The Federal Deposit Insurance Corporation put First Community Bank of Crawford County under a consent order in July citing a long list of concerns regarding financial soundness.
The bank signed the consent order July 27 without admitting or denying any of the issues raised in the 24-page filing. Regulators cited the bank for poor credit administration, questioned loan underwriting practices, insufficient board oversight, weak earnings, capital shortfall and sensitivity to market risks, according to the order made public Friday (Aug 31).
The bank noted in a release the order reflects the FDIC’s concerns over a small number of loans, primarily in Northwest Arkansas, which have been adversely affected by the economic downturn across the nation.
“Fortunately, these issues are identified and are limited in scope,” according to Debbie Gipson, spokeswoman for the bank.
She said the bank is making steps to eliminate the concerns raised by the Arkansas State Bank Department and the FDIC.
“The board is very confident that’s conservative business strategy will be successful and that we will remain active in the business of making loans in the communities we serve, but with a stronger emphasis on the quality of loans we extend. We believe in time, most of the criticized loan will be good loans and perform well for our bank,” Gipson said.
The consent order requires the bank to complete a management staffing study with an outside consultant that scrutinizes the qualifications of key management. The bank make also file a completed management plan with regulators in the coming days.
“Staffing studies don’t come cheap, they can cost between $20,000 to $25,000. But when the regulators ask for one, a bank has to comply,” said John Dominick, professor of banking at the University of Arkansas, and state bank consultant.
He said the more and more regulatory orders are keying in on management issues, something not done as often a few years back. The FDIC gave First Community Bank higher capital guidelines, which is also standard in most orders, according to Dominick.
“Capital is king, and there is never enough when banks have to start aggressively downgrading loans,” he said.
The order requires First Community to reclassify a number of non-performing loans and immediately put $787,000 into the bank’s loan loss reserves. In the future, the bank must get board approval to advance money on loans deemed classified.
Aside from a full internal loan audit, the bank must hire an outside consultant to complete an external loan review. Dominick says it’s pretty standard procedure, but it will cost the bank roughly $100 per hour for those services.
The bank was ordered to reduce its number of delinquent loans, by either collecting or charging them off within 60 days. As of June 30, the bank had $ 5,184 million in non-performing and past due loans. At the same time the bank has loan loss provisions of $2 million.
Through the first half of 2012 the bank charged off $478,000 in past due loans, compared to $181,000 during the same period of 2011. Gipson said the bank is experiencing what many other institutions have already gone through as a result of a sluggish economy.
This week the FDIC reported the number of troubled banks it was overseeing totaled 732, or about 10% of all federally insured banks. The "problem" list had 772 troubled banks in the first quarter. So far this year, 40 banks have failed. That's far below the 92 banks that shuttered last year and the 157 that closed in 2010.
First Community Bank reported total net income of $231,000 in the first half of 2012, that compared to $398,000 in the year-ago period.
The bank took a net loss of $399,000 to end 2011, according to FDIC call reports.
The bank was also asked to file updated call reports once the $787,000 added provision is taken. This will swing the bank’s 2012 profits into losses.
Dominick said there is no magic solution to shake a regulatory order of this level because it takes time to work out loans gone bad.