The ongoing impact from the recession, combined with increased regulatory oversight, has resulted in a recent wave of Consent Agreements and Cease & Desist Orders for community banks. Unfortunately, the outlook is for many more enforcement actions in the coming months.

For banks whose regulators have put them on notice that an enforcement action is imminent, the time to begin preparing your constituents for the news is now. Not only should you be laying the groundwork with shareholders, customers and employees, but it is vital that you are proactive in talking with the media as well.

We have assisted several clients in communicating Consent Agreements and C&D’s. In the process, we have seen a clear-cut difference between those banks that were proactive and those that were not in terms of their treatment in the press and the overall perception of the event by their stakeholders.

What Works?

In this environment, most every community bank is undertaking some type of effort to raise capital, shore up liquidity, reduce problem loans and cut costs – roughly equivalent to what regulators typically call for in their enforcement agreements. As such, it makes strategic sense for banks to inform their constituents of these actions through a variety of channels – letters from the CEO, statement stuffers, quarterly reports, press releases, etc. – ahead of any formal enforcement action.

Place your efforts in the context of an overall strategic plan to improve the safety and soundness of the bank. This opens the door to talking about the enforcement in positive terms, such as the bank having already made significant progress on many of the areas laid out in the C&D, and the relationship with the bank’s regulators being a partnership to ensure that the bank improves its safety, soundness and ability to succeed over the long term.

Next, just prior to the enforcement being made public, contact your local newspapers to let them know of the action. (Make no mistake: the media diligently follow and cover regulatory agreements. They will not miss yours.) Talk with reporters about your situation and let them know to expect a press release from your bank officially announcing the agreement.

In doing so, you take control of the situation, informing the media of the actions you already have underway to resolve issues brought up in the enforcement. Again, talk about the agreement in terms of a partnership with regulators to ensure that the bank is in the best position possible to weather the remainder of the recession and benefit in the eventual recovery.

This formula has proven effective time and again.

What Doesn’t Work?

Lying low in the hope that no one picks up on the action, or opting to make no comment when the press calls, are both wrong-headed moves. Again, reporters are on the lookout for such news, and they keep a constant watch. Your C&D will be reported.

Further, in the absence of any communication from the bank, reporters will have no choice but to use verbatim language from the agreement, even though they know that this language is virtually the same for all banks receiving such actions.

We’ve said it before, and it bears repeating: Burying your head in the sand and hoping for the best is not a viable communications strategy – in this or any operating environment.

You be the Judge

Following is an actual news article about a C&D for Cherokee Banking Company, which communicated proactively with its constituents and with the media ahead of the agreement:

Cherokee Banking Co. signed a consent order with the Comptroller of the Currency, forcing the parent of Cherokee Bank to improve its capitalization and credit quality.

 

Canton, Ga.-based Cherokee Banking (OTC BB: CHKJ) said it must achieve a minimum Total Risk-Based capital ratio of 12 percent and Tier 1 capital ratio of at least 8 percent. The company already enacted a three-year strategic plan aimed at achieving these levels.

 

“In response to the collapse of the housing and real estate markets, we proactively initiated our own strategic plan in June 2008 aimed at ensuring that we remain a safe and sound institution,” said Dennis Burnette, president and CEO, in a statement. “The actions in our plan are aligned with the requirements in the consent order, primarily, increasing our capital ratio over and above our level at March 31, 2009, which was categorized as ‘well-capitalized’, as well as maintaining an adequate level of liquidity and reducing our problem assets.”

 

The agreement has no impact on deposit and retirement accounts, the bank noted.

In contrast, following are excerpts from articles about a bank that chose NOT to communicate with the media:

Article 1

In an order issued last month, the Federal Deposit Insurance Corp. says it found reason to think (Bank) engaged in “unsafe or unsound banking practices and had committed violations of law and/or regulations.”

 

The order does not close the bank but outlines FDIC’s demands that the bank stop operating with a large volume of poor-quality loans and lax underwriting standards. The federal agency also advises the bank on how to appoint qualified management and to increase participation of its board of directors.

Article 2

In its order, the FDIC said it had reason to believe (Bank) “had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations.” Among other charges, regulators said the bank was operating with inadequate board supervision, inadequate capital, a large volume of poor quality loans, inadequate oversight of its loan portfolio, and lax underwriting and weak lending procedures.

The difference in language – and more importantly, in the perception by readers and stakeholders – is stark. By contacting key reporters in advance of the enforcement action being made public, you can help to avoid phrases like “engaged in unsafe or unsound banking practices” and “committed violations of law and/or regulations.” Instead, you may succeed in framing the event in your own, much more positive terms.

The choice is yours.

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