Planning For Recovery - Banking Beyond 2011


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Presentation from the 2011 Florida Bankers

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Planning For Recovery - Banking Beyond 2011

  1. 2. Planning for Recovery – Banking Beyond 2011 Katherine Koops & Rob Klingler Florida Bankers Association 2011 Annual Convention Orlando, FL
  2. 3. Lawyers? <ul><li>Of course! </li></ul><ul><li>Big Picture </li></ul><ul><li>Collective Experience </li></ul><ul><li>Ideas to take home, ponder, and ultimately, implement </li></ul>Katherine Rob
  3. 4. Planning for Tomorrow <ul><li>Lessons Learned (and Not Learned) </li></ul><ul><ul><li>Tomorrow’s Regulations Reflect Yesterday’s Problems </li></ul></ul><ul><li>The New Normal </li></ul><ul><ul><li>Three Times Book Ever Again? </li></ul></ul><ul><li>Implementation at the Governance Level </li></ul><ul><ul><li>Engaged Boards of Directors </li></ul></ul>
  4. 5. Survey!
  5. 6. What Happened? <ul><li>D-Day was 2005 </li></ul><ul><li>Sun-Belt Migration </li></ul><ul><li>Bank Profitability </li></ul><ul><li>Housing a Priority </li></ul><ul><li>Regulators and Bankers Thought Prepared </li></ul>
  6. 7. What Did We Miss? <ul><li>Role of Land Speculators and Fraud </li></ul><ul><li>Role of Interest Reserves </li></ul><ul><li>Loans to Projects vs. Loans to Customers </li></ul><ul><li>Impact of Lack of Core Deposits </li></ul><ul><li>Concentrations of Loans and Deposits </li></ul><ul><li>Free Market De Novo Bank Formation </li></ul><ul><li>Effect of Loan Loss Methodology Changes </li></ul><ul><li>Effect of Loan Participations </li></ul>
  7. 8. What Did We Do Wrong? <ul><li>Crisis NOT Caused by Regional Regulatory Failures </li></ul><ul><li>Competition in Regulatory Toughness (and fear of Regulatory Reform) </li></ul><ul><li>Self-fulfilling Prophecy of Asset Value Deterioration </li></ul><ul><li>Role of FDIC/Treasury Asset Dumps </li></ul><ul><li>Legislating in a Crisis is Not Productive </li></ul>
  8. 9.
  9. 10. Lessons Learned? <ul><li>Banks Cannot Outperform Local Markets </li></ul><ul><li>Local Markets Cannot Recover Without Local Banks </li></ul>
  10. 11. Lessons Not Learned? <ul><li>Overreliance on Models and Appraisals </li></ul><ul><li>Directors and Officers are Neither Stupid nor Evil </li></ul><ul><li>Micro-managing Access to Credit Counter-Productive </li></ul>
  11. 12. Future Regulatory Environment <ul><li>Capital </li></ul><ul><ul><li>End of TRuPs and BHC Loans </li></ul></ul><ul><ul><li>Emphasis on Common Equity </li></ul></ul><ul><ul><li>Increased Capital Ratios </li></ul></ul><ul><li>Asset Quality </li></ul><ul><ul><li>Return of RAP vs. GAAP </li></ul></ul><ul><ul><li>Non-Performing Determinations </li></ul></ul><ul><ul><li>No Tolerance for Concentrations </li></ul></ul><ul><ul><li>Loans to One Borrower Tests </li></ul></ul>
  12. 13. Future Regulatory Environment <ul><li>Management </li></ul><ul><ul><li>How Aggressive will the FDIC be? </li></ul></ul><ul><ul><li>How will Directors React? </li></ul></ul><ul><ul><li>Increased Board Involvement </li></ul></ul><ul><li>Earnings </li></ul><ul><ul><li>Only Acceptable without Risk? </li></ul></ul><ul><ul><li>Not From Interest Reserves </li></ul></ul>
  13. 14. Future Regulatory Environment <ul><li>Liquidity </li></ul><ul><ul><li>No Tolerance for Concentrations </li></ul></ul><ul><ul><li>Reconsideration of “Core” </li></ul></ul><ul><li>Sensitivity </li></ul><ul><ul><li>Models are the Answer! </li></ul></ul><ul><ul><li>Greater Variance </li></ul></ul>
  14. 15. Future Regulatory Environment <ul><li>De Novo Banking </li></ul><ul><ul><li>“ Convenience and Necessity” </li></ul></ul>
  15. 16. Future Regulatory Environment <ul><li>Compliance </li></ul><ul><ul><li>The Bureau </li></ul></ul>
  16. 17.
