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PCBB Banc Investment Daily January 29, 2013
Banc Investment Daily
January 29, 2013

THE STATUS OF LENDING ACTIVITIES

A study by the Brookings Institution of the largest 100 metropolitan areas finds housing costs an average of 2.4x more near a high scoring public school than a low scoring school (about $11,000 more per year). In addition, home values are $205,000 higher on average in the neighborhoods of high scoring vs. low scoring schools and those homes have 1.5 more rooms. Finally, the study found 60% of high school dropouts came from the bottom 20% of families by income and 70% of students enrolled at the most competitive universities in the country came from the top quintile of parental socio-economic status. We found these data points interesting, so we share them this morning. In an interesting twist for the banking industry, it was recently made public that following a shareholder lawsuit over some bad loans, the board of Synovus Bank has agreed to no longer participate in the approval of any loans the bank is considering. That is certainly an odd twist for most community banks, as nearly all we know have a director's loan committee where directors are commonly included in such decisions. Upon reviewing regulatory materials on the roles and responsibilities of directors, it is clear bank regulators do require the board to play various roles when it comes to loan activity. But does that mean they actually need to approve specific loans? The technical answer is no in most cases, but you be the judge. Under the regulations, bank directors are responsible for overseeing the loan review process (usually through audit) and must have a loan committee set up to ensure management handles credit risk in compliance with policies. The committee must verify management is following appropriate procedures to recognize adverse trends, to identify problems in the loan portfolio early, to take corrective actions and to maintain an adequate allowance for loan and lease losses. Finally, the committee must make sure risk controls are in place to ensure compliance with loan related or applicable laws and regulations. As can be seen, so far nothing above absolutely requires that directors evaluate or approve specific loans (or make credit decisions), although this is quite common and especially so when it comes to larger dollar amounts. The exception of course relates to loans to insiders to comply with Regulation O and securities exchange corporate governance rules, among others. However, regulatory actions following bank failure have shown directors that served on loan committees and approved loans may be targeted. A director that recommends a loan for approval vs. actually approves it can blur the lines between directors and management. In a failed bank situation, that may increase the possibility of regulatory action. That said, it is also quite difficult as a director to try and avoid responsibility for the business unit that typically produces the most revenue. In short, it is critical that directors set the tone from the top with strong policies and procedures. All directors should know how the policies apply, no matter how they are personally involved in the process. Such key factors as credit quality, concentrations, laws, regulations, loan limits, risk appetite, training and others all come into play. In addition, directors that have information about the borrower should share what they legally can to enhance the credit decision making process and help the lending team. As you conduct your own lending process analysis to determine whether it is high or low scoring, it is good to know that the law says credit decisions are generally subject to the business judgment rule. In short, directors are presumed to have taken action in the best interest of the bank, with the care that an ordinary prudent person would exercise in similar circumstances. Take care when lending and be prudent, but don't be afraid to get involved regardless of your lending socio status.