Call it a halfway house for bankers.
As more once-struggling banks march toward release from formal enforcement actions, banking lawyers say executives should prepare to enter into informal agreements as a provisional step to freedom. Such agreements are highly likely for banks that have lingering issues that require time to work out in this particularly stubborn downturn.
"My opinion is that if the bank has resolved all of its issues, the order should go away in totality," said Frank Bonaventure Jr., a partner at Ober, Kaler, Grimes & Shriver and a former lawyer with the Office of the Comptroller of the Currency.
"If they are in substantial compliance and have addressed all of the safety and soundness issues, but still haven't quite gotten everything cleared up, getting downgraded to an informal agreement seems like a logical step," Bonaventure added.
At Royal Bancshares of Pennsylvania Inc. in Narberth it was a welcomed step. On Tuesday, the company said its bank was notified by the Federal Deposit Insurance Corp. and the Pennsylvania Department of Banking that a 2009 consent order would soon be lifted and replaced with an informal agreement.
"It was a natural progression as our bank improves. We had no expectation that we would come off of it completely," James McSwiggan Jr., the company's president and chief operating officer, said in an interview Thursday.
"We've made a lot of progress over the last three years, but we still have a lot of work to do," McSwiggan added. "We need to continue to address our nonperforming assets and return to consistent profitability."
Removing the consent order should help Royal Bancshares achieve better profitability, because such orders are costly.
"The key to coming out of it is that it will enable us to cut expenses going forward," including accounting fees, insurance premiums and legal fees, McSwiggan said. "You'd be surprised at how costly it can be in other areas. It doesn't just increase the FDIC assessment."
There is no particular rule that states that formal agreements must be replaced with informal ones. Serena Owens, associate director for risk management examinations at the FDIC, said the cycle is getting to a point where some banks might be ready to be released from formal agreements, but still might need some heightened supervision.
"If the bank has improved and the conditions that warranted being placed under an order have been alleviated or corrected, there is no reason to leave a formal agreement in place that is not current," Owens said. "Nothing is served by continuing a formal agreement that is no longer necessary."
McSwiggan said an informal agreement is still being worked out, but he expects it will largely be related to a continued need to improve the bank's credit quality.
The bank's formal agreement addressed capital, asset quality, profitability and its concentration in commercial real estate. McSwiggan said it was the regulators that initiated the discussion about downgrading the bank's order to an informal agreement.
Royal Bancshares was able to comply with the capital requirements through the equity it received from the Troubled Asset Relief Program. It shrunk assets by 37% since the third quarter 2009, to $857 million at the end of the third quarter of this year.
The company also brought in $12 million of capital by selling its Asian bank last year to its local president. Its nonperforming assets totaled $80 million at the end of the third quarter, compared to $106 million two years earlier.
Other banks are benefiting from downgraded orders.
Earlier this month, Western Liberty Bancorp Inc. in Las Vegas said regulators had released its bank from a September 2010 consent order, replacing it with a memorandum of understanding.
First Bancshares Inc. in Mountain Grove, Mo., had a 2009 cease-and-desist order terminated in October. Its bank now has an informal agreement in place.
Bonaventure said that credit quality would be a perfect example of something that regulators can continue to monitor through an informal agreement, particularly if the bank "has shown good faith."
"Maybe they are not exactly where the regulators wanted them to be," Bonaventure said. "Maybe they are 80% of the way there."
The FDIC is apt to look at lifting the order if the bank can show great strides. "If we can see that the board is making its best efforts and can point to significant progress, then it is something we can consider," Owens said.
An apparent good attitude couldn't have hurt either. Robert Tabas, the company's chairman and chief executive, referred to the regulators as "partners" with the bank in an interview.
"They gave us good guidance and it helped us," Tabas said. "They have their jobs to do, we recognize that and we did our best to comply. My advice to other banks is view them as partners for success."
Thomas Bieging, a partner at Bieging Shapiro & Barber LLP in Denver, said the regulators might be inclined to take a tiered approach because of their own accountability. Examiners are erring on the side of caution because they don't want to be blamed for not acting with enough vigor. "It used to be that regulators would say you're in compliance and check you off the list," he said.
"Now, they say you're presently in compliance, but won't say you're fully compliant until they are sure the bank has adopted a culture of continuing compliance," Bieging added. "They have to keep watching [because] they can't have you just wander off."