Current State of the Banking Industry A View from the Street ARTISAN ADVISORS, LLC. Jim Adkins Jeffrey Voss

Transcription

1 Current State of the Banking Industry A View from the Street ARTISAN ADVISORS, LLC Jim Adkins Jeffrey Voss December 7, 2011

2 The Industry Today Source: FDIC Quarterly Banking Profile, September

3 The Industry Today Source: FDIC Quarterly Banking Profile, September

4 The Industry Today Source: FDIC Quarterly Banking Profile, September

5 The Industry Today Source: FDIC Quarterly Banking Profile, September

6 The Industry Today Source: FDIC Quarterly Banking Profile, September

7 The Industry Today Source: FDIC Quarterly Banking Profile, September

8 The Industry Today Source: FDIC Quarterly Banking Profile, September

9 The Problem Framed Source: FDIC Quarterly Banking Profile, September

10 The Problem Framed Source: FDIC Quarterly Banking Profile, September

11 The Problem Framed Source: FDIC Quarterly Banking Profile, September

12 The Problem Framed Source: FDIC Quarterly Banking Profile, September

13 The Problem Framed Source: FDIC Quarterly Banking Profile, September

14 The Problem Framed Source: FDIC Quarterly Banking Profile, September

15 The Problem Framed Source: FDIC Quarterly Banking Profile, September

16 Asset Quality Issues Borrower inability or unwillingness to service its contractual debt NPA s and TDR s. Collateral valuation problems stemming from macro economic issues, and more specifically real estate market recession ALLL Impairments and Charge-offs Concentrations by geography, type, affiliated borrower. Poor underwriting no global cash flow and limited guarantees. Inability to resolve asset quality problems without significant negative impact to bank capital. 16

17 Compounding the Problem Source: FDIC Quarterly Banking Profile, September

18 Compounding the Problem Source: FDIC Quarterly Banking Profile, September

19 Compounding the Problem Source: FDIC Quarterly Banking Profile, September

20 Capital (the Buffer between the Bank and FDIC) Capital ratios were falling as credit risk was increasing. Regulatory capital requirements increase with risk. Difficulty raising capital from outside the Boardroom and existing shareholder base. M&A activity has been virtually non-existent in Chicago during this cycle. Sellers are competing with FDIC for qualified Buyers. Private equity investors today are not equal partners they are risk averse and IRR driven. Holding company debt creates problems with recapping the bank. 20

21 Failed FDIC-Insured Institutions 2008 through 2010 Source: SNL Financial and J.P. Morgan

22 Failed FDIC-Insured Institutions (3Q) 22

23 Failed Institutions by State Source: SNL Financial and J.P. Morgan. 23

24 Reasons for Slowdown in Activity Source: FDIC Quarterly Bank Review, September

25 Troubled Bank Pipeline Failures Still likely on the Horizon 25

26 Texas Ratios by State for Troubled Banks Source: SNL Financial and J.P. Morgan. 26

27 The Regulatory View The Board and Management are ALWAYS responsible for the problems of the institution! The Board and Management implemented inadequate risk management systems. The Board and Management did not effectively plan for a downturn in the economy. There was inadequate oversight by the Board, which is dominated by bank management. Management ignored recommendations from the exams (e.g. repeat violations). Disregard for regulatory and accounting guidance. 27

28 The Regulatory View (quotes from examiners) Stop blaming the economy for your problems! The economic downturn is not the primary factor in the poor performance of your bank. It is only a contributing factor. There are over 6,000 healthy banks in the country. How come your bank is not one of them? Management is paid to manage through the highs and lows of the economy. The economy just didn t go bad overnight. 28

29 The Bankers View (quotes from our clients) The worst economy since the Great Depression caused our credit problems, and the bank to fail! Real estate lending has always been a good model. Why should I take the blame as a community banker for a national depression in the real estate market? We are treated like criminals guilty until proven innocent! Regulators told me that they are my partners! The regulators have an agenda fewer banks! They are out to get me. They want to put me out of business and are succeeding. I am tired and worn out fighting with the regulators. 29

30 The Bankers View Issues of Regulatory Conflict Inconsistent application of Rules and Regulations examiners often do not understand technicalities. Interpretation of rules is often subjective (ALLL), ambiguous (TDRs), and inconsistently (Appraisal requirements) applied. Every regulatory action has a negative effect on the ability of the bank to overcome its problems. Asset quality determines outcome of CAMEL ratings. 30

31 The Bankers View Areas of Regulatory Conflict Inconsistent treatment among banks where Management is considered a problem or a strength. Added problems now occurring in areas of Compliance and BSA, where management has diverted attention to resolve Safety and Soundness Issues. Mark to market appraisal process has been overly punitive. Losses could be amortized over ten years providing critical time for the market to stabilize and regulatory capital relief. The FDIC receivership machine is efficient, accepted by Congress, and the only method of resolution that has been used. 31

32 Straight Talk From the Street Asset Quality Watch your loan concentrations! Geographic Industries Type niche programs can quickly become concentrations, if unchecked. Related or affiliated Best practices calls for community banks to establish a loan risk management function. The regulators like to see a portfolio approach to loan management. Most banks are in a defensive mode and are ignoring their good customers. Now is the time to reach out to customers. If capital is tight, reserve loan money for existing clients. 32

33 Straight Talk From the Street Capital Think like BUYERS, not SELLERS if you want to find capital. Most banks that have raised capital have significantly underestimated the actual need WHY? A DISTRESSED approach should be considered when evaluating capital needs you must understand the MARKS on your balance sheet DO YOUR HOMEWORK then negotiate. Finding capital is still challenging, but not impossible. Don t make it harder by having administrative issues that cast management in a negative light. Holding company capital and debt structures are a major impediment to the capital raising process (BANK, SUB, TARP, TRUPs). 33

34 Straight Talk From the Street Management Do not be in denial if you have a problem. Problems do not go away on their own. Many bankers wait too long to make important decisions. Planning is an important part of the regulatory puzzle. The regulators want to see a strategic plan and budget that is current, realistic, and is being followed by senior management. Repeat exam violations only serve to make the regulators mad and belief that Management is not capable of fixing their problems. Don t go there! Make sure you understand regulatory guidance. Get help if you need it. Do not lose you temper with the regulators. You have to stay calm, professional, and trustworthy. Don t make it personal. They are doing their job take your frustrations to Congress. 34

35 The Fear Factor The Fear Factor is very real and a Regulatory lever to get the Bank to comply! It s the fault of the Board and Management if the bank is not operating well, not the economy, or the real estate market, or Washington-driven economic policy. The Board and Management MAY be held responsible if the Bank does not adhere to Regulator directives, or if the Bank fails. Time is a precious asset or your worst nightmare use it wisely to resolve the Regulatory Stress! 35

36 Jim Adkins, Managing Director Jeffrey Voss, CPA, Managing Director

37 APPENDIX 37

38 Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. 38

39 Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. 39

40 Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. 40