April 30, 2020
Authored by: Jim McAlpin
In March, I dialed into the first ever “conference call only” meeting of a 14 year old community bank. The main office of the bank is located in Philadelphia and there was growing concern about the rapidly increasing number of Coronavirus cases in New York and New Jersey, and the spread of new cases into eastern Pennsylvania. I recalled that our board had reviewed an updated version of the bank’s pandemic policy in December but I couldn’t remember the details. Suddenly that policy had relevance in a way I could never have imagined. In April, our board held its second conference call only meeting, and we are likely to continue that pattern for several more months.
We are all aware of the circumstances that led to pandemic policies being retrieved from file folders and read with interest for the first time. What we don’t yet know is how severe the resulting economic shock will be, and the degree to which loan portfolios of community banks will be adversely impacted. It is clear, however, that the adverse impact on small to medium sized businesses across the U.S. has been considerable. As the CEO of one of our law firm’s bank clients in the Southwest recently remarked, we are experiencing the first ever government imposed recession.
God willing, the banking industry will remain strong and be a source of support for the nation’s economy as we recover from the onslaught of COVID-19. In that context, the boards of community banks could benefit from recalling some hard learned lessons from the recent Great Recession.
Listen attentively and pay attention to the trends
It is very important that members of bank boards understand the business of banking and the key ratios of measuring a bank’s financial health and performance. To the extent members of your board are in need of a refresher course, this would be a good time to seek it. Problems on bank balance sheets and income statements are often more evolutionary than revolutionary. We saw this in the Great Recession – what were first only incremental-changes in key indices quickly began to accelerate. Those boards that recognized the growing problem early, and worked with management to address capital issues while capital was still available, did their banks a great service.
This is one of those periods when it could be challenging to serve on the board of a community bank. The good news is that the banking industry as a whole is in a much stronger state than when entering the last downturn. Banks could be one of the critical components in stabilizing a fragile U.S. economy and putting the country back on track for renewed prosperity. My advice to board members is to be clear-eyed and observant. Pay close attention to key financial and reporting ratios and don’t be shy about asking questions. The role of the board is oversight and not management, but in turbulent times it can be important that the board’s oversight role is more actively exercised.
Not all good loan officers are good at work outs
Staffing levels at community banks do not allow for the “special situations” groups that exist at the larger banks. Even in many regional banks there aren’t teams of experienced employees ready to swoop in and address problem loan situations. Boards should ask about the plan for addressing the most significant of the bank’s problem loans as they develop. Often, the loan officer who originated a troubled loan can feel responsible for the situation and/or committed to helping the borrower as much as possible. Those are admirable character traits but they can be harmful to the best interests of the bank in a workout situation. Especially for problem loans of significant size, there needs to be a plan to involve objective, experienced assistance in protecting the bank in a work out setting.
In turbulent times quality, not growth, should take precedence in loan portfolios
There are numerous examples from the 2008 to 2010 time period of well capitalized banks perceiving an opportunity and either lending into deteriorating market conditions or to quality borrowers in distress, with disastrous results. Boards should be careful not to put pressure on management teams to take advantage of a downturn. Let management run the bank and be supportive when management feels a need to pull back from growth in the market in order to focus on quality.
Be there for the bank’s best customers
Relationship banking is the core strength of community banks. Never is it more important than in times of economic uncertainty. If the bank’s customers feel supported in difficult times they are far more likely to remain loyal customers in the best of economies. Boards should ask about efforts being made to reach out to customers, and particularly the best customers. Such outreach can include conversations about ideas for bolstering liquidity, tapping into insurance policies for virus related losses and other practical advice and insight that bankers are well positioned to provide to business owners. It will pay long term dividends for the bank in strengthening customer relationships.
The current crisis will pass. We just don’t know when. Unfortunately, we may have to navigate the waters of a deep economic downtown before we get to the other side. In times like these I marvel at those who seem to become stronger in difficult situations. With age and experience I’ve come to realize that those people don’t change in a crisis, everyone else does. Hopefully your board will be one which seems to grow stronger in difficult times. These are the times when bank management can most benefit from sage advice coupled with focused, informed and calm oversight from boards of directors.