Don't Despair: Things Keep Looking Worse for Many Sectors. but Tomorrow's Winners Will Be Those Banks That Keep Their Eye on the Whole Journey, Not Just the Next Period

[ILLUSTRATION OMITTED] All roads appear to lead downhill right now for community banking. As you wade through the seemingly endless reports of this worsening credit and liquidity crisis, it is nearly impossible to refute that the events we've witnessed to date will lead us into a long and deep recession. Even if you are in the optimistic outlook group, the risk is there, and now is the time to plan accordingly. Don't just wade through the mire waiting for the good news to be delivered. You must begin to think, plan, and lead as if the good days are already here. Indeed, in recollecting recent banking history, we are reminded that in the crazy 1980s many banks gave up much value when things went south. That's because they had short-term reactions, instead of proactive long-term implementation. We can learn from history. Three faces of banking In the midst of this worsening situation, we are seeing three types of leaders-those whose banks have yet to be impacted; those who have been hit hard with the credit and liquidity issues; and those who regardless of the level of impact are committed to their future. Unscathed optimists. Of those leaders whose banks have yet to be impacted, most continue to believe that their tactical one-to three-year plans will keep them on track. What is troublesome about this unscathed segment is that they truly believe they will remain exempt from difficulties. As a result, they have not taken the steps needed to plan through this crisis. It's important to note that the community banking community is indeed starting to show signs of cracks. Over the last 12 months, community banks between $100 million and $5 billion have seen, on average, nonaccrual loans rise 72%; charge-offs increase 63%; and provisioning for losses go up 105%. Nonperforming loans are at the same level they were at during the peak of the 2001 recession. And these numbers are from the third quarter-when the economy was still strong! Pessimists caught in the headlights. The second type of leader we have observed is the one hit hard with credit and liquidity issues. These blows have left the entire board and management team frozen. They are dealing with only the current nonperforming loans and failing to continue to build franchise value. The core issue here is the ripple effect on the entire bank-causing uncertainty and lack of focus. So often, the board and management get so tied up in their problems that they ignore the bank's future. The employees see a grim management team constantly in long meetings behind closed doors. Think of the message this sends to the employees and customers. Communication is a planned event. Ensure you are doing it often, and keep the team motivated to build the franchise value. Realists who want to survive. The final type of leader we've observed is the one who, regardless of their level of problems, is committed to focusing their entire institution on increasing future franchise value. This is the leader we want to highlight and learn from here. Now is the time to solidify and renew your strategic directives-proactively attack this uncertain economic environment with investments in training, management development, and even recruiting. You as community bank leaders must take steps to manage your way out of this difficult time, and just as importantly, lead as if you were already on the other side. Balancing strategy and risk Where can you start? The first step is to pull out your strategic document. As you evaluate it, ask: "Does it state clear, concise goals? Identify value? Evaluate risk and return? Establish succession planning? Set measurable benchmarks?" You need to be sure that your plan is structured properly to get you to where you wish to be in the long-term-after the current downturn is over. Next, start assessing your bank's risk in a recessionary environment by considering the implication of declining interest rates and a steepened yield curve. …