Bank Director magazine and Grant Thornton LLP have released the results of The Sixteenth Bank Executive Survey. The survey queried bankers in November of 2008 about their take on the banking industry today and in the future. By and large, bankers’ perspectives were gloomier than in prior years—but also reflected a determination to survive within changing economic and industry conditions.
Laying blame Bank Director asked executives to identify three primary causes behind the current economic crisis. Many bankers cited loose underwriting practices, plus the political mandate to increase homeownership, inadequate oversight in the mortgage industry, and an insufficient understanding of risks associated with certain financial practices.
Bank organizers, who are either purchasing or starting up a bank, can pull a few “lessons learned” from this insight. Clearly, it’s easy for underwriting standards to slip under the pressure of larger industry trends. Therefore, once an institution’s lending strategy is defined, bank executives should be conscientious about adhering to that strategy. Community banks that maintained their underwriting discipline throughout the mortgage boom are now able to operate with a distinct competitive advantage—namely, a relatively clean balance sheet.
There is another lesson in the admission that many bankers didn’t understand the risks associated with their own activities. As Bank Director President TK Kerstetter points out in the survey report, “banks and boards have a lot of work to do in the area of enterprise risk management.”
Confidence lacking A majority of survey respondents indicated that consumer confidence in the industry has declined. That’s really no surprise, given the speed at which consumers pulled their deposits from IndyMac and WAMU last year. But bankers themselves also admitted their own confidence was lacking. Seventy-six percent of respondents said they were pessimistic about the outlook for banking in 2009. In 2008 and 2007, only 54 percent and 21 percent of respondents were pessimistic about the banking outlook.
Bankers are also preparing for increased loan losses in 2009; 66 percent expected an increase in commercial loan losses, while 54 percent expected an increase in consumer loan losses.
The majority of respondents expect the credit crisis to wane towards the end of 2009 or sometime in 2010.
Acquisition and organic growth expectations About one-quarter of respondents said their institution would pursue the acquisition of another bank or financial services company in 2009. And 13 percent of queried executives expected to sell or close offices this year. Only 22 percent had plans to expand by opening new branches this year—this figure is substantially lower than what was reported in prior years’ surveys.
A more uniform response resulted when bankers were asked about their strategies for organic growth in 2009:
• 80 percent expect to increase cross-selling initiatives
• 77 percent expect to pursue new customers with existing products and services
• 38 percent expect to build the bank’s online presence
Risk-aware management, capital levels key to survival At year-end, 47 percent of survey participants expressed interest in the TARP Capital Purchase Program. This figure would likely be lower today, however, since the Obama administration has subsequently mandated executive compensation limits on banks receiving government assistance.
Going forward, bankers will be focused on managing credit risk, interest rate risk and portfolio risk—while working to maintain adequate sources of funding. Deposits will be the primary funding source, but the outlook there is uncertain. Experts are split on whether today’s more conservative consumer will save more or (due to unemployment) save less.
Overall, the survey responses largely present a back-to-basics mentality for the banking industry. As the survey report explains, “Community bankers, in particular, have faith in the guiding principles that have kept their customers and communities strong for decades.”
Source: The Sixteenth Bank Executive Survey, A Grant Thornton LLP study produced in association with Bank Director magazine.
http://www.grantthornton.com/staticfiles/GTCom/files/Industries/FSandFI/Bank%20Survey/Grant%20Thornton%2016th%20Bank%20Executive%20Survey.pdf
Herald National Bank President and CEO David Bagatelle recently made an appearance on FOX Business News to discuss the banking environment with correspondent Connell McShane. Herald National opened its doors last November and currently operates three bank branches in the state of New York.
During the interview, Bagatelle asserted that now is a great time to establish a de novo bank—despite the turmoil in the financial markets and in the banking industry. A new bank competitor in this environment automatically has the striking advantage of a clean balance sheet. Unencumbered by toxic assets and rising defaults, the de novo bank can deliver its products and services at a much higher level of efficiency.
Bagatelle indicated that Herald National has realized some success in recruiting top talent from other banks. Many of these relationship managers were frustrated by the inability to serve their customers in this extremely tight lending environment. Herald National represented a great opportunity for those relationship managers to get back to the business of making loans.
Herald National is a balance sheet lender, and is therefore less impacted by the shutdown of the securitization market.
Looking ahead, Bagatelle was cautiously optimistic about programs initiated at the federal level to loosen up the securitization market. He did express concern about the state of the commercial real estate market, which may still be a ways from the bottom.
Click here to see the Bagatelle interview.
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=12189234&src=finance&ch=1316259
With the Deposit Insurance Fund (DIF) reserve ratio at its lowest point since June of 1994, the FDIC is currently moving forward on the Restoration Plan that was announced last year. The plan seeks to restore the reserve ratio to the required amount of 1.15 percent within five years; as of September 30, the reserve ratio was 0.76 percent, down from 1.01 percent three months prior.
The Plan involves overhauling the assessment system so that the riskier financial institutions will bear a greater burden in restoring the DIF balance and reserve ratio. As an immediate measure to increase the fund, the FDIC did initiate a 7-basis-point increase to its assessment rates across the board. This change, which created an assessment range of 12 to 50 basis points, was effective only for the first quarter of 2009. The proposed changes for the second quarter are geared towards implementing assessment-pricing calculations that weight an institution’s risk profile appropriately.
Second quarter brings more robust pricing formulasThe proposed base assessment rate ranges from 10 to 45 basis points. Risk Category I institutions would begin with an initial assessment rate of 10 to 14 basis points; the corresponding assessment rates for Risk Categories II, III, and IV would be 20, 30, and 45 basis points, respectively. Further adjustments would be made to account for the institutions’ unsecured debt, secured liabilities and brokered deposits. The resulting total assessment ranges in basis points by risk category are:
• I: 8-21
• II: 18-40
• III: 28-55
• IV: 43-77.5
Some points to note regarding the proposed changes to the pricing calculations include:
• CAMELS component ratings and financial ratios will still be used to determine assessment rates for most institutions.
• An additional ratio will be added to increase the assessment rate for institutions that experience rapid asset growth funded by brokered deposits.
• The pricing calculation used for large Risk Category I institutions will consider the assessment rate from the financial ratios method and other information, in addition to the bank’s weighted-average CAMELS component rating and long-term issuer rating.
• The FDIC may increase the assessment rate by up to 10 basis points on Risk Category II, III, and IV institutions, when the institution’s ratio of brokered deposits to domestic deposits exceeds 10 percent.
• Institutions in any category that rely heavily on secured liabilities, such as Federal Home Loan Bank advances, will face an increased assessment rate.
• Institutions that carry long-term unsecured debt may have their assessment rate reduced as a result.
Bleak outlook Under this plan, the FDIC expects 2009 assessments to increase to $10 billion, from $3 billion in 2008. The agency had previously estimated bank failure costs of about $40 billion through 2013, but because the economy has worsened since last fall, this estimate is now believed to be too low.
Whether you intend to start a new bank or buy an existing one, you’re going to need some help. That help is found in the form of qualified organizers—the entrepreneurial individuals, who pursue the business plan relentlessly and, eventually, create value in the new banking entity.
The organizer’s responsibilities are varied and time-intensive (usually 10-20 hours per month). A de novo or purchased bank project doesn’t get off the ground well unless the team of organizers is focused and unified. This means the organizers must be ready to contribute productively to committee discussions and assist in making informed planning decisions. Those decisions cover a variety of topics, from branding to operations:
• Branding: The organizers build the new bank’s brand from the ground up, deciding what the bank’s mission will be, how it will differentiate itself, what the logo will look like, etc.
• Human resources: The organizers must recruit and hire a qualified management team.
• Project management: A branch location must be selected and modified or built to suit the bank’s purposes. IT systems and other support vendors must be priced and selected, etc.
• Operations: The team must select the products and services the bank will offer and strategize on how those products and services will be distributed and fulfilled.
• Bank Policies: The organizers/new board of directors assist management in drafting and approving the bank’s policies and procedures, a very critical part of banking.
Contributing insights and shaping decisions are just the beginning of the organizer’s responsibilities. However, a pivotal part of what the organizer does is raise capital—both by investing his or her own money and by recruiting more investors to the project. The recruitment process begins with the organizer contributing a sizeable list of names of potential investors. Once the capital campaign gets started, the organizers must be willing participate in their share of the weekly meetings to pitch the investment opportunity.
The ideal organizers and where to find them
Obviously, not everyone is well suited to be a bank organizer. Decisions need to be made, networking needs to be done, and money needs to be raised. These tasks are not easily accomplished by someone who doesn’t have the right characteristics and skill sets. Ideally, your organizers will be:
• Visible in the community
• Opportunistic
• Task-oriented
• Motivated by challenge
• Outgoing, enthusiastic
• Able to juggle several projects at once successfully
Knowing what to look for is half the battle; the other half is knowing where to look to find it. The simplest means of locating potentially suitable organizers is to recruit within professions that typically attract the above qualities; below is a short list of professions:
• B2C service providers: Contractors, plumbers, dry cleaners, car dealers, insurance agents, general contractors, financial planners, doctors, dentists, real estate agents
• B2B service providers: CPAs, marketing consultants, real estate brokers, pharmaceutical account representatives, office supply representatives
• Niche business owners: franchise owners, hotel operators, ethnic market owners, retail store owners, technology providers
Here’s the big picture to remember when seeking out organizers. The organizers you select should operate successful businesses and have access to and represent the segments of the community your bank will serve. In addition, they must be motivated enough to stick with the project for the long-haul. And finally, it takes the right person to understand that starting a bank, or re-branding a purchased bank, is an enormously challenging, but ultimately rewarding endeavor.