Hoosier Banker 39 framework or using your historical methodology, past experience holds few clues as to what your actual losses will be. Of course, you need to be able to justify your decisions to auditors and regulators, but an extra-cautious posture seems more appropriate than a drip-drip-drip approach. • Communicate financial results in a straightforward manner. After the Great Recession, many banks focused on pretax, pre-provision earnings, almost as if the loan loss provisions did not matter. There are contexts where it is reasonable to discuss PTPP and other trends, but losses are losses, and the net income or loss – as well as its effect on book value – are of critical importance to investors. Demonstrate that you have a handle on credit administration and risk management, and provide meaningful information about loan concentrations and other matters. If shareholders hear tough news directly from you, they may be less inclined to make pessimistic assumptions. • Maintain an appropriately strong capital position. Remember that “Capital is King.” That does not mean that you need to have tremendous excess capital, but it does not hurt to maintain an extra margin of safety until you have clarity on your asset quality and business outlook. Most banks will not want to raise equity capital at current valuation levels if avoidable. It is often preferable to shrink your balance sheet a bit if you need to improve your capital ratios marginally. Issuing debt may be an attractive alternative, but market conditions can shift quickly. Banks with a plan can move decisively when needs and market opportunities align. In the near term, it might make sense to stay cautious about stock buybacks, even though your stock may, in hindsight, have represented a bargain. On the other hand, shareholders may often prefer that the board maintain the bank’s current dividend level if possible. For what is, in many cases, a relatively modest amount of money, a bank can send the market a strong signal of confidence. • Consider growth opportunities: selected acquisitions and talent additions. If your bank was interested in acquisitions before recent market turmoil, do not rule out potential opportunities. Continue to cultivate relationships with prospective partners. Both parties will need a higher degree of wariness with respect to credit diligence in the near term, but a deal might still materialize. Some very attractive deals took place in the aftermath of the Great Recession. Particularly if there is a stock component to the deal, a given seller may be able to take a buyer’s stock at somewhat depressed levels and ride back up with the buyer when market conditions improve. Additionally, whether or not you consider acquisitions, now may be a good time to add skilled bankers who can help you in the years ahead. • Adopt a growth mindset from a customer standpoint. You can either wallow in defensiveness, or you can adopt an entrepreneurial approach and find new opportunities. In the midst of the Great Recession, some banks kicked playlists.infotex.com out all customers in certain SIC codes or dramatically reduced commercial real estate exposure, losing longtime clients. As a result, nimble banks with a growth mindset ended up with high-quality new customers that previously were not considered likely prospects. History does not always repeat itself, but there should be some attractive free agent targets this time around as well. As for today’s coronavirus crisis, nobody wanted to be in this position from a health or economic standpoint, but opportunities to strengthen your business will appear as we all work through the current market turmoil. By drawing on the lessons learned from the Great Recession, many banks will emerge even stronger in the years ahead. HB The information contained herein is for informational purposes only and is not a recommendation to buy or sell any security, nor is it advice of any kind. The opinions expressed herein are representative of the Boenning & Scattergood Inc investment banking department’s point of view only and may not be consistent with or reflect the opinion of the company’s research department.
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