Corporate Governance

The Board of Directors and the Executive Management Team of a Community Bank are charged with the primary responsibility for both the creation of enterprise value and the safety and soundness of the Bank. To at least some extent, there is an inherent conflict between these dual responsibilities that has to be effectively balanced in the execution of the Bank’s business plan.

Franchise value is created by effectively establishing market and customer relationships, a broad and stable deposit base, a balanced and sound asset portfolio, and consistent and sustainable earnings. Most of these attributes can be readily evaluated at face value by the Board of Directors, with the obvious exception being the loan portfolio. A review of the financial data relative to invested assets provides very little insight into the current quality of those assets. In order to effectively evaluate the soundness of the loan portfolio, one must consistently review and report on the loans both at origination and throughout their term in the portfolio.

The FDIC at its recent 2003 symposium on “Lessons Learned From Bank Failures,” stated in its white paper on “The Root Causes of Bank Failures” that contributing factors of past bank failures include:

• Managerial weaknesses
• Overly aggressive business strategies
• Poor internal routines and controls
• Fraud & concealment
• Economic conditions

Of the five factors noted above, the only factor over which the Board and Management have no control is economic conditions. Warning signs of an impending bank failure include a lack of corporate governance and concealment of information.

The presence of capable corporate governance within the Bank is evidenced by:

• Board competency
• Participation by outside directors
• Integrity of management
• Internal control program
• Segregation of duties

A Board composed of competent, interested and participating directors with both inside and outside interests is essential to a well-run bank. Executive Management, in particular, should be of unquestionable integrity. But, the Board of Directors has the ultimate responsibility for the safety and soundness of the Bank, accompanied by an increasing liability exposure. Good corporate governance requires that the Board of Directors establishes an effective organizational structure, oversees the implementation of and adherence to sound internal controls, develops an effective audit program, and demands quality information systems and reports. To ensure that there is integrity in the system, there needs to be a segregation of duties; although this is often difficult to accomplish in smaller community banks due to budget constraints.

Ewing Loan Advisors, Inc. provides a service that effectively satisfies many of the tactical requisites necessary for good corporate governance. The focus of our service is the lending function and the loan portfolio, and this alone. Ewing Loan Advisors possesses the competencies to assist in the formulation and formalization of loan policy, to fully perform loan review on an outsourced basis, and to consult, as needed, on credit underwriting, credit risk and interest rate risk management. In addition, the firm has qualified and experienced members able to assist in the efficient and effective resolution of problem assets. These services will be performed by more qualified and experienced professionals and at costs considerably less than can be performed internally by the Bank.