Tough Times on the Exam Front: When a Bank's Latest Examination Indicates "Matters Requiring Attention," or Worse, Board and Management Have to Know Their Ground

[ILLUSTRATION OMITTED] The bank's CEO looked at the document, written in typical agency boilerplate. He was puzzled. Everyone at the table knew, as they sat there in the conference room on a Thursday afternoon, that the bank was going to fail that Friday. It was irrevocable; a done thing. Yet the examiners had handed this agreement to him as the bank were a going concern. Isn't this a corrective program for the bank? he finally asked. The examiner in charge said, yes, that was so. The CEO pondered this, and then responded, I'm not sure we're going to get much corrected between now and 6 p.m. tomorrow night. anecdote comes from the current case files of banking attorney Jeffrey Gerrish. He likes to kid banking regulators that they've adopted a paper for strategy. He believes in today's environment, federal examiners are out to hang some kind of regulatory order, be it formal or informal, on every institution they visit. Gerrish blames the attitude on regulators' fear of being second guessed, and their desire to cover their rear ends at all times. Gerrish, now chairman of Gerrish McCreary Smith LLC, a consulting firm and law firm, started his banking career as an FDIC attorney suing directors, years ago. As a result, he knows both sides. The regulators' attitude isn't surprising, said Gerrish. During a recent ABA telephone briefing he observed that most bankers and directors have never seen anything like current conditions. It's tougher out there than have seen in a 35-year career, said Gerrish. From the regulators' standpoint, unprecedented times require unprecedented actions. So what we're seeing right now is a significant ramp-up in aggressive tactics by the regulators. At the time of the late September telephone briefing, FDIC's problem bank list had passed the 400 mark. Gerrish considers that count understated. I think there'd be a lot more than that, said Gerrish, if they could get them examined faster. Gerrish predicted that the FDIC's list will top 1,000 in time. Gerrish was a panelist during the ABA America's Community Bankers Council director telephone briefing, Directors and Regulators: Understanding The Examination and Enforcement Process. (To order CDs of the Sept. 23 event, go to www.aba.com/teleweb/tb092309.htm) Gerrish spoke of what he's been seeing in enforcement activity in his travels around the country, and advised bankers and directors on how to approach enforcement actions in the new environment. Watch out for the Often, Gerrish said, banks are finding themselves victims of a snowball effect. Failure to identify fully the bank's troubled credits means credit problems haven't been flagged. Examiners will find those. Inadequate flagging of credits means the bank's allowance for loan and lease losses hasn't kept up. Examiners will find that. In turn, said Gerrish, once the bank, on regulatory order, catches up on those fronts, then capital becomes diminished. This probably results in some adverse publicity, said Gerrish, which creates liquidity pressures. And then, all of the sudden, the starts going downhill. Management that was brilliant two years ago running a CAMELS 1-rated bank now appears to be a bunch of idiots running a 4- or 5-rated bank. Such a drastic shift in circumstances can leave a bank's board pretty much shell-shocked. Even things are not that dramatic for most banks, conditions for many of them have changed drastically. For example, regulators are now expecting to see 12% risk-based capital, and 9% tier one capital. Gerrish said his firm recently had a regulatory proposal placed before a client that called for 14% tier one. I called the regulator to see that was a typo, said Gerrish. It wasn't. [ILLUSTRATION OMITTED] He urged bankers to prepare their boards for such possibilities. …