Current State of the Banking Industry A View from the Street ARTISAN ADVISORS, LLC Jim Adkins Jeffrey Voss December 7, 2011
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 2
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 3
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 4
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 5
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 6
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 7
The Industry Today Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 8
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 9
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 10
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 11
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 12
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 13
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 14
The Problem Framed Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 15
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. www.artisan-advisors.com 16
Compounding the Problem Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 17
Compounding the Problem Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 18
Compounding the Problem Source: FDIC Quarterly Banking Profile, September 2011 www.artisan-advisors.com 19
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. www.artisan-advisors.com 20
Failed FDIC-Insured Institutions 2008 through 2010 Source: SNL Financial and J.P. Morgan.. www.artisan-advisors.com 21
Failed FDIC-Insured Institutions 1979-2011 (3Q) www.artisan-advisors.com 22
Failed Institutions by State Source: SNL Financial and J.P. Morgan. www.artisan-advisors.com 23
Reasons for Slowdown in Activity Source: FDIC Quarterly Bank Review, September 2011 www.artisan-advisors.com 24
Troubled Bank Pipeline Failures Still likely on the Horizon www.artisan-advisors.com 25
Texas Ratios by State for Troubled Banks Source: SNL Financial and J.P. Morgan. www.artisan-advisors.com 26
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. www.artisan-advisors.com 27
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. www.artisan-advisors.com 28
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. www.artisan-advisors.com 29
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. www.artisan-advisors.com 30
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. www.artisan-advisors.com 31
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. www.artisan-advisors.com 32
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). www.artisan-advisors.com 33
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. www.artisan-advisors.com 34
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! www.artisan-advisors.com 35
Jim Adkins, Managing Director 630-742-1052 jadkins@artisan-advisors.com Jeffrey Voss, CPA, Managing Director 630-768-2124 jvoss@artisan-advisors.com www.artisan-advisors.com 36
APPENDIX www.artisan-advisors.com 37
Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. www.artisan-advisors.com 38
Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. www.artisan-advisors.com 39
Illinois Troubled Bank sorted by Texas Ratio Source: SNL Financial and J.P. Morgan. www.artisan-advisors.com 40