Legacy National Bank Under OCC Regulatory Agreement

Legacy National Bank of Springdale was issued an enforcement action and entered into a formal written agreement with its federal regulator, the Office of the Comptroller of the Currency.

The bank’s board members and assistant deputy comptroller, F. Christian Dunn, signed the agreement on April 24.

The document specifically addresses nine factors, including measures to make sure the bank is adequately capitalized, beefs up the management of its loan portfolio and risk assessment, and restricts its ability to buy brokered deposits without supervision from the OCC.

On Monday, the OCC also issued an agreed enforcement action against Metropolitan National Bank of Little Rock. ArkansasBusiness.com will post a report on that, with comments from CEO Lunsford Bridges, on Monday afternoon.

In the Legacy agreement, most of the articles require bank officials to tighten controls, while adhering to several strict reporting measures – both internally and to the assistant deputy comptroller.

“The agreement with the OCC is recognition that there are issues that need our highest focus of attention,” said Don Gibson, president and CEO of LNB.

“The agreement doesn’t ask us to do anything we don’t want to do anyway. Legacy and the market will work through these issues in time,” Gibson said.

The agreement is not unlike the OCC’s agreement with the now-failed ANB Financial NA of Bentonville. On June 25, 2007, the OCC issued an agreement with ANB addressing similar issues about asset quality and risk management and its ability to deal with potential losses.

It’s worth noting the absence of a phrase from Legacy National Bank’s agreement that was damning in ANB’s: “The Comptroller has found unsafe and unsound banking practices relating to the supervision of the affairs of the Bank.”

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LNB lost $500,000 at the end of 2007 and had lost $1.15 million as of March 31.

The bank’s total noncurrent loans, including those 30 days or more past due, were $18.2 million as of March 31, or about 11.36 percent of its total portfolio.

The LNB Agreement

The nine factors addressed in the agreement are: criticized assets; loan portfolio management; credit risk; problem loan identification; allowance for loan and lease losses; brokered deposits; capital plan and higher minimums; a strategic plan; and progress reporting to the OCC.

The OCC requires the bank monthly to scrutinize its criticized assets (loans that have potential problems) valued greater than $500,000 and report its findings to the OCC.

LNB is required to create systems that inspect loans for early detection and reporting of potential problems.

Under the heading of “credit risk,” the agreement states: “The Board [of directors] shall ensure the Bank adherence to a written program to reduce the high level of credit risk in the Bank.”

This includes procedures to strengthen all credit underwriting, particularly in the construction loan portfolio. The OCC mandates LNB reduce loan-to-cost guidelines for speculative home construction loans to prevent 100 percent financing, strengthen guidelines for third party inspections and improve equity requirements for construction and development loans.

As of March 31, LNB had $169.4 million in real estate loans, about 84 percent of its total portfolio, which is valued at $201.6 million.

The OCC requires Legacy to review and establish a program for the maintenance of an adequate loan loss allowance, which should include focused attention on the trend of delinquent loans, concentrations of credit and present and prospective economic conditions.

The bank had $3.85 million in its loan loss reserves as of March 31, up from $2.6 million a year earlier.

As for capital, the OCC requires LNB to maintain total risk-based capital at least equal to 12 percent of risk-weighted assets, and tier 1 capital of at least 8 percent of its adjusted total assets.

The agreement states that if the bank does not maintain those capital levels, LNB’s board of directors “shall develop, implement, and thereafter ensure Bank adherence to a three-year capital program” which would include growth projections, projections of sources and contingency plans.

But Gibson said LNB exceeds those requirements (15.93 percent of risk-based capital and 14.68 percent of tier 1 capital as of June 12) and that it received a $5 million capital infusion from shareholders in March.

Under the agreement, Legacy is to submit an application with the assistant deputy comptroller before it can acquire brokered deposits.

As of March 31, LNB had $77.59 million in brokered deposits, about 38 percent of its total deposits.

Gibson said that figure is down slightly since March 31 and the bank intends to manage its brokered deposits and grow with those available in the market.

Irregulation?

Kevin Mukri, spokesman for the OCC, couldn’t comment directly about LNB, but said any formal written agreement is not a reaction to ANB’s failure (or possible forthcoming failure at that time). The agreements are unique to all banks.

“We regulate by individual banks because all banks have different portfolios and business plans,” he said. “So enforcement actions are specific to individual banks.”

Mukri cautioned that just because a bank received an enforcement action, it doesn’t mean it will fail, or even that it is unstable.

“Our job is the safety and soundness of the national banking system. We look at and monitor [banks’] business plans,” he said. “We don’t stop banks from taking risks, but we want them to make prudent risks.”

The OCC doesn’t track its enforcement actions but according to its Web site, it issued 19 for the first four months of 2008 (not counting LNB) and 40 during 2007.

David Barr, spokesman for the Federal Deposit Insurance Corp., said there were 90 banks on its problem list as of March 31, up from 76 at the end of 2007. He couldn’t say if LNB was on the list.

Barr said the number of banks on the list is about 1 percent of the banks the FDIC insures, compared with a roughly estimated 10 percent ratio in 1990.

“It’s increasing, but it’s manageable,” Barr said.