Expert at NICB meeting says there is light at end of tunnel

Although the environment is challenging, the community banking industry will survive, attorney and consultant Jeffrey Gerrish told bankers attending the annual meeting of the Nebraska Independent Community Bankers on Nov. 3 in Lincoln. Gerrish offered a realistic but hopeful assessment of the industry.. "It is not a question of survival," Gerrish said of community banking. "It is a question of earnings. You might make less.". Gerrish noted that community banks are experts when it comes to making agricultural loans, lending to small business owners and relationship banking. People want these services and the large retail banks don't do this well, he said. Gerrish said there is a light at the end of the tunnel for community banks, "and the light is not a train.". Scott Selko, NICB Chairman, concurred with Gerrish, noting that he is hopeful about the future at his own Bank of Mead. "Our bank has been around for over 125 years. We've lived through a lot of different situations and we will live through this one," he said.. "The ag thing is doing great here. Probably the biggest complaint I hear is there is not a lot of loan volume right now, so earnings are down. Farmers are using their own money because of the success they are having in their industry, which is just great. I don't hear a lot of people struggling with bad loans. I think we are in a good spot.". Gerrish said he is seeing signs of what he called "regulator fatigue," which is resulting in regulators giving a struggling bank more time before deciding to close it. He also said that the numerous distinctions in the Dodd-Frank Act which separate community banks from very large banks are a positive development.. In 19 of the last 20 planning sessions Gerrish has conducted for banks, he said the banks identified "profitability" as their top priority. This is a change from earlier when the typical priority was stability.. Gerrish predicted that industry conditions will return to pre-crisis characteristics by the end of 2012, although he was quick to add that he has made many other such predictions with little accuracy.. Gerrish, who has worked with hundreds of community banks across the country over several years, described a couple of difficult situations which he sees repeated too often. The first is the "asset quality snowball," where a bank is forced to add to loan loss reserves, which reduces the bank's earnings and limits its ability to add to capital. With capital not keeping up, regulators then cite a management problem. Such a scenario can cause dramatic change at a bank. "I have seen a bank go from a CAMELS 1 to a 5 in one exam cycle," Gerrish said.. Gerrish then warned bankers against putting additional capital into a troubled bank if the additional capital is insufficient to solve the problem. "I knew a group that needed to come up with $40 million in capital and they started by going around the table. The directors came up with $7 million. They put that into bank capital but were unable to raise the rest and the bank eventually closed, and they lost that money," he said.. Although M&A activity among the largest banks is slow, Gerrish said the M&A market among community banks is strong. He said bankers are selling their banks for one of three reasons: impaired loans, bankers are 'worn out', and traditional reasons such as succession.. The key determinant to the long-term sustainability of a community bank is succession planning. "If you have this, you will survive," Gerrish said.. Succession planning should be part of the bank's strategic plan. Succession planning, he said, will protect the bank, establish a chain of command, provide for a seamless transition in the event of a change, help to enhance the value of the bank, groom internal candidates and identify needs (holes) in current management.. With the emphasis on profitability, Gerrish encouraged bankers to look for new sources of revenue and to look hard at expenses. He advised bankers to appeal adverse exam findings because they can have a material impact on FDIC premiums. He also encouraged bankers to seriously consider staffing, and to consider wholesale versus retail sources of funding.. Planning is essential, however, or nothing will happen, Gerrish said. Strategic planning gets a bad name, he said, because people sometimes view it as a waste of time. Gerrish said it's okay to skip some of the broader exercises such as SWOT analysis, and instead to focus on specific action items.. Gerrish concluded with these "commandments for board directors:". • Think prospectively: Pay attention to everything.. • Don't forget your real job: Enhance value for the shareholders.. • Regulators will be regulators: Learn to deal with them.. • Be petrified of compliance: Your compliance officer needs to be on his or her "A" game.. • Capital is still king: Don't be afraid of it and understand how to get it.. • Understand mergers and acquisitions: Does size matter?. • Vote no: Understand liability issues.. • Address succession issues: Both board and management.. • Deal with your shareholder base: Make a determination about ownership and liquidity.. • Plan for the future. It will be different than you think.