FDIC warns Lexington bank of unsafe practices

Federal regulators have ordered a Lexington bank to shore up its lending practices and implement better collection procedures after its past-due loans nearly quadrupled over the past year.

The “cease-and-desist” order issued to Bank of the Bluegrass & Trust Co. was finalized July 18 and is the fourth order issued to a Kentucky bank during the past two years.

Bank of the Bluegrass voluntarily made the order public Monday, even though the Federal Deposit Insurance Corporation, which monitors banking practices, has not yet released it.

The order charges that the bank failed to collect proper loan documentation, failed to establish and reinforce loan repayment schedules, and that the board of directors failed to provide adequate supervision and oversight at the bank, which has two locations in Lexington.

The FDIC order does not affect day-to-day operations at the bank, Lexington's seventh-largest by amount of deposits, with $196.8 million, as of June 2007.

The order outlines a series of steps the bank must take to put its financial house in order. It will be under the supervision of the FDIC until state and federal regulators are satisfied the problems are corrected.

Residential loans and all other aspects of business will continue as usual, said Mark Herren, the chief executive officer. The bank has more than $24 million in capital and is not in danger of insolvency, Herren said. The bank has also increased the amount of money it sets aside to cover potential loan losses.

Herren said Monday that a weak real estate market has caused many of the financial woes. According to banking records from March 30, the bank had more than $11 million in loans 30 days past due, up from $3 million a year earlier. Herren and Bill Allen, president of the bank, said the number of past-due loans is now at about $9 million.

Herren said some of the bank's past-due loans were from five midsize builders affected by the the housing market downturn.

The order says that the bank cannot extend additional credit to customers with past-due loans.

Banking regulators were also concerned that the bank's loan portfolio — the type and mix of loans — was not diverse enough. Moreover, the bank was operating with too high of a percentage of bad loans on its books. In March 2008, the bank had approximately 3.4 percent of its loans past due, more than double what banks of similar size have, according to federal banking data.

The bank had been using an outside firm to help it monitor loans, which is not uncommon for banks of similar size. The bank will soon have its own internal loan review officer, Herren said.

The bank also has added staff in its loan division to ensure compliance with all FDIC rules.

“There isn't a problem with the staff we have. We've just needed to add more people,” Herren said. The FDIC has not alleged any criminal wrongdoing on the part of the Bank of the Bluegrass staff, Herren said.

It is the policy of the FDIC not to comment on specifics of a bank's cease-and-desist order.

The FDIC order calls for the bank to change certain policies, including beefing up its conflict of interest policy. The policy should require that any bank officer or bank director disclose any relationship with any loan applicant, the order says. Herren said that in one instance a loan officer was involved in a loan that went to a business partner. The bank opted to move the loan to a different officer.

Federal regulators wanted the board to be more involved, meet more often and have more oversight over major loans, and the board has agreed, Herren said.

Allen said the bank has already changed all of the policies challenged by regulators. The additional loan staff members have already been hired or will start soon, he said.

The bank employs 63 people and has two locations, one on High Street and a second on Southland Drive.

Bank of the Bluegrass grew out of an appliance business started by Charles Jett Sr. in 1933. Jett began lending customers money so they could buy appliances on a payment schedule. In 1972, the company was granted a commercial bank charter and the name was changed to Bank of the Bluegrass.

“We're going to be here for another 36 years,” Herren said on Monday. “We will not sell the bank.”

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