Community bank directors have had an easy job for the last 10 to 15 years, and though I hear many directors complain about the job's workload and complexity, it is absolutely nothing compared to the early 1990s.
Keeping up on regulatory compliance issues is hard work but not as tough as working on massive portfolios of loans that have gone bad.
I have met very few directors who are prepared for the kind of credit-quality meltdown we saw 15 years ago and which might soon reoccur.
When community banks get in deep trouble, it is almost always for one of five causes: asset-liability mismatches, net interest margin compression, excessive overhead costs, inadequate levels of capital, or high levels of nonperforming loans
Asset-liability mismatches seem to be a thing of the past. Borrowing short and lending long was proven not to work by the savings and loan industry, and regulators are much stricter about this now.
Net interest margins are a problem today with the inverted yield curve, yet banks seem to be dealing with it and still churning out decent earnings.
Overhead issues are interesting. They are typically a function of some failure on the revenue side, and the board will simply have to make some tough decisions. Either revenue must go up, or there must be expense cuts. It seems that management often resists layoffs, so leadership might have to come from the board.
Though it can be expensive, raising capital has never been easier. For a variety of reasons, even the few banks doing very poorly have access to capital. It may not be cheap, but it is available.
Nonperforming loans are always a problem, but numerous ways exist to spot them early.
If a bank starts doing poorly, it is really quite easy for the board to figure out what the problem is. There truly are only a handful of ways for a bank to get in trouble. And for each of these the cure, though not necessarily easy, will be straightforward and very obvious.
When I've had this conversation with directors, the response often is: "You just don't understand," or "it's just not that simple."
I've been on the boards of three banks and have been the president and chief executive officer of two. And it is that simple.
When a person sees a doctor because he or she is not feeling well, there can be hundreds and hundreds of possible causes. And there can be lots of variables that could mask the real cause.
When I hear directors of underperforming banks complain about how hard it is to get their banks healthy again, I often talk to them about how a doctor must figure out what ails a sick patient and how that is really difficult.
Diagnosing a sick bank is infinitely easier. Very little detective work is needed. Board members must not get overwhelmed by their task.
