Bankers and Regulators Chart Slow Course to Better Relations

Community bankers are making a quiet push to thaw relations with regulators.

Tension has been high since the financial crisis increased political pressure on regulators and banks. The passage of time has not taken much of the edge off.

So a growing number of bankers are extending olive branches to their supervisors. Many executives are trying to improve communication and give examiners a better understanding of their banks' more-complex business dealings. To some, it is a matter of enlightened self-interest.

"Informal conversations are a great idea," says Kevin Jacques, the chairman of finance at Baldwin-Wallace College in Cleveland who worked at the Treasury Department and the Office of the Comptroller of the Currency. "It seems that there's a game of telephone that extends from the regulator in Washington to the examiner and the last person involved in this game is the banker.

Brad McMurtrey, the president of USAmeriBancorp in Clearwater, Fla., is one of several bankers who have reached out to regulators. "There are bankers out there who see regulators as the enemy," he says. "We see them as part of our industry with a job to do."

USAmeriBancorp executives make an annual pilgrimage to visit regulators in Atlanta and Tallahassee, Fla., to discuss the company's performance and provide updates on the strategic plan. Regulators often provide insight on their expectations. "We meet them on their own turf," he says. "It's a two-way conversation."

"It makes sense to be proactive, so you're not in the dark about a regulator's priorities," says Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP and a former examiner at the Federal Reserve Board. "If you're a small bank, it may be easy for you to be forgotten until your examination."

Still, more work is needed before either side can declare a détente.

"The judgment in regulation is disappearing," says Nicholas Ketcha Jr., a former supervision director at the Federal Deposit Insurance Corp. and New Jersey regulator who is now a consultant at FinPro. "It is stifling the dialogue. There was always a dialogue when I was there. Now it seems like a monologue where only the regulator is talking."

"This is a really tenuous time for the relationship between banker and regulator," Jacques adds, with the Dodd-Frank Act serving as the source of most angst. "You have banks across the board that are scared about what is going to come out of Dodd-Frank," he adds. "What scares them the most is how much regulators will dictate the products banks can offer their clients. There is an enormous amount of uncertainty."

As a result, many growth-minded banks are in a holding pattern.

"How do you get aggressive when the regulators haven't done all the rule writing yet?" says Marty Hansen, the president of First State Bank in Fairfax, Okla. "We're still in limbo here."

In all fairness, regulators are making some attempts to reach out to community banks.

"At the FDIC, there is a strong interest in having a dynamic community banking presence in the industry," Martin Gruenberg, the FDIC's acting chairman, told attendees at the American Bankers Association's annual meeting in October. The FDIC will host a community banking conference early next year, and plans are being worked out for roundtable meetings with community banks across all six of FDIC's regions.

"Community banks have a role to play in our financial system," Gruenberg said, especially with small-business lending and serving rural markets. "Community banking is a niche … that is unique."

The Fed has also vowed to monitor how examiners handle their jobs. "It is not appropriate for examiners to be overly engaged in the routine business of a healthy bank," Sarah Bloom Raskin, a Fed governor, said in prepared remarks in April. "We have worked hard to ensure that our examiners are well-trained and employ a balanced approach to reviewing banks' credit policies and practices."

"We believe frequent, open communication is the key," adds Dean DeBuck, an OCC spokesman. "That includes direct communication with the local exam team and the assistant deputy comptroller about supervisory issues as well as outreach activities."

Some bankers believe those efforts are helping.

"Regulators are definitely focused on safety and soundness," says Joe Reilly, the president and CEO of Centrix Bank & Trust in Bedford, N.H. "I've found them to be quite reasonable. Granted, they gave us a million recommendations but it wasn't anything hellish."

Paul Siebenmorgen, the president and CEO at Farmers & Merchants State Bank in Archbold, Ohio, says he has a better understanding of how the FDIC is approaching compliance. McMurtrey says his meetings have revealed that regulators are focusing more on the Bank Secrecy Act and on training programs for operational activities such as capital management.

Bankers have also struggled with explaining the ins and outs of complex products with examiners. First Commercial Bank in Seguin, Texas, believes it has found a solution. "We bring our consultants in for examinations," says Mark Long, the bank's president and CEO. Long says it has proven helpful to all parties having consultants on hand to discuss items such as employee stock ownership plans and the bank's exposure to bank-owned life insurance.

There are also other issues looming that could strain the relationship between banker and examiner. For instance, the banking industry is strongly supporting a new bipartisan bill that would let banks appeal examination findings to an outside arbiter. Though regulators are staying quiet in public, they seem apt to strongly oppose the bill unless significant changes are made.

So both sides have more work ahead and communication can be improved further. Several bankers at the ABA conference were reluctant to fully embrace the FDIC after Gruenberg's speech.

"I'm still a bit skeptical and I want to see how it plays out," said John Boyer 4th, the chairman and chief executive of Kanza Bank in Kingman, Kan. "It's nice to hear someone at his level say" community banks are important, he said. "But it is not a new message."

Craig Meader, the chairman and CEO of First National Bank of Kansas in Waverly, said the FDIC must encourage better communication between Washington and the agency's regional directors. "I think the field directors take a lot of liberty with their field examiners," he said.

A lack of trust remains the biggest hurdle, Jacques says. The best thing each side can do to repair the relationship is foster communication. "Regulators need to help bankers understand their thinking and process. It is about more than just the rule," he says.

"I think from the banker's perspective, the bank must show the steps it is taking in a post-crisis world and help the regulator understand how the bank is measuring and managing potential areas of concern, such as risk. The key is to be forthcoming about plans to manage potential problems."