LITTLE ROCK — In an unusual move, Priority Bank of Ozark has chosen to contest sanctions issued by federal banking regulators.
The federal Office of the Comptroller of the Currency issued a “notice of charges for an order to cease and desist” against Priority Bank, which has $90 million in assets. The notice was issued May 9 but not released publicly until Friday.
The regulator listed 14 “matters requiring attention” at Priority Bank.
“I have never seen anything like this [among Arkansas banks],” Randy Dennis, president of Little Rock-based DD&F Consulting Group, a bank consulting firm, said of the notice against Priority Bank.
An administrative law hearing, which likely will be open to the public, will be held in Fort Smith in regard to the sanctions, the notice said. No date or exact location for the hearing has been set.
“Normally when there is a cease-and-desist order, it is agreed to by the bank, which waives its right to a hearing,” Dennis said. “But [Priority] has refused to be put under a cease-and-desist.”
Trevor Lavy, the owner, chairman and chief executive officer of Priority Bank, said in an e-mail that, “Priority Bank will defend itself in due course before an administrative law judge, who has already been assigned to hear the case.”
The bank also has appealed to the regulator’s Office of the Ombudsman, Lavy said in the e-mail.
“Priority Bank expects to prevail on all material points and to be fully vindicated after a hearing,” Lavy said.
Priority Bank ranks 99th of the state’s 127 banks in terms of assets. It has one branch in Ozark and one in Fayetteville.
But Priority is one of the state’s most profitable banks. It had the eighth-best return on equity last year at 18.91 percent and the 13th-best return on assets last year at 1.65 percent. It had more than $2 million in profits last year.
Priority Bank had almost $79 million in loans in March, but only $730,000 in loans not generating interest.
There are 19 Arkansas-based banks under some form of federal regulatory sanctions and another 18 under state banking sanctions.
Unlike typical orders issued by federal regulators, which are very vague, the notice against Priority goes into detail.
In the notice, the Office of the Comptroller of the Currency released the normally undisclosed CAMELS rating - an acronym for capital, asset quality, management, earnings and liquidity - for Priority Bank. The rating ranges from a 1, which is excellent, to a 5, which is poor.
“CAMELS ratings are never made public,” said Tim Yeager, associate professor of finance at the University of Arkansas in Fayetteville.
In a full-scope examination of the bank that began in August, the federal regulator downgraded Priority Bank’s capital to a 3, its asset quality to a 4, its management to a 4 and liquidity to a 3. The regulator downgraded the bank’s overall composite rating from a 2 to a 3.
Included among the 14 areas the bank was told to address was credit risk, residential loan underwriting, transactions with affiliates, and conflicts of interest with respect to insider transactions and with respect to purchases of loans originated by affiliates of the bank.
Priority Bank improperly did not include real estate taxes and insurance in its debt-to-income calculations, the federal regulator said. It either did not provide training for loan officers or it was ineffective, it said.
The bank faces an uphill battle in overcoming the charges, Yeager said.
“Given the financial condition that a lot of banks have been in the last several years,the [regulators’] attitude is going to be that banks have to be cautious in their risk-taking,” Yeager said.
In another information release Friday, the Office of the Comptroller of the Currency stated it renewed an existing consent order against One Bank & Trust Co. of Little Rock. The renewal was issued on May 21. One Bank & Trust first received sanctions from the Office of the Comptroller of the Currency in January 2011.
The regulator told One Bank to revise its strategic plan, improve its capital levels, correct deficiencies in management, improve management of its loan portfolio and improve management of its problem assets.
Business, Pages 21 on 06/19/2012