Short-Term Planning for Recovery and Survival
(This post was authored by Walt Moeling and Dustin Hall. A version of this post originally appeared in the August 2009 issue of the ABA’s Community Banker magazine.)
The grim economic prognoses we continue to hear about have an immediate impact in the bank board room. Boards must think about short-term planning for recovery and survival because virtually no bank is wholly immune from the current recession. Although the problems may have started with residential real estate in the Sunbelt, they have gone much beyond that now, impacting banks throughout the country.
As a director you must plan for both long-term and short-term. Long-term planning is tremendously important, and we hope to make it to the “long-term,” but short-term planning is critical today.
Short-term planning in this context deals with the reality of today’s marketplace. The focus is not on earnings or even stock value, two traditional focal points for planning. Instead, the focus is on capital management, liquidity, and asset quality.
Your short-term capital planning in the face of mounting losses cannot focus on today or yesterday; it must focus on tomorrow. You must ask: Where are we going? What will happen if housing prices drop for another two and a half years, as predicted by some? Can our borrowers sustain a more prolonged recession? If not, where will our capital be three, six, and nine months from now? In essence, you must stress test your bank to see how far it can go.
A real problem for directors is assuming that capital today is as readily available as it has been for the past 15 years, or that they can sell the bank if there is a real problem. Unfortunately, there is no public market, and virtually no private equity, for bank stock. Those sources are presently closed, shall we say, for repair. Instead, short-term capital is likely to be found only within the boardroom and from family and friends.