ombudsman on all material findings that served as the basis for the notice of charges, according to Lavy.

“Priority Bank expects to prevail on all material points and to be fully vindicated after a hearing,” Lavy said.

He expects the hearing to take place in July.

In the published notice, bank officials were asked to properly address the shortage in loan loss reserves and capital levels given the high degree of risk taken in the bank’s lending practices — which is primarily home loans. The OCC notes Priority Bank is in violation of numerous laws and regulations.

“At the time of the 2011 full-scope examination, management had not established concentration risk tolerance levels as a percentage of capital, approved a formal capital plan, or approved a dividend policy. Management and the board refused to properly report on its Dec.31, 2011 Thrift Financial Report the substandard and doubtful classifications identified by the OCC in the bank’s residential loan portfolio. The OCC determined management to be deficient and downgraded the rating to a 4,” according to the charges cited in the notice.

Key ratings range from 1 to 5, with anything below 3 deemed unsatisfactory, according to OCC guidelines. These key ratings are rarely made public as bankers can be sanctioned for sharing the information. However, regulators fully disclosed these ratings in the Priority Bank’s recent notice after the bank refused to sign — in essence, consent —  the order.

Priority Bank had formerly been regulated by the Office of Thrift Supervision prior to 2011, but oversight was transferred to the OCC in July 2011 as part of the Dodd-Frank Wall Street Banking Reform and the Consumer Protection Act. This transfer of regulatory supervision triggered the full-scope audit which prompted the notice for enforcement action.

The bank was tagged a “troubled institution” as a result of the intensive 2011 audit. The bank was asked to immediately address 14 areas of concern in mid 2011, but as of May 9 the OCC said bank management had not done so. The bank’s asset quality was also downgraded to “4” with classified assets at 209.2% of the Tier 1 capital and loan loss reserves as of Sept. 30, 2011, according to the notice.

The asset quality had eroded from 29.6% at the 2009 examination. This increase in classified assets were a result of $14.6 million in residential loans where borrowers have not paid their taxes, insurance, or both. The OCC also classified the $573,000 that the bank made in advances for these borrowers for payment of taxes and insurance.

The OCC noted the bank did not demonstrate these borrowers have the capacity to repay the advances.

“Anytime classified assets rise to more than 100% of Tier 1 capital and loan loss reserves, regulators are concerned. This bank has always been very sound financially and one of the most profitable banks of its size. As a thrift, the bank now finds itself having to operate under a new set of guidelines and different regulator expectations. It will be interesting to see how the appeal process goes,” said John Dominick, banking consultant and professor at the University of Arkansas.

Despite the notice from regulators, Priority Bank continues post some of the highest profits in the nation. Independent Bankers of America, an industry trade group, rates the local thrift among the top 10 performing Subchapter S institutions with assets between $50 million and $100 million.

Priority posted return on assets (ROA) of 2.61% at the end of 2011 and 1.66% in the recent quarter, following the re-classification of $14.6 million in loans to “troubled status," according to filings with the Federal Deposit Insurance Corp.

Dominick said an ROA of 1.66% is still well above the industry benchmark of 1%.

A more impressive number is Priority Bank’s return on equity (ROE) of 29.71% at the end of 2011, which was the third best in the country among Subchapter S banks of its size.

As of March 31, Priority Bank posted net income of $387,000 with assets of $93.367 million.