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Time for a 5-point bank tune-up

Much has changed. Make sure the bank is ready

Now and then you have to rotate the tires in the bank, too, says consultant and attorney Jeff Gerrish. Now and then you have to rotate the tires in the bank, too, says consultant and attorney Jeff Gerrish.

This is my first blog on community banking since the beginning of 2017. Considering the new year, I thought it appropriate to discuss the need for a “tune-up” of our community banks.

What do I mean by “tune-up”? I mean that it’s time to review some basic “blocking and tackling” issues for our community banks and ensure any minor—or even major—adjustments are made.

1. The board should determine whether the corporate documents for the bank and holding company are in good shape.

This goes beyond determining whether the company is in “good standing” under state law. The review focuses on the substantive provisions of the company’s articles of incorporation and bylaws, as well as the charter and bylaws of the bank.

Many community banks probably have not reviewed their charter and bylaws since they were created.

Consider that some community banks came into existence over 100 years ago. And their holding companies are probably approaching 30 or 40 years old. Suffice it to say that now is the time to go back and look at the content of the governing documents to determine whether they contain appropriate corporate governance provisions.

For example…

• Is there cumulative voting for directors? (Probably good to eliminate.)

• Are there preemptive rights for shareholders—i.e., the right of a shareholder to buy a pro rata portion of any new stock issuance? (You should probably eliminate that one too.)

• Do the documents provide for a staggered board of directors and/or other anti-takeover defenses? This can include measures such as fair-price provisions, (i.e., preventing a two-tier front-end loaded tender offer) and provisions authorizing the board to consider factors other than simply price when contemplating an acquisition.

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• What is the requirement for a shareholder to call a special meeting?

• How do you remove a director?

All of these items fit in the corporate governance category and need to be reviewed or “tuned up” for the new year.

2. Another key area for tune-up is dealing with the major asset class in the bank—the lending area.

This review includes lending policy as well as the loan function and operations.

Has your lending policy has been in use for 50 years or so? Does it grow simply by “bolting on” changes as different matters arise?

Then it might be time to take a complete, fresh look. On this one, I generally recommend the community bank have an independent third party review the lending policy and the loan area in its entirety.

3. Other non-credit policies should be reviewed as well.

 • Does the bank have a merger and acquisitions policy or a policy dealing with unsolicited offers?

If so, that needs to be revisited to make sure that the terms of that policy are appropriate for the company’s current strategy.

For an unsolicited offer policy, this generally means ensuring that the terms under which the board is required to consider an unsolicited offer are “tuned up.” (For example, it must consider any deals with greater than the pre-determined book value and earnings multiples, or however the policy is written.)

Many banks with a goal of independence may be seen by the industry as exceptional targets. They need to make sure their unsolicited offer policy makes sense in the new year.

The same approach should be taken with the capital plan, strategic plan, dividend policy (if any), and the like. Much has changed in the past few years. The bank’s policies and procedures should reflect that.

4. What about the organizational structure?

This includes corporate structure, subsidiary entities, bank departments, and management/personnel hierarchy.

Many community banks, again, as they continue to grow, will keep the same organizational structure at $700 million that they had at $200 million. It is not that the retention of the same organizational structure was some kind of proactive decision; it is simply “the way it has always been done.”

Our firm conducted a number of management studies in 2016 (and have a number slated for 2017) where the board of directors wanted a fresh look not only at the organizational structure, but at the individuals filling the positions within the organizational structure.

Keep this in mind: The individuals who navigated the organization through the Great Recession may not always be the best candidates to lead the bank in the “new normal.” This could mean a new CEO, a restructuring of the lending department chain of command, or any number of things.

As a subsidiary point to this, a review of the organization and its people is also a great time to “tune up” the bank’s internal culture. Personnel issues or departmental rifts can grind efficient operations and good morale to a halt. There is no time like the present to address any such issues.

5. Don’t leave out the board.

It would also be appropriate from a tune-up standpoint to look at the board of directors of your bank and holding company. This would include addressing board succession issues; identifying needed board skill sets; ensuring appropriate training opportunities; and the like.

This dovetails a bit with corporate governance. The issues of how to get rid of a board member or how to evaluate one are clearly board matters with a strong corporate governance component.

Just because your board isn’t openly dysfunctional does not mean it is operating effectively and efficiently.

All this needs to be part of a fresh tune-up now that it is 2017.

2017 will undoubtedly be an interesting year for community banks. As a New Year’s resolution, a board of directors, in order to continue to improve their community bank, needs to consider a review or “tune-up” of the various areas and policies addressed above.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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