FDIC Flags Dissenters, Raises Ire

In its most recent press release listing the banks that received cease-and-desist orders, the Federal Deposit Insurance Corp. included a new section: the dissenters.

For the first time in the nearly 20 years that enforcement actions have been made public, the FDIC released a notice of charges against the banks that refused to consent to the proposed orders.

This will become routine, but given the graphic nature of the notices — they include exam data and details of alleged wrongdoing — industry insiders and observers say such disclosure could harm banks. Some also contend that the change is meant to dissuade banks from contesting regulatory orders, just as more are starting to do so.

"This seems like a ploy to beat bankers into submission," said Joseph D. McKean Jr., the chairman and owner of the $720 million-asset Frontier State Bank in Oklahoma City, which went to court this summer over an FDIC order and is awaiting a decision on the case. "It is not a well-thought-out tactic. Anything the FDIC posts in this regard is likely to hurt a bank."

According to the FDIC, the change is not meant to harm or bully the dissenting banks; rather, it is intended to make the enforcement process more visible.

All formal regulatory orders became public in 1990, under the Financial Institutions Reform, Recovery and Enforcement Act.

But before its Aug. 28 press release, the FDIC had not been so publicly outing the banks that dispute such orders. The notice of charges could be obtained by making a request under the Freedom of Information Act. The charges also would be aired at a public hearing, if the squabble went that far.

David Barr, an FDIC spokesman, could not specify what triggered a change now, after nearly 20 years. But he said the goal is simply to make the information accessible.

The notices will be included in a press release of regulatory orders each month, he said. "Since the notices are part of the enforcement process, we decided to make them available when they are imposed."

While the Aug. 28 press release specifies a notice is a proposed enforcement action, not a final decision or order, observers said that the charges can come across as damning, and that the wording is harsh.

"This is just another way of putting additional pressure on community banks to consent to these orders, even if they think it is not in the best interest of the bank," said Jeffrey C. Gerrish, a partner at the law firm Gerrish McCreary Smith PC in Memphis. "The inflammatory nature of these charges could certainly do damage to a community bank."

Gerrish is representing Evergreen State Bank in Stoughton, Wis., one of the three banks to have their notice of charges published. The other two are Central Bank of Georgia in Ellaville and First State Bank in Cranford, N.J.

A cease-and-desist order typically includes boilerplate language, and without identifying what rules a bank broke, gives directives on how it must improve. The notice of charges is far more explicit.

The FDIC accuses the $249 million-asset First State — which has been only adequately capitalized for the past eight quarters — of breaking the law by misrepresenting its reliance on brokered deposits on call reports.

The $354 million-asset Central Bank allegedly inflated its capital ratios by borrowing money from a director immediately before the end of the second quarter of 2008, only to repay it July 1, 2008.

The charges against the $286 million-asset Evergreen include one about underreporting its nonaccrual loans.

First State and Central did not return calls. Evergreen declined to comment, and Gerrish would not discuss his client specifically.

Barr dismissed the idea that the disclosure could hurt banks, saying the charges against dissenters come out during public hearings anyway.

"If a bank isn't going to stipulate, a lot of information is going to be made public. That is part of the process," Barr said. "There is the notice, motions, testimony, so all of that information is going to be made available at some point."

That's accurate, but disingenuous, according to several banking lawyers. Few banks ever take a dispute with regulators to the point of a hearing. More often, a bank contests an order to buy more negotiating time, in the hopes of getting a lighter enforcement action.

"Almost every one of those cases settle," said Sanford Brown, a managing partner at the law firm Bracewell & Giuliani LLP. "The typical dance has been the threat of a C&D, the bank refusing to sign it, the FDIC issuing a notice of charges, but that has stayed out of the public, and they have continued to negotiate toward the hearing."

Regardless of whether the FDIC changed its longstanding practice to gain leverage, banking lawyers said that the details included in a notice could damage a bank.

"I don't think the FDIC is trying to do anything bad to the bank, but this still might have a bad effect," said Chip MacDonald, a partner at the law firm Jones Day. "It is not going to put you in a very good light. A lot more information is going to come out than if you consented."

Rusty Cloutier, the president and CEO of the $1 billion-asset MidSouth Bancorp Inc. in Lafayette, La., agreed that this change might be harmful, but strongly advised against battling regulators in the first place.

"I would tell you that being on the opposite side of the regulator is the worst mistake that can be made, period. They carry enormous power," said Cloutier, who negotiated a memorandum of understanding — a decidedly softer enforcement action — with regulators in the 1980s. He credits his bank's survival to a proactive approach and a willingness to work with regulators. He still keeps the document in his desk as a reminder to stay proactive.

Ken Thomas, an independent banking consultant in Miami, said that while the banks may feel as if the details in the notices are unsubstantiated or incorrect, the information should be made public. "False or misleading reports, manipulated and misstated and inflated capital accounts … why shouldn't this be public?" Thomas said. "I am of the school of the more disclosure the better."

Walter G. Moeling 4th, a partner at the law firm Bryan Cave LLP, said regulators are under increasing pressure to be more forthcoming about their dealings with banks, and the Office of the Inspector General is repeatedly complaining that regulators did not act fast enough with troubled banks. So the FDIC's decision to disclose the notices more quickly and more publicly than in the past could just be about improving transparency.

"The public very much has a need-to-know philosophy," Moeling said. "So perhaps the FDIC just wants to spell out what they are doing in full."

Still, Moeling said the small pool of banks willing to rebut charges is likely to shrink further.

"This change may influence their decision to consent or run the risk of having the strong rhetoric that exists in the order out there," Moeling said. "The press coverage of a C&D is bad enough."