Feds Crack Down On Byron Bank

October 18, 2002
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BYRON CENTER — O.A.K Financial Corp. (OKFC) and its subsidiary, Byron Center State Bank, announced Wednesday they had entered into a written agreement on Oct. 4 with the Federal Reserve Bank of Chicago and the state’s Office of Financial and Insurance Services (OFIS) to address issues of bank management and asset quality.

The day before, the bank announced that long-time president and CEO John Van Singel, who also was director of OKFC, had stepped down “to pursue other interests.”

Patrick Gill, former president and CEO of the Bank of Lenawee in Adrian has been tapped to replace Van Singel. He is to take over Nov. 4.

The Fed and OFIS requested a written agreement following the most recent, regularly scheduled examination of the bank by regulators from both agencies.

A report filed with the Securities and Exchange Commission (SEC) and the Federal Reserve Bank stated that “examiners raised concerns and identified supervisory issues with respect to the bank’s operations including, among others, its board of directors, management, asset quality and credit risk.”

The agreement requires that the bank’s board review the functions and performance of the bank’s senior executives and specifies actions the bank must take to resolve concerns raised during the examination, including maintaining adequate allowance for loan and lease losses.

The agreement gave the bank deadlines for hiring a new president and CEO, a qualified chief lending officer, a qualified commercial loan workout officer to assist in collection of problem loans, and a loan officer with experience in consumer lending.

The company also was given deadlines for submitting to regulators a revised written plan to strengthen board oversight of the bank’s management and operations, a written loan policies and procedures document that addresses deficiencies reported in the examination; and a written business plan and budget for 2003.

Commissioner of Financial and Insurance Services Frank Fitzgerald said it’s neither common nor uncommon for banks and bank holding companies in Michigan to execute a written agreement with regulators to address concerns.

“This sort of agreement is used in instances where there are very identifiable issues that need to be addressed and can be addressed,” Fitzgerald explained.

The agreement essentially creates a partnership between the regulators and the financial holding company to resolve the issues, he said.

“That the bank is open and operating indicates that it is in a safe and sound condition. That the agreement is in place indicates that there are some issues that need to be worked on and which is felt can be addressed.”

Both the bank and holding company boards of directors said they are “aggressively responding” to the requirements of the agreement and issues raised.

Even before the written agreement was executed, the company put together a team of employees to devise and implement action plans to resolve regulatory issues.

Jim Luyk, chief financial officer, said the company formed a bank improvement team made up key employees and began working on a number of the issues back in June.

How close the bank is to full compliance with terms and conditions of the written agreement, Luyk couldn’t say.

“We really can’t comment on that because the regulators will determine if we’re in compliance or not,” he explained. “We’ve made significant progress, I can tell you that. But to tell you how far completed we are, I can’t give you that.”

In addition to having already hired a new president and CEO, the bank reported last week that it expects to have a new chief lending officer on board soon.

Two new directors also were recently added to the bank and holding company boards, and two additional new directors are expected to be seated by year’s end.

Despite asset quality concerns raised during the examination, the 81-year-old bank points out that its capital exceeds regulatory requirement for being well capitalized under applicable laws and regulations.

The bank’s officials believe the restrictions imposed by the agreement will be short-lived.

“Moreover, we expect that the bank and OKFC will be profitable for the balance of this year,” said Robert Deppe, chairman of the bank’s board.

“The bank has a strong capital position, is well positioned in excellent banking markets, has been successful in attracting two excellent new directors and a highly qualified new president and chief executive officer, and has made significant progress to date in dealing with the requirements of the written agreement and asset quality issues.”

While the agreement is in effect, OKFC and Byron Center State Bank have to secure regulatory approval to pay dividends, add new directors, employ new senior executive officers, and pay certain severance or related compensation.

OFIC’s Fitzgerald said this is a very challenging time for financial institutions — both banks and credit unions. He said for the last 18 months, in dealing with the banks within its purview, OFIS has seen changing conditions in the economy affect the banks.

“Bad credit quality is an issue sort of across the board, and with some institutions specifically. Earnings for banks have been weak really across the board. Management issues have kind of come to the forefront,” Fitzgerald observed.

“We are taking a conservative approach to the allowance for loan losses and have been looking very closely at that particular component of a bank during the examinations that we have been conducting over the past year to be sure that, in fact, there is adequate reserving going on for that.”

An advantage that Michigan has that some other states may not have is that going into this period of economic downturn, Michigan’s state chartered banks, in the aggregate, were in very, very good operational and financial condition, Fitzgerald said.

And their performance is still good, even though not as strong as it was two or three years ago, he added.

“I think people in their dealings with state chartered banks in Michigan right now can take comfort in the fact that our banking community remains strong.”

James Piper, spokesperson for the Federal Reserve Bank of Chicago, said according to the Reserve Bank’s policy, the Form 8-K report document submitted by Byron Center State Bank and OKFC to the SEC and Reserve Bank “speaks for itself” and serves as a vehicle for public information on the matter.

The Chicago bank, one of 12 regional Reserve Banks serving the nation’s central bank, supervises 1,293 banks and bank holding companies in the Seventh Federal Reserve District, which covers Michigan, Iowa, Indiana, Wisconsin and most of Illinois.

Since January, the Federal Reserve Bank of Chicago has entered into written agreements with seven banks and bank holding companies. Last year, 11 such agreements were executed.            

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