Priority Bank of Ozark Nearing End of Dispute with Fed

The dispute between the Office of the Comptroller of the Currency and Priority Bank of Ozark is nearing private resolution after a partial public airing. The Office of Financial Institution Adjudication entered an order of indefinite continuation that postponed a Dec. 10 appeal hearing on the matter.

Instead of resolving the disagreement at the Sebastian County Courthouse in Fort Smith, the parties are said to have reached an agreement in principle that will soon produce a formal settlement.

Unlike the OCC’s May 9 charges for an order to cease and desist, the settlement won’t be public.

That filing came after Trevor Lavy, owner, chairman and chief executive officer of Priority Bank, declined to accept the cease-and-desist order from the OCC.

As part of the appeal process launched by Lavy, the OCC findings were reviewed by its Office of the Ombudsman. The Ombudsman’s rulings produced mixed results for the $94.8 million-asset thrift.

The Ombudsman ruled in favor of modifying, for the better, Priority’s CAMELS examination ratings in four of the five areas previously downgraded by the OCC.

The ratings system, ranging from 1 (strongest) to 5 (weakest), is an acronym for six areas of a lender’s operations graded by regulators to determine its overall condition: Capital, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk.

Capital was downgraded to 3 after the OCC’s 2011 full-scope examination, but the revised notice of charges doesn’t specify the new and improved score.

Priority’s equity capital totaled $7.2 million at year’s end. The number now stands at $7.8 million.

Asset quality and Management, which were given 4s previously, were both bumped up to 3.

Earnings, which had “deteriorated” to 2 by OCC reckoning, returned to 1, although the revised notice of charges didn’t detail that.

Priority produced earnings of $2 million during 2011 when the OCC conducted its examination that produced its cease-and-desist findings.

The thrift recorded a $1.3 million profit through the first nine months of 2012. That includes a $372,000 profit during the third quarter.

The ombudsman upheld the OCC findings regarding Priority’s composite CAMELS score of 3, which was based on “less than satisfactory ratings in asset quality, management and liquidity.”

The Ombudsman also upheld the OCC findings regarding Priority’s downgraded Liquidity rating of 3 and “troubled condition” designation.

“Liquidity risk at this examination was high and increasing,” the OCC reported. “The bank continued to heavily rely on Federal Home Loan Bank advances for liquidity funding purposes.”

The amended notice of charges for an order to cease and desist includes some stilted language regarding alleged unsafe or unsound practices and violations of law, rule or regulation.

The OCC initially charged that Priority Bank “has engaged” in those practices and violations. That was modified to a more sweeping qualifier: “is engaging or has engaged, and/or the OCC has reasonable cause to believe the bank is about to engage.”

The OCC’s amended filing contains the same 14 matters requiring attention detailed in its initial document.

That list includes inadequate: credit risk management, residential loan underwriting, criticized assets management, loan portfolio management, problem loan identification and loan review, capital planning, allowance for loan and lease losses methodology, other real estate loan accounting, concentration risk management and controls over affiliate and insider transactions.