Small banks struggle with new regulations

With a quarter-century in the industry, Patricia G. Satterfield has long recognized that regulation of banks is a subjective practice. But the president and CEO of the Virginia Association of Community Banks says the current regulatory environment is the most difficult and “over-reaching” of her career.

“Banks are receiving uncertain and mixed messages in the examination process. They don’t know what to expect,” she said. “What was once A-OK is no longer A-OK, but no one knows that until after the examination.”

That, bank officials say, is what happened recently to Old Dominion Bank in North Garden, which entered into a formal agreement with the Office of the Comptroller of the Currency to make changes to its lending practices, accounting and capitalization.

The agreement states that federal regulators found “unsafe and unsound banking practices” and requires the bank’s board of directors to develop new plans for capitalization, loan reviews and contingency funding. But Old Dominion officials say the bank is safe and sound and that the agreement is a result of ever-changing requirements and regulations used by the bank examiners.

“We’re doing everything right, it’s just that the rules are changing,” said Charles V. Darnell, president of Old Dominion Bank. “We are solvent and we’ve addressed all of their concerns mentioned in the letter.”

Regulators declined to give any details on where or how Old Dominion failed to meet federal standards or what those standards are or if the standards had changed without the bank’s knowledge.

Neither would examiners say whether Old Dominion was on sound financial footing or otherwise, or what criteria were used to determine the bank’s condition, or if the agreement was the result of changes in federal requirements.

“We can’t comment on anything regarding the bank other than refer to the formal agreement,” said Dean DeBuck, of the comptroller’s office.

DeBuck said the formal agreement is one of numerous tools regulators use to bring banks in compliance and is not uncommon practice.

“We probably issue a dozen of them every month across the country,” he said.

Darnell said the bank is addressing an examiner’s request that it increase its capital to help offset any potential future loan losses by holding a Sept. 10 stock issuance.

“They’ve changed the ratios and the standards for what they consider to be well-capitalized, so we plan to address that on Sept. 10,” Darnell said.

State banking officials say Darnell’s claims of changing regulations and requirements are accurate. They say examiners don’t want to appear lax in enforcement should a bank fall on tough times. In fact, as many as one in three Virginia community banks may have either informal or formal agreements with examiners, Satterfield said.

“It used to be that if a bank was in an agreement like this, it was a sign of trouble,” Satterfield said. “Now it’s pretty much seen as normal.”

More than 460 banks nationwide have formal agreements or consent orders and more than 800 banks are under some sort of corrective agreement with federal regulators, according to the Federal Deposit Insurance Corporation. The vast majority of those banks are community banks with assets of less than $1 billion.

Regulators and bankers note that the wording of the agreement between the federal government and Old Dominion, including the use of the phrase “unsound and unsafe,” is taken directly from the federal banking laws giving the regulators authority over banks. Regulators have a variety of tools to use to force banks to comply with their recommendations, including informal agreements that remain private and formal agreements that are made public.

Regulators can also enter into consent orders with the banks, can take over a bank or close a bank, if they determine that there is sufficient reason for them to believe the bank is in trouble. Willful violation of a consent order allows bank regulators to put the bank into receivership. That’s not the case with formal agreements like that between the government and Old Dominion Bank, however.

“The decision to utilize a formal agreement instead of a consent order is largely driven by negotiation strategy and the discretion of the delegated decision-making official,” a procedure and policy manual for the Office of the Comptroller of the Currency states.

Bank officials said that keeps many bankers from speaking out about the federal procedures.

“The examiners have a lot of power and the bankers don’t want to upset the examiners,” Satterfield said. “Bankers are trying to determine how much push-back they can afford without the examiners coming down on them.”

Although bankers bemoan the changing standards that make it difficult for them to meet all examiner requirements, examiners are concerned that community banks are the ones that are failing.

In the first half of 2010, 118 banks failed, all of which have been community or regional banks, according to the FDIC. Florida leads states with bank failures with 22, followed by 15 in Illinois and 10 in California.

On Aug. 20, regulators shut down Imperial Savings and Loan Association in Martinsville and transferred the deposits and assets to River Community Bank in Martinsville. It was Virginia’s first failure for 2010. The bank had $9.4 million in assets and six employees.

Old Dominion had $53.3 million in assets as of June 30, according to the FDIC.

The nation’s 7,830 banks made a combined $21.6 billion in net income in the second quarter of 2010, according to the FDIC, but the nation’s 105 banks with assets of more than $10 billion made $19.1 billion of that profit.

Federal Reserve Bank officials estimate that the largest 20 banking organizations in the United States now control nearly 80 percent of total banking assets, with four banks — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — controlling about 48 percent of assets.