Western Independent Banker - November/December 2008 - (Page 31)

By John Hurlock The Role of the Board in a Credit Crisis THE INTENT OF this article is not to walk through the standard steps of dealing with a regulatory order or deteriorated credit situation. Odds are, as a director, you have been through some training and through a regulatory exam. Most likely you have consulted with an experienced bank attorney to understand your responsibilities and have had exposure to compliance and audit issues in the past. Instead, this article offers some strategic perspectives on the bank director’s role during a credit crisis. This article is not intended as legal advice and should not be taken as such. Bank directors need to consult their legal counsel regarding their legal, regulatory, and fiduciary responsibilities in response to issues affecting their bank. Bank directors are successful business people in their own right, and are usually interested in serving on the board of directors of a community bank because they want to be involved in the community and understand the value a successful bank can provide. When a crisis hits such as the current credit quality challenges, board members may want to take control after uncovering problem loans or discovering that the lenders or the loan process may have been compromised. Strong entrepreneurs often react by applying their “fi x-it” skills to the situation. This is not an uncommon occurrence. However, board members may need to be more temperate as they empower bank management to handle credit crisis situations. Some considerations for thoughtful board members are as follows: • This is usually not the time to resign or be resigned. Regulatory, fiduciary, and legal responsibilities may make management accountable for actions leading up to a crisis. • Objectivity is key. Is it time to sell the bank, close the bank, recapitalize the bank, deposit money to replace f leeing money? These are important questions. For a bank, this may mean that the directors deposit their own money during a run on the bank. This is not a capital infusion, but a deposit. While this is an extreme example, it points out the actions that could be considered during a “run”—the most extreme outgrowth of a crisis. • Understand the risks the bank faces. To fully understand the risks, it may be best to bring in someone from the outside to analyze the situation and provide assistance. • Is management capable and able to deal with this crisis? The alternative is not necessarily for you to run the bank but for you to replace management with a new leader or team. During the good times, there will be a certain number of “mistakes” that take place (documentation, underwriting, violation of loan policy, etc.). It is only when the bank is trying to collect the loan that these items surface. If the loan were performing as agreed, the bank might never realize the issues the loan had. • Force management to take hard actions. For loans that mature and can’t be repaid at that time, it may be appropriate for the loan committee to insist on a principal reduction of at least some amount (e.g., 10 percent) to demonstrate good faith on the part of the borrower. While not an all inclusive list of potential actions, the above bullets can help you focus on the problems at hand and be constructive in your actions. It is difficult for a single board member to initiate significant actions. All members of the board must usually reach a consensus in order to effect change. To end this, consider this quote from Stephen Frost, from his book The Bank Analyst’s Handbook: “There is no doubt that quality of management is the single most important factor in determining operating performance that is within a bank’s control. An individual bank can usually do little to influence the external operating environment. In a recession non-performing loans will rise at all banks and the differences between individual banks will only be ones of degree.” John Hurlock is director of integrated risk management with Metavante Consulting and Professional Services in Kansas City, Mo. He can be reached at john.hurlock@ metavante.com. “There is no doubt that quality of management is the single most important factor in determining operating performance that is within a bank’s control.” — Stephen Frost, The Bank Analyst’s Handbook Western Independent Banker November/December 2008 31

Table of Contents Feed for the Digital Edition of Western Independent Banker - November/December 2008

Western Independent Banker - November/December 2008 Contents A Message from the President & CEO A Practical Approach to Director Evaluations Director Assessment: New Standards for a High Performing Director The Best of the West: Traits of High Performing Banks Best Practices Checklist for the Audit Committee The Real Performance Metric: It Takes a Balance of Profitability and Growth to Be Successful The Role of the Board in a Credit Crisis A Bank Director's Obligation to Be Aware of Regulatory Change Benefits Tied to Performance Receive Higher Approval Rating by�Board Members Increasing Shareholder Value: Key Profitability Drivers Board Portals Streamline Efficiency for 21st Century WIB Service Corporation Report WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - November/December 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.