  17. 18. A New Stress Test for Banks
  18. 19. Global Leverage Down <ul><li>Slower Growth </li></ul><ul><li>Reduction in Credit Card Availability </li></ul><ul><ul><li>Increase in Savings? </li></ul></ul><ul><li>Lack of Syndication of Consumer Debt </li></ul><ul><ul><li>Pricing Rationalization? </li></ul></ul><ul><ul><li>Opportunity for Community Banks? </li></ul></ul>
  19. 20. Expected Impact of Regulations <ul><li>Higher Capital Ratios and Slower Growth </li></ul><ul><li>Lower ROAE and ROAA </li></ul><ul><li>Higher Regulatory Compliance Costs </li></ul><ul><li>More Core Deposits </li></ul><ul><li>Changes in Competition </li></ul><ul><li>Changes in Board Room </li></ul><ul><li>Focus on “Customer” Loans vs “Project” Loans </li></ul>
  20. 21. Current State of the Industry <ul><li>2007 – 3 </li></ul><ul><li>2008 – 25 </li></ul><ul><li>2009 – 140 </li></ul><ul><li>2010 – 157 </li></ul><ul><li>2011 – 47 (through June 17 th ) </li></ul>
  21. 22. FDIC “Problem” Institutions
  22. 23. Effects on Bank M&A Market <ul><li>Have we Reached Bottom? </li></ul><ul><li>Pro Forma 2-Rated Bank </li></ul><ul><li>FDIC Assisted Transactions Continue to Dominate </li></ul><ul><li>Burdens of TARP and TRuPs </li></ul><ul><li>Regulatory Costs and Oversight </li></ul><ul><li>Model of Many Urban Community Banks is Dead </li></ul>
  23. 24. What Will Investors Expect?
  24. 25. Survey Questions <ul><li>What does an ideal community bank look like? </li></ul><ul><li>What level of profitability should be expected? </li></ul><ul><li>What about M&A multiples by 2013? </li></ul><ul><li>What is the most significant factor in achieving consistent profitability? </li></ul>
  25. 26. The Ideal Community Bank as of December 2013 <ul><li>“ The ideal community bank will either (i) have a dominant market share in a rural slow growth market; or (ii) if located in an urban market, have enough scale and product offering to compete for deposits with the larger banks.” – Adam Aspes, Sterne Agee </li></ul><ul><li>“ Investors will value concentrated market share community banks, not fragmented markets.” – Jennifer Demba, SunTrust Robinson Humphrey </li></ul>
  26. 27. Asset Size <ul><li>In all but rural markets, consensus minimum was $500 million. </li></ul><ul><li>“ $1 billion in asset size will not be a large bank by 2013.” </li></ul><ul><li>“ While not universally applicable, in general we think the regulatory costs of operating a bank have increased such that it is difficult to produce adequate long-term returns for a bank below $500 million in assets.” – Chris Marinac, FIG Partners </li></ul>
  27. 28. As of December 31, 2010 Asset Size # Institutions Risk Weighted Assets >$1 Trillion 4 $4,097,582,006,000 $100-999 Billion 12 $1,468,738,483,000 $50-99 Billion 19 $988,292,605,000 $5-49 Billion 120 $1,036,912,286,000 $1-4.9 Billion 481 $637,780,117,000 $500-999 Million 646 $309,852,894,000 $250-499 Million 1,161 $277,997,761,000 $100-249 Million 2,212 $242,924,470,000 $50-99 Million 1,326 $63,333,059,000 $0-49 Million 944 $18,331,475,000 6,925 $9,141,745,156,000
