Posts Tagged ‘bank failure’

Change?  No change is necessary.

That is what some bankers thought when their institutions began to suffer the first shocks of a quake that started rattling the financial industry in the mid-1980s.  These bankers figured that if they just hunkered down and minded their own business the tremors would subside.

Bank Strategic Planning

Bank Failures Since 1979, Source: SNL Financial and FDIC
Number of Failed Banks in 2012 is annualized based on 23 failures as of 5/1/12

Instead, many banks – and bankers – vanished.  From 1988 to 1992, the U.S. banking industry witnessed more bank failures than ever before, especially in any comparable five year period.

The reasons were complex.  Massive change hammered the industry.  New banking laws and regulations altered how financial institutions could do business and increased base-line costs.  For banks that were already on shaky financial footing, new capital requirements dictated cutbacks and/or injections of hard-to-find investment dollars.  The debut of interstate banking intensified price-cutting campaigns to win market share, and margins began to shrink.

Sound familiar?  It’s de ja vu all over again!  “Same events, different time.”  The earthquakes returned in 2008, and the financial world began to come undone once again.

For survivors of repeated quakes, reality has arrived.  If we hope to retain our jobs and help our institutions withstand external pressures, we had better prepare for life in an earthquake zone.  Strategic Planning is needed today more than any time since the 1980’s.  Through strategic efforts, banks can intelligently re-engineer their institutions to gain the resilience and strength needed to absorb shocks – and even expand – in our unstable economy.

Strategic Planning is extremely challenging in this environment, since it requires looking at the future and making assumptions.  Today, about the only given is that more massive change lies ahead.  Yet, an outline is emerging of the future that banks will face.  Over the next four or five months, we will comment on dealing with specific trends.

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Since September of 2008, we have been in the most challenging economic environment since the great depression. During this period, we have seen unprecedented government intervention with programs like TARP, and with the most recent passage of the Dodd-Frank Act, the regulatory burden is going to dominate the time of each management team and their board of directors. Risk Management practices have continued to improve, but it is the unforeseen risk, whether it is a double dip recession, continued declines in real estate values, deflation or a host of other things, that has to challenge the critical thinking of each bank’s leadership.

In this challenging environment, strong leadership is a must. Each CEO must be proactive and not reactive. Communication with regulators, the board of directors and the management team, as well as with all employees in the organization, is vital in order to maintain a healthy and well run financial institution. It also goes without saying that keeping shareholders informed of the strategy, vision and health of the bank is a must in order to build confidence in the marketplace. Capital is king, and investor confidence is vital especially in this economic environment and the access to new capital is paramount.

With respect to lending, there is an old saying that “you can fix bad loan underwriting but you cannot fix a bad market.” In light of the economic issues and the increased regulatory burden, Management needs to constantly monitor asset quality, ensure a diverse loan portfolio and be acutely aware of trends in the markets that the bank serves. Constant independent loan review in order to maintain a strong performing loan portfolio is now a best practice.

On the funding side, deposit composition is critical, as Jumbo CD’s and Brokered Deposits are not considered as part of a strong core deposit base. The true value of a bank is based on its loyal core deposit base. At the same time, management must make the tough calls and close branches where the economic risks are too great in a market that has been challenged by this prolonged economic downturn.

The banking business is still a people-driven business. Long-term, the key to success is having strong leadership that continually adds talented people to the organization.

To close, I’ll leave you with the idea that tough times do not last but tough-minded people and organizations do!

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Why do community banks fail?  We are being called by a growing number of community banks that have serious credit problems, usually related to commercial real estate loans.  These banks desperately need capital, as losses from loan write-offs have eroded the capital base.  Why have so many community banks found themselves in this situation?

I could argue that the nation’s policies and regulations pushed community banks into their current situation.  If the problem today is too much concentration in real estate loans, I’m sorry, but this was the only lending niche left for community banks after interstate banking allowed large-scale mega-banks to form and compete on price for Commercial and Industrial loans and the consumer loan business was handed to the credit unions with their non-taxable status and the auto companies with their ability to finance their cars at giveaway rates.  Where else could community banks turn but local businesses and their real estate needs.

Matthews, Young SextantNow, having argued that they couldn’t help it, I would also argue that the real problem was a lack of leadership.  Lack of leadership started in Washington, where Congress allowed unfair competition.  Regulators tried to bring attention to the concentration of real estate loans being built-in community banks, but they were obviously not very convincing in so doing.  Boards of Directors allowed concentration risk to build because they assumed that real estate value would always appreciate.  Finally, too many CEOs and other senior officers of community banks took the easy way out and grew their banks down the path of least resistance.  People ALWAYS make the difference; on the way up and on the way down.

Armchair quarterbacking is easy, and I can’t claim that I saw the enormity of the impact of the real estate bubble or the liquidity crisis, but these things worried me and I tried to warn clients that diversity of assets, funded by a strong local deposit franchise was a worthy goal.  Alas, wholesale funds were too cheap and real estate was booming, so that approach seemed pretty boring.  Perhaps next time, we will all risk being stronger leaders.

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