Can saving face help save a struggling bank?
Bankers like Chuck Frost, the president and chief executive officer of First State Bank in Winchester, Ill., say it can. His $36.3 million-asset bank is negotiating the terms of a cease-and-desist order with regulators, and Frost is worried about the language that will be used in the public document.
He acknowledged that First State needs major repairs, but he said in an interview this month that the order's release could accelerate an outflow of deposits.
"We know what we've done wrong," Frost said. "I don't see how telling everyone that we are the dumb kids on the block is going to help us get back in shape."
Bankers facing such a predicament now have an advocacy group. Community Bankers Revolt, started by Jeffrey C. Gerrish, a partner at Gerrish McCreary Smith PC in Memphis, is lobbying regulators to tone down the language of enforcement actions and to emphasize what banks must do to right themselves, rather than how they have erred.
"I've never thought that the goal of an enforcement action is to punish the bank publicly. They are meant to correct problems that are revealed in the examination," Gerrish said.
"So I think the whole process should be more constructive, instead of something that hurts the bank. Let's all get on the same page and address the problems."
The most egregious type of order is the cease-and-desist one issued by the Federal Deposit Insurance Corp., he said; though a bank that receives such an order is clearly facing difficulty, the introductory language that orders it to stop "unsafe and unsound banking practices" is boilerplate that has not been changed since at least the 1970s (when he started his law career at the agency).
Gerrish argued that regulatory orders should be more like the Federal Reserve Board's, which are light on introductions and go straight to the steps the institution is ordered to take.
"All that language at the top is unnecessary and can be inflammatory. Just get to the corrective action," he said. "The language we used then is the same language they use now, but the difference is that these documents weren't public then."
Of course, given the public anger at the banking industry and the Obama administration's pledge to increase government transparency, Gerrish's goal may be a long shot.
Even observers who agreed that enforcement orders can be damaging said they were skeptical that regulators would be receptive to changing them.
"Soften the language for banks that have problems? That's like asking the cops to be nicer to you," said Rusty Cloutier, the president and CEO of the $1 billion-asset MidSouth Bancorp Inc. in Lafayette, La., which was under a memorandum of understanding with its regulator during an earlier crisis in the 1980s. "It's a nice wish, but I just don't see it happening."
Steven Reider, the president of Bancography, a consulting firm in Birmingham, Ala., said that even though he understands the potential damage that can be done, bankers should be more considerate of their image before they are in the hot seat.
"I see the point of view that the wording is overly severe, especially at a time when consumers are so sensitive," Reider said.
"If you don't want that harsh language, don't do the things that bring it along. Ultimately, the institutions who are encountering this have brought it onto themselves."
First State is one of two bank units of Scott County Bancorp Inc. Frost, who is also the president of Scott County Bancorp, said the danger for First State is not the loss of pride but the loss of liquidity. As rumors have swirled about the bank's viability over the last few weeks, it has lost $1 million of its deposits — about 3% of the total.
The language of the cease-and-desist order could hasten that march, especially if the local press harps on the details, he said.
First State is not working with Community Bankers Revolt. Nevertheless, Gerrish described the same fears.
"That language can be a terrible indictment that could cause liquidity problems," he said.
"It can lead to an erosion of confidence. If it was necessary, fine. But it isn't."
Gerrish said he has begun heralding the cause where he can. He met in March with officials of the FDIC, the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Representatives of the Independent Community Bankers of America and the American Bankers Association attended the meeting.
He said he continues to talk with the FDIC, whose chairman, Sheila Bair, sent him a letter last month saying, "We are working to address your concerns."
Gerrish also said a recent consent order from the OCC against Florida Capital Bank in Jacksonville was a "kinder, more gently" worded agreement. Though he does not know if he can take credit for that, he said he is encouraged by it.
A representative for the OCC said that there has not been any change, and that the language of each agreement is different.
Representatives from the FDIC and the Fed did not return calls for comment.
The OTS said it is always willing to hear concerns about the regulatory process, though it has not heard of Community Bankers Revolt.
A spokesman for the agency said that much of the language in its orders is necessary and is required by statutes.
Chris Cole, the vice president and senior regulatory counsel for the ICBA, said the trade group has not taken a position on Gerrish's proposal, though it is definitely worth checking out.
"If there is a perception about C&Ds that makes the public think failure is not only imminent, but that management did something wrong, if not illegal, then, yes, I think it is something worth studying," Cole said.
He also said Gerrish's efforts do not compete with those of the ICBA, since it is focused on the overall regulatory environment.
Gerrish said he is not looking to compete with or replace the ICBA or the ABA.
Aside from getting regulators to change their language, Community Bankers Revolt's only goal is to encourage the Treasury Department to consider community banks when designing any kind of program for purchasing toxic assets.
However, Gerrish also said his group can be more pushy and provocative than the more established trade groups.
"We already have two great national groups. The difference is we can be unrepentant rebels," he said. "It doesn't matter who we aggravate — we just want to get the issues out there."
Gerrish said he has to be protective of the group's membership and supporters, out of fear of punishment. He would not give an exact number of banks that have taken up his cause, but he said that he has talked to dozens of bankers about the concept, and that there has been significant interest.
"They all want to stay anonymous," he said. "They are afraid of retribution; it does exist."