planning for recovery - banking beyond 2011

Planning for Recovery – Banking Beyond 2011

Katherine Koops & Rob Klingler

Florida Bankers Association 2011 Annual Convention

Orlando, FL

3

Lawyers?

• Of course!• Big Picture• Collective Experience• Ideas to take home,

ponder, and ultimately, implement

Katherine Rob

4

Planning for Tomorrow

• Lessons Learned (and Not Learned)– Tomorrow’s Regulations Reflect Yesterday’s Problems

• The New Normal– Three Times Book Ever Again?

• Implementation at the Governance Level– Engaged Boards of Directors

5

Survey!

6

What Happened?

• D-Day was 2005

• Sun-Belt Migration • Bank Profitability• Housing a Priority

• Regulators and Bankers Thought Prepared

7

What Did We Miss?

• Role of Land Speculators and Fraud• Role of Interest Reserves• Loans to Projects vs. Loans to Customers• Impact of Lack of Core Deposits• Concentrations of Loans and Deposits• Free Market De Novo Bank Formation• Effect of Loan Loss Methodology Changes• Effect of Loan Participations

8

What Did We Do Wrong?

• Crisis NOT Caused by Regional Regulatory Failures

• Competition in Regulatory Toughness (and fear of Regulatory Reform)

• Self-fulfilling Prophecy of Asset Value Deterioration• Role of FDIC/Treasury Asset Dumps• Legislating in a Crisis is Not Productive

9

10

Lessons Learned?

• Banks Cannot Outperform Local Markets

• Local Markets Cannot Recover Without Local Banks

11

Lessons Not Learned?

• Overreliance on Models and Appraisals

• Directors and Officers are Neither Stupid nor Evil

• Micro-managing Access to Credit Counter-Productive

12

Future Regulatory Environment

• Capital– End of TRuPs and BHC Loans

– Emphasis on Common Equity

– Increased Capital Ratios

• Asset Quality– Return of RAP vs. GAAP

– Non-Performing Determinations

– No Tolerance for Concentrations

– Loans to One Borrower Tests

13

Future Regulatory Environment

• Management– How Aggressive will the FDIC be?

– How will Directors React?

– Increased Board Involvement

• Earnings– Only Acceptable without Risk?

– Not From Interest Reserves

14

Future Regulatory Environment

• Liquidity– No Tolerance for Concentrations

– Reconsideration of “Core”

• Sensitivity – Models are the Answer!

– Greater Variance

15

Future Regulatory Environment

• De Novo Banking– “Convenience and Necessity”

16

Future Regulatory Environment

• Compliance– The Bureau

17

18

A New Stress Test for Banks

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Global Leverage Down

• Slower Growth• Reduction in Credit Card Availability

– Increase in Savings?

• Lack of Syndication of Consumer Debt– Pricing Rationalization?

– Opportunity for Community Banks?

20

Expected Impact of Regulations

• Higher Capital Ratios and Slower Growth• Lower ROAE and ROAA• Higher Regulatory Compliance Costs• More Core Deposits• Changes in Competition• Changes in Board Room• Focus on “Customer” Loans vs “Project” Loans

21

Current State of the Industry

• 2007 – 3• 2008 – 25• 2009 – 140• 2010 – 157• 2011 – 47

(through June 17th)

22

FDIC “Problem” Institutions

0

200

400

600

800

1000

2006 2007 2008 2009 2010 March 31

23

Effects on Bank M&A Market

• Have we Reached Bottom?

• Pro Forma 2-Rated Bank

• FDIC Assisted Transactions Continue to Dominate

• Burdens of TARP and TRuPs

• Regulatory Costs and Oversight

• Model of Many Urban Community Banks is Dead

24

What Will Investors Expect?

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Survey Questions

• What does an ideal community bank look like?

• What level of profitability should be expected?

• What about M&A multiples by 2013?

• What is the most significant factor in achieving

consistent profitability?

26

The Ideal Community Bankas of December 2013

• “The ideal community bank will either (i) have a dominant market share in a rural slow growth market; or (ii) if located in an urban market, have enough scale and product offering to compete for deposits with the larger banks.”

– Adam Aspes, Sterne Agee• “Investors will value concentrated market share

community banks, not fragmented markets.” – Jennifer Demba, SunTrust Robinson

Humphrey

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Asset Size

• In all but rural markets, consensus minimum was $500 million.

• “$1 billion in asset size will not be a large bank by 2013.”

• “While not universally applicable, in general we think the regulatory costs of operating a bank have increased such that it is difficult to produce adequate long-