Regulatory Directives Hit Bank

HEIGHTENED SCRUTINY RESTRICTS FUTURE LENDING

By Kim Souza

Sunday, November 29, 2009

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SPRINGDALE — First Federal Bancshares confirmed it came under regulatory directives issued by the Office of Thrift Supervision on Nov. 19. The OTS is the bank’s primary regulator.

This heightened scrutiny will restrict the bank’s future lending practices and overall near-term growth as First Federal works to reduce its troubled loan portfolio.

The Harrison-based bank detailed the restrictions in a quarterly fi ling with the Securities and Exchange Commission, made public on Tuesday.

CEO Larry Brandt said the directive is not uncommon when asset quality weakens because of rising credit delinquencies.

At last count the Federal Deposit Insurance Corporation’s “problem list” reached 552 banks, the highest number in 16 years because of rising loan delinquencies and falling real estate prices.

“We know our asset quality is not at the level it needs to be, but we are working to make improvements,” Brandt said.

The directives require the bank to obtain approval of the OTS in order to make, modify, renew, extend or refi nance any commercial real estate loan exceeding $1 million.

Without prior regulator permission, the bank is also prohibited from accepting or renewing any brokered deposits, opening branches or loan production off ces or engaging in any new activities or services the bank did not practice prior to the regulatory order.

“This order seems to tie up all but the bank’s routine duties. Their growth ability has been restricted for both deposits and loans,” said John Dominick, banking professor with the University of Arkansas.

He said as more area banks come under these restrictive orders there will be less money to fund new businesses or other ventures, which could lengthen the region’s recovery period.

Dominick estimates as many as seven local banks could be under similar orders — though not all are made public. He said the widespread real estate problems in this region have likely brought tighter regulatory oversight for all the banks with real estate development loans.

Legacy National, Metropolitan National and Parkway Bank all came under public regulatory orders in the past 18 months. Each was given directives to clean up problem loan portfolios.

Banks regulated primarily by the Arkansas State Bank Department are protected from having their identity made public as state law prohibits the agency from disclosing the names or locations, according to Luther Guinn, deputy commissioner.

There were eight statechartered banks in Arkansas under informal or formal regulatory orders in June of 2008, according to Guinn.

As of Wednesday, Guinn said that number had risen to 15 banks.

Dominick said First Federal’s directive is one of the less severe he has seen.

“One good signal for First Federal is the nonmention of additional capital requirements,” he said.

Brandt said the bank remains well-capitalized according to industry standards, despite its $23.4 million loss in the quarter ending Sept. 30.

He said the bank shifted just over $30 million of capital to its loan losses reserves in the recent quarter. “We moved the money as a contingency and were still able to remain above industry standards with respect to our capital, which is an accomplishment in this operating climate,” Brandt added.

Real Estate Struggles

First Federal’s financial struggles are a direct result of real estate loans made in Benton and Washington counties in recent years. The bank reported $95.3 million of troubled loans as of Sept. 30.

Brandt said the bank got caught up in the local building euphoria despite having 30 years of experience in this market.

This year First Federal reclassified $35.6 million of local real estate development loans to nonaccrual status — the last step prior to foreclosure.

The underlying collateral for the bank’s troubled loans includes 42 residential lots in Cave Springs, 52 housing lots and 25 acres of undeveloped land in Fayetteville, 96 residential lots in Fayetteville, 60 acres zoned residential in Fayetteville, 80 acres for future residential development in Fayetteville, 35 acres for a proposed residential subdivision in Fayetteville, 40 acres for a proposed subdivision in Farmington, 29 acres for commercial development in Springdale, 24 acres commercially zoned in Lowell, 2.49 acres of commercial land in Rogers and 20 other loans under $1 million each, according to the recent fi ling.

“We expect a significant amount of the nonaccrual real estate loans to eventually migrate to real estate owned as $27.9 million of the nonaccrual real estate loans are in bankruptcy or some stage of the foreclosure process as of Sept. 30,” Brandt said.

He said the bank has devoted substantial resources toward the resolution of its delinquent and nonperforming assets.

“Larry Hall, a seasoned banker with 35 years of banking experience, is working full time as our special assets offcer at our Pinnacle branch in Rogers. He is committed to liquidating the bank’s properties in the Northwest Arkansas market which is the bank’s No. 1 priority,” Brandt said.

Other issues addressed in the directives include gaining OTS permission before: Declaring stock dividends, making any contract changes for executive officers or increased borrowing by the bank.

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