  28. 29. As of December 31, 2010 4,482 Banks 6,770 Banks 155 Banks 83% of Banking Assets Asset Size # Institutions >$1 Trillion 4 $100-999 Billion 12 $50-99 Billion 19 $5-49 Billion 120 $1-4.9 Billion 481 $500-999 Million 646 $250-499 Million 1,161 $100-249 Million 2,212 $50-99 Million 1,326 $0-49 Million 944 6,925
  29. 30. Profitability <ul><li>Size and Scale Matter </li></ul><ul><li>Have Banks Worked Through Existing Credit Issues? </li></ul>
  30. 31. 2013 ROE – Survey Projections <ul><li>Banks with Assets < $500 Million </li></ul><ul><li>Banks with Assets $500M to $1 B </li></ul><ul><li>Banks with Assets $1B to $10 B </li></ul><ul><li>Banks with Assets > $10 B </li></ul><ul><li>6-8% </li></ul><ul><li>8-10% </li></ul><ul><li>12%-15% </li></ul><ul><li>15% </li></ul>
  31. 32. ROE – Banks < $100 Million
  32. 33. ROE – Banks $100M - $1B
  33. 34. ROE – Banks $1B - $10B
  34. 35. 2013 ROA – Survey Projections <ul><li>Banks with Assets < $500 Million </li></ul><ul><li>Banks with Assets $500M to $1 B </li></ul><ul><li>Banks with Assets $1B to $10 B </li></ul><ul><li>Banks with Assets > $10 B </li></ul><ul><li>0.50-0.85% </li></ul><ul><li>0.70-1.00% </li></ul><ul><li>1.00-1.25% </li></ul><ul><li>1.25-1.30% </li></ul>
  35. 36. ROA – Banks < $100 Million
  36. 37. ROA – Banks $100M - $1B
  37. 38. ROA – Banks $1B - $10B
  38. 39. M&A Multiples <ul><li>Primary Driver of Community Bank Shareholder Value Creation over Last Two Decades </li></ul><ul><li>“ 1.5x book will be the new 2.5x book value of a few years ago. Sellers should be focused on relative value of the pro forma company rather than the headline in the newspaper article. This has always been the most difficult concept to get across to a board, but it is necessary in creating a good stock and good returns, prospectively.” – Peyton Green, Sterne Agee </li></ul>
  39. 40. 2013 Projected Multiples <ul><li>Banks with Assets < $500 Million </li></ul><ul><li>Banks with Assets $500M to $1 B </li></ul><ul><li>Banks with Assets $1B to $10 B </li></ul><ul><li>Banks with Assets > $10 B </li></ul><ul><li>1.00x book 10x p/e </li></ul><ul><li>1.25x book 10x-12x p/e </li></ul><ul><li>1.25x-1.50x book 10x-12x p/e (1.75x-2.00x book for the best) </li></ul><ul><li>1.50x-2.00x book 12x-15x p/e </li></ul>
  40. 41. Drivers of Profitability <ul><li>#1 Answer – Deposit Mix </li></ul><ul><li>Growth vs. Risk Management </li></ul><ul><li>Product Mix and Innovation – Diversification </li></ul><ul><li>Expense Controls (Pool and Outsource Compliance and Operational Resources?) </li></ul><ul><li>Rational Branch Structure </li></ul>
  41. 42.
