FRB Action: A Sign of the Times

Tom Field (SecurityEditor) • May 14, 2008

In case you missed it - because it wasn't a huge headline anywhere - here's a bit of news about First Pryority Bank, a 108-year-old community bank based in Pryor, OK.

Well, first a bit of background. First Pryority was founded in 1900 by W.A. Graham, a rancher who helped develop the town. Nolan Jacobs bought the bank in 1957 and was primary shareholder until his death in 1984. His son, Mike Jacobs, has been the main shareholder ever since. That's the history.

The news is: Effective March 25 of this year, First Pryority Bank entered into an agreement with the Federal Reserve Bank of Kansas City and the Oklahoma State Banking Department. The goal: restoring and maintaining the financial soundness of this community bank. Among the stipulations:

First Pryority must engage an independent consultant to review the effectiveness of the bank's corporate governance and management structure, culminating in a detailed report of findings, recommendations and actions;

The bank must submit revised loan and credit administration policies and procedures. Additionally, First Pryority must maintain a sufficient capital position and submit a written business plan for improving earnings.

First Pryority must take immediate action to correct technology deficiencies that are identified in the Report of Examination. This includes, but is not limited to, its information security program, system access levels and internal controls.

Re: compliance, the bank must take steps to correct any violations of laws cited in the FRB's report.

And to ensure that it will comply with all terms of the agreement, the bank must appoint a compliance committee to monitor and coordinate the bank's activity.

There's more, including a timeline and all the gory details of how each of the bank's officers must be evaluated for basic competency, and you can read all of that here:

http://www.federalreserve.gov/newsevents/press/enforcement/enf20080403a1.pdf

The point is: This agreement represents a powerful step by the FRB not just to punish, but more to preserve this venerated institution. It's in no one's best interests for a bank to fail, so here's the FRB stepping in to infuse some success.

Will it work? We'll see.

Are such drastic actions common? More so than you might think. Check out this list of enforcement actions by the FRB so far in 2008:

http://www.federalreserve.gov/newsevents/press/enforcement/2008enforcement.htm

Why do I mention this case? Because it strikes me as a huge story for the people of Pryor, OK, who've entrusted their assets to this bank for more than a century. And it also strikes me as a sign of the times - a wake-up call to other community banks struggling with regulations, resources, security threats and the weak economy.

Times are tough, yes, but the threats don't care. Regulatory compliance and information security have to be top priorities - or else you run the risk of being the next First Pryority.

I'd welcome your insights on this story and what it means to you.