FIRE PREVENTION IN BANKING

You may not have known it but your home is 10x more likely to have a fire than be burglarized according to the data. That is why when the clocks change for daylight savings time, experts remind everyone to replace the batteries in smoke detectors (it is good to do that 1x per year just to be safe). Experts also say you should test the smoke alarm monthly and replace the entire unit every 8 to 10Ys. When it comes to the cause of residential fires, the leading cause is cooking at about 3x more than anything else. In order, after that are heating; careless smoking; electrical equipment; candles; children playing with fire; bad wiring; flammable liquids; Christmas trees and barbeques. You can never be too careful when it comes to fire, so be aware, buy some fire extinguishers to spread around the house and make sure your smoke detectors are ample and batteries are fresh. Community bankers also feel like they have been fighting a credit fire for the past few years, as regulatory alarms sound continually throughout the house. Now that the economy seems to be finding some footing, it appears lending too will begin to return in the next few years. Before that happens, we spend a little time today to focus on the loan portfolio in order to prevent a credit fire in the future. When it comes to the loan portfolio, it is important to set the tone from the top. Directors should ask themselves what risks they want to take and which ones they most assuredly do not. Since things are not static, this can change over time, but when it does it is important to maintain controls and processes. Regulatory agencies are also very good at communicating outbound when they see something they don't like. Whether these are called negative trends, guidance or areas of concern, directors need to stay current on new information and requirements. It also makes sense to periodically take a close look at the entire board package. Ask yourself whether it is providing information and reporting that is sufficient to make informed decisions. Are you just listing things or is there enough data to make a decision and ask questions? Ensuring credit trends are picked up as they begin a cycle and being proactive in strategic planning/risk setting are all key areas where directors and senior management teams can make a difference. Another good idea is to have an annual or semiannual loan review team come in and kick the tires. They should be independent and focus on areas of risk both now and developing in the loan portfolio. Done properly, these teams not only can help surface problem loans; but also offer mitigation suggestions, recommend additional reporting, review policies and procedures and ensure grading accuracy is maintained. They are hired by you to identify and improve things, so don't be shy about asking for and documenting areas they see where your teams can improve, are strong, what are the latest best practices and potential areas of risk for the future. Finally, it is important every year or so to take a hard look at the loan review process overall to be sure it is doing what you want it to do. Closely review the troubled loan identification process and tighten up or refine as needed. In addition, check grading, key risk exposures, loan loss reserve adequacy and process, sector exposures, growth opportunities/risks and other factors. Doing this periodically with an eye toward improvement and by asking yourself how to improve things is just a good practice and setting a regular cycle (such as when you change your smoke alarm batteries) ensures you maintain consistency over time. Everyone can improve, just as checking the house for fire hazards, getting more education, having a focused effort and practicing can help prevent a potential problem.