Small signs are finally emerging that the frosty relationship between community bankers and federal regulators is thawing, particularly for executives willing to speak out.
Note, I am not describing anything like full-blown détente, but it does appear that criticism of overzealous oversight is having an impact.
Exhibit A is Paul Reed, president and chief executive of the $256 million-asset Farmers Bank and Savings Co. in Pomeroy, Ohio.
Reed testified at a Senate Banking subcommittee hearing in April on the "opportunities and challenges" facing community banks. He had just completed an exam conducted by the Federal Deposit Insurance Corp. and had yet to receive the report.
After he and two other bankers testified, Sen. Bob Corker, R-Tenn., asked, "Is it fact or myth that the regulators you deal with … are keeping you from making loans" to crediworthy borrowers?
Reed replied first, and said simply, yes, it's a fact.
The two other bankers gave longer answers that amounted to pulled punches. Reed asked Corker if he could elaborate.
During his recent exam, Reed said, the examiner had dressed down Farmers' CFO for not depreciating wallpaper fast enough and harassed the chief lending officer over a $323 loan. But those were merely annoyances. Reed's main gripe was the examiners' insistence that Farmers further downgrade a loan to a longtime customer, a move that ended up choking off credit to its community.
Reed told the lawmakers something that bankers across the country believe: federal examiners are exercising too much control over lending decisions.
"That $150,000 that we had to beef up our loan reserve for a very solid customer equates to $1.5 million of loans," Reed testified. "Our board members now ask the question, What will the regulators think of this loan?" The regulators "have entered into our decisions on what is best for our communities."
Sen. Jerry Moran, R-Kan., called Reed's testimony "very compelling" and then noted the two other bankers testifying "have a lot less to say."
Many bankers contend they don't complain because they are afraid examiners will punish them. Reed is no different.
In an interview, he said that as he flew back from Washington he thought, "What have I done to our board and our shareholders?"
In a way, Reed conjures a much saner version of Howard Beale, the "mad as hell" character in the 1976 movie "Network."
Reed, the great-grandson of Farmers' founder, guided the bank to an ROA near 1.20% and ROE near 14% last year.
"It just made me boil," he said. "We had a great year, but had the worst exam ever. I had to speak up. I was concerned about regulatory backlash, but I couldn't stay silent anymore. They were mistreating the bank and mistreating those of us trying to run good community banks."
But contrary to his fears, Reed said he has not experienced any retribution.
In fact, a few days after the Senate hearing, Anthony Lowe, director of the FDIC's Chicago office, invited some bankers, including Reed, to his office to discuss their concerns about the exam process. Two weeks later, Reed saw Lowe at an event in Ohio.
"Lowe came up to me and said, 'We heard you. That's not what we want from our examiners,' " Reed recalled. Lowe even offered to meet with Farmers' board of directors to drive home the point that the FDIC does not want its examiners usurping the bank's lending decisions.
"The discussions with Anthony Lowe really helped. We didn't agree to disagree. We agreed to agree."
Despite his positive experience, Reed said he continues to confront the same struggle every other banker is facing — trying to lend to borrowers weakened by the economic recession.
"We still are afraid to go out on a limb for a solid customer that has two years of bad financials, because we know we are going to be criticized," Reed said.
That's a problem Bob Jones, CEO of the $448 million-asset United Bank in Atmore, Ala., is grappling with as well.
In an interview, Jones said bankers feel pressure from policymakers to lend money to fuel the economy and spur job growth, but then face examiners who want loans classified, reserves bolstered and capital raised.
The longer the economy languishes, the harder it is for any borrower to qualify, Jones said, because traditional underwriting practices look at the last three years of financial performance and very few borrowers look strong over that time frame.
"We've never had a period like this. It's unprecedented since the Depression that we've had a cycle that is as deep and as long and as difficult as this one," Jones said. "If you apply traditional valuation methods, you are going to get an adverse outcome. So, at a time when we are trying to help create opportunities, in addition to being prudent, how do you evaluate a credit so you can make a good determination?"
Reed said that Farmers will "fight the battle" for a solid long-term customer, but that it's much harder to make the case to regulators for newer borrowers.
"If a customer has been with us three years or less and they don't have a track record, we still look at every way to make the loan. But if it's close, we will more than likely err on the side of" rejecting the loan to avoid riling examiners.
Reed said community bankers need to push back harder.
"We are tired of sitting on the sidelines," he said. "We want to get back in the game of lending and developing our communities and starting some economic growth. If you don't say what's on your mind to the regulators, we are going to stay on the sidelines."
Everyone gets that it is easier and safer for regulators to simply force banks to hold excess capital and only lend to the safest creditors, but that strategy will slow an economic comeback.
"Unless community bankers can create opportunities, I don't know how we reverse this cycle," Jones said. "A philosophy of the regulators is running contrary to the needs of the country."
Barb Rehm is American Banker's editor at large. She welcomes feedback to her column at
