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Damage control: What to do when your reputation takes a hit

A reputational crisis can strike at any time.

Eagle Bancorp in Bethesda, Md., is the latest bank to learn that lesson after mismanagement allegations sent its stock plummeting by nearly 25% on Friday.

The severity of the claims — that CEO Ronald Paul and other directors engaged in dubious insider dealings — spurred the $7.4 billion-asset company to vigorously defend itself, issuing two press releases and a letter from Paul that vehemently denied the allegations.

Eagle’s experience highlights the importance of having a crisis management team on staff and a plan in place before something happens, industry experts said. Doing so allows management to get in front of the news and help control the message, which is increasingly vital as shareholder activism gains more influence.

“If you don’t have a crisis playbook that anticipates the major types of crises you might face, then it’s too late when a crisis does occur,” said Mike Clement, founder and managing partner of Strait Insights, a communications consulting firm.

“You will be pushing a big rock uphill,” added Clement, who is also a former communications director at Bank of America. “In the past, you normally had some time to respond, but today everything is instantaneous.”

Crises range from natural disaster — as was the case in Florida and Texas when recent hurricanes hit — to the unexpected death of a key executive. Data breaches are another major concern that could spark a crisis that requires a fast response.

There are also instances like the crisis at Eagle, where management must respond to questions about operations and policies.

Bank of the Ozarks was in a similar situation last year after Carson Block, founder of Muddy Waters Research, questioned the Little Rock, Ark., company’s business model. BofI Holding in San Diego, like Eagle, mounted a vigorous defense in late 2015 after a lawsuit accused it of lax controls.

Paul said he first learned of the Aurelius report after someone called him about it on Friday. He read through the allegations before hosting a call with Eagle’s board. The company immediately drafted a release to distribute, he said.

The situation required a “quick schooling” on how to respond, Paul said, adding that the Aurelius report was the first time he has had to deal with this type of event.

“You have to go out and communicate with shareholders, customers and employees as to what the facts are,” Paul said. “So much of this is unfortunate. You’re defending against something you didn’t do. You’re playing so much defense when, for 20 years, you have been playing offense.”

Aurelius did not respond to a request for comment.

A crisis response team should go beyond public relations and marketing personnel to include representatives from key areas of the bank, Clement said. For instance, a finance executive may be needed to discuss the cost implications of the emergency.

Because it is management’s responsibility to protect shareholders’ interests, a bank should comment on a situation when it is damaging the business and causing a significant change in its stock price, said Chip MacDonald, a lawyer at Jones Day.

Public statements must be factual and transparent, and lawyers and investor relations experts should be consulted to make sure a bank doesn’t run afoul of securities laws, industry experts said.

“In this age of activism, you need to be prepared for something like this to happen,” MacDonald said. “Someone out there may have a different agenda than you.”

Banks may also be constrained by the type of information they can disclose due to privacy concerns around customers and regulatory exams, even if those details would support their position, said Catherine Mealor, an analyst at Keefe, Bruyette & Woods.

“These events can weigh on a stock,” Mealor said. “Management has to keep delivering on their fundamentals and over time the stock will work out.”

Gerald Armstrong, a veteran bank investor with a small stake in Eagle, said he doesn’t automatically get spooked by such reports, especially if the assertions are made anonymously or involve a short seller. Rather, he takes a broader approach to his bank investments.

“I’m not in a panic to sell something,” Armstrong said. “I would want to know more and I don’t like anonymous information. The issue [for a bank] is to be honest and explain what has happened and what their response will be.”

David Bishop, an analyst at FIG Partners, has been satisfied with Eagle’s response so far, especially with how management rebutted the report’s various allegations.

Still, it could take time for Eagle’s stock price to fully recover from Friday’s hit. For instance, BofI’s stock still remains below the price it had prior to the 30% hit it took in October 2015, according to data from FIG Partners.

While Eagle’s stock has rebounded somewhat, it was still about 15% below Thursday’s close as of early afternoon trading on Tuesday.

“Once investors dig through the report and digest management’s response they will come to realize it … is business as usual at the bank,” Bishop said. The stock “will recover over time. We’re standing with management and the stock.”

Management needs to ensure that its response doesn’t come across as shrill or accusatory, said Jeff Davis, managing director of Mercer Capital’s financial institutions group. In some cases, it may be prudent for a company to hire an outside firm to independently vet any issues. Though it would be an unfortunate expense for a bank, doing so may also ease any lingering concerns, he said.

“Unless the board is 100% certain about every issue that was raised, it just seems like prudence says you form an independent committee,” Davis said. “If it is all bogus, then it is a shame the stock was knocked down. If not, then maybe the report has done them a favor so they can investigate.”

Eagle has encouraged the appropriate agencies to investigate whether Aurelius was trying to manipulate its stock price, and Paul said the company may consider litigation. Regardless of the regulatory and legal implications, Paul said he hopes Eagle can quickly return to playing offense.

“When you find yourself in this position, you don’t change your day-to-day playbook,” Paul said. “We’re not any different from Thursday before this happened. You just have to get back to what you do best, which is banking.”

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