  42. 43. Profitability <ul><li>“ It’s all about NIM – consistent, reliable low cost funding is critical, as is a higher percentage of earning assets.” – Stephen Curry, Everett Advisory Partners </li></ul><ul><li>“ Considerable efforts will be made by all banks to achieve economies of scale. With the menu of products shrinking and price controls coming in on fee income, the only escape hatch to restoring profits is lowering expenses through size and scale.” – Curtis Carpenter, Sheshunoff </li></ul><ul><li>“ For the next few years, capital support, a strong low cost deposit mix, and improved diversification and performance metrics of the loan portfolio will be key to improved profitability.” – Angela Holguin, Integrated Bank Solutions </li></ul>
  43. 44. The Winners <ul><li>Solid Management </li></ul><ul><li>Growth Market or Dominant Position </li></ul><ul><li>Core Size </li></ul><ul><li>Consistent Earnings Power </li></ul><ul><li>Core Deposits </li></ul><ul><li>Diversified Loan Portfolio </li></ul><ul><li>Diversified Fee Income </li></ul><ul><li>Tight Expense Controls </li></ul><ul><li>Strict Risk Management and Credit Controls </li></ul><ul><li>Economies of Scale </li></ul>
  44. 45. Bryan Cave Perspective <ul><li>Organic Growth Will Be Much Slower </li></ul><ul><li>Focus on Profitability & Expense Controls </li></ul><ul><li>Core Deposits and Core Customers Drive Value </li></ul><ul><li>“ Excess Capital” is once again a Non-Sequitur. </li></ul><ul><li>Capital is King </li></ul><ul><li>Agility will be a Valuable Trait </li></ul><ul><li>Consolidation, but Viable Communities will Continue to Support “Local” Banks </li></ul>
  45. 46. Are your Board and Management Team Ready for these Changes?
  46. 47.
  47. 48. Corporate Governance <ul><li>Deal with the Issue of “Director Liability” </li></ul><ul><li>Provide the Board with Information, not Data </li></ul><ul><li>Adopt a Meaningful Agenda </li></ul><ul><li>Encourage Board Participation </li></ul><ul><li>Make the Committees Work </li></ul>
  48. 49. Corporate Governance <ul><li>Use Directors in the Examination Process </li></ul><ul><li>Move Executive Sessions to the Board Room </li></ul><ul><li>Use Nominating Committee to Keep Board Engaged </li></ul><ul><li>Develop Real Board Leadership </li></ul><ul><li>Consider Distributing Do’s and Don’ts </li></ul>
  49. 50. Walt Moeling Partner - Atlanta 404.572.6629 Kathryn Knudson Partner - Atlanta 404.572.6952 Beth Lanier Counsel - Atlanta 404.572.4571 John ReVeal Counsel - Washington, DC 202.508.6395 Jerry Blanchard Partner - Atlanta 404.572.6804 Judith Rinearson Partner - New York 212.541.1135 Lyn Schroeder Counsel - Atlanta 404.572.6904 Jim McAlpin Partner - Atlanta 404.572.6630 Katherine Koops Partner - Atlanta 404.572.6819 B.T. Atkinson Partner - Charlotte 704.749.8954 Jonathan Hightower Associate - Atlanta 404-572-6669 Ken Achenbach Associate - Atlanta 404.572.6808 Mike Shumaker Associate - Atlanta 404.572.5908 Margo Strahlberg Associate - Chicago 312.602.5094 Rob Klingler Associate - Atlanta 404.572.6810 Lauren Brown Associate - Atlanta 404.572.6769 Financial Institutions Practice For the latest banking law updates, visit Andy Brummel Associate – Kansas City 816.374.3352 Barry Hester Associate - Atlanta 404-572-6711 Kristine Andreassen Associate - Washington, DC 202.508.6117 Amber Hall Associate - Atlanta 404.572.6829 Dustin Hall Associate - Atlanta 404.572.4573
  50. 51. For further information: Katherine Koops | [email_address] Rob Klingler | [email_address]