ABA Banking Journal - February 2008 - (Page 22)

Community Banking rience in the early years of 2000. The amount of prepayments is anyone’s guess, but one could model a number of scenarios from worst to best case. To begin, test your ALCO model. Did it actually predict in 2005 what your margins did in 2006-07? If not, an investment in better risk assessment tools should be part of your long-term plans. And, if your bank is going to have a year of reduced earnings, take advantage by taking losses on investments, loans, or even high-cost borrowings. If you’re down, you are down, no matter if it is 10% or 75%. The strategy is to make future years better. Many banks did just that at the end of last year. 4. What is the bank’s capital risk? The average equity-to-assets ratio for community banks is 10.77%, while risk-based capital is 15.27%. This would suggest that the community banking industry is entering this difficult period in a well-capitalized position. Boards should review capital levels in relation to their credit risk. Will the bank meet minimum capital requirements if earnings are affected? If the bank is operating with lower credit risk, is there a war chest for strategic acquisitions? Make these conversations high priority, to ensure you are wellequipped for issues at hand, and growth issues through the next five to ten years. The board should incorporate a long-term capital plan that includes a dividend plan. Unfortunately, if a bank needs capital, raising it in this environment could be very difficult. Issuing trust preferred debt was easy early in 2007. But presently, there it is a tough market. The majority of trust preferred issuance was placed into CDOs (Collateralized Debt Obligations) which have been headlined with the subprime crisis. As an alternative to securitization markets, bankers could consider offering private placements of trust preferreds in their local market. Make reputation risk part of the review and discussion by the board and management. Avoiding issues can only harm the long-term reputation of the bank. That’s why communication with your employees, shareholders, and the public should be constant and consistent. We’ve seen where a simple message from the CEO, stating that the bank was not involved with subprime lending and that it followed conservative lending practices, has positively impacted the bank’s share price. On the other hand, we’ve also seen banks with legitimate problems sending cryptic messages to the public and failing to post press releases on their websites. Within your strategic plan, spell out how the bank will communicate with the public. Be up front about the current situation and impart that there is a plan of action. And don’t forget your internal audience. While key employees will always be needed to put out fires, this cannot be done at the detriment of the entire organization. Continue to deploy vibrant marketing tactics and new products that are dynamic. It will have a positive impact on everyone and send the message that the bank is moving forward. times we will revert to what we know, so that we are all a “WIP” (work in progress). We will use the book’s lessons, moving forward, to work at incorporating the skill set needed to be effective leaders, and to build an organization that is a viewed as a leader in the communities that we serve. As Sanborn maintains, everyone in an organization can do this; we do not need a title to lead. Sanborn goes on to say: “What we need is nothing more nor less than a burning desire to make a positive difference and an awareness of the opportunities to lead that present themselves each day—at work, at home, with our friends and relatives, within our communities.” One other interesting point: As bankers we all think we know what ROI is. Yet Sanborn defines it much differently: R=relationships; O=outcomes; I=Improvements. Remedy 4 Mike Murphy, executive president and chief financial officer, First American Bank, Norman, Okla. Winners Never Cheat: Everyday Values We Learned As Children (But May Have Forgotten), Wharton School Publishing, by Jon M. Huntsman. This is one of my favorite business books. The book’s focus is that we learned everyday values as children, but we may have forgotten them. It discusses honesty and integrity, setting the example, picking your friends and associates, and getting mad—but not even. I like that last one. One of my favorite quotes from the book (and there are many) is: “Gray is not a substitute for black and white. You don’t bump into people without saying you’re sorry. When you shake hands, it’s supposed to mean something. If someone is in trouble, you reach out. Values aren’t conveniently molded to fit particular situations. They are indelibly etched in our very beings as natural impulses that never 5. Take the positive view Now that we’ve considered risk, let’s consider present and future opportunities. Don’t put your growth goals on hold. There will always be significant opportunities for strong community banks. If a board and management team strategically outline the opportunities they want to pursue, they will be able to take swift action when an opportunity arises. Consider potential acquisition opportunities. There could be very attractive acquisition candidates, but many boards will throw up their hands and retreat in the face of problems. For those bankers that experienced the 1980s, you’ll remember that many could not deal with heightened risk and regulatory pressures. The community banking industry has enjoyed a very long stretch without a credit cycle. This, of course, has created an environment where many banks relaxed their lending standards to get deals. On average, community banks grew loans 22 FEBRUARY 2008/ABA BANKING JOURNAL http://www.bankfab.com/ http://www.amazon.com/gp/product/0131863665?ie=UTF8&tag=ababankingjou-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0131863665 http://www.amazon.com/gp/product/0131863665?ie=UTF8&tag=ababankingjou-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0131863665

Table of Contents Feed for the Digital Edition of ABA Banking Journal - February 2008

ABA Banking Journal - February 2008 Contents On ABABJ.COM: Have You Visited Our Brand-New Website? Editor's Column "That's Edutainment" Snapshot: Tier 1 Ratios Stable so Far 100th Anniversary: Then and Now ABA Resources ABA Chairman's Position Don't Despair Pass the Aspirin Cover Story: Socially Responsible Banking Profitably - Incoming America's Community Bankers Council Chairwoman, Dorothy Bridges Demonstrates the Way A True "Rags-to-Banker" Story Retail Banking: On the Money Hunt Community Bank Management: The Ugly Truth About Board Relations Does Core Really Matter? Security 2.0: Not Just a New Kettle of Phish A Personal Case of Mal-Serendipity DOD Credit Regs Demand Attention Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - February 2008

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