Rising From The Ashes
By Stephen M. Klein
April 23, 2010
On the Road Again
Well this time it was Italy for pleasure. But guess what I encountered? – a volcanic eruption with ashes spewing all over Europe and tying air transport into virtual knots. Currently en route to London after a 10 hour wait at Rome airport – hopefully returning home tomorrow just a day late.
The Fallen Ashes
Well the ashes from the Icelandic volcanic eruption got me thinking and my writing juices flowing. To me the ashes also symbolize the numerous banks which have disintegrated during the past year or so from the seismic economy. One of those, which took place this past week, was our longtime client City Bank, Lynnwood, Washington (the “other” City Bank). It not too long ago was one of the top performing banks (ranked by ROAA) in the country. It makes me sad to even think about it.
Out of the Ashes
The good news is we are seeing successful capital raises, some by our publicly traded bank clients and others through private placements, some completed, some pending. Clearly, capital remains the ballgame. It rights many wrongs, rehabilitates your key ratios, allows flexibility in disposing of troubled assets and keeps the regulators happy.
FDIC Assisted Transactions
Real or imagined, FDIC assisted transactions are the darling of banks and investors. Perceived to be relatively inexpensive and low risk, the market has embraced these deals with welcoming arms. How much longer this continues and how successful these transactions turn out is yet to be seen.
The Ongoing Regulatory Struggle
Without capital, the battle with regulators rages on. Exams continue to be challenging and downgrades and further enforcement actions still commonplace. With Regulatory Reform pending, it makes the whole environment uncertain and decision making protracted by the regulators. Once you get caught in the regulatory vortex it’s pretty tough to escape the clutches of Charybdis.
What Lies Ahead – The New Order
Probably a modified regulatory landscape. Continued contraction of the industry through more failures and ultimately mergers. Many bankers are just plain tired of the struggle – low margins, regulatory burdens and oversight, reduced lending opportunities and an uncertain future.
The New Order will look different. A different mix of loans, less leveraging, lower returns and more risk aversion. Banks also will have to diversify their products and services. Essentially, sole dependence on interest income and related fees will not suffice, especially with margins skinny and regulatory burden increasing.
One long-term concern is the ability to retain and recruit top talent to an industry under siege, including compensation restrictions.
Be Flexible and Keep an Open Mind
With all the challenges and changes facing our industry, it is important for boards of directors and management to be flexible and keep an open mind to new ideas and opportunities. With contraction should come opportunities for survivors, particularly those with a solid capital base.
Traditional annual strategic planning is outmoded. Boards and management teams should be “thinking strategically” on a continuous basis and setting aside at least a portion of one board meeting quarterly to seriously focus on the future of their organization to ensure stability and enhance shareholder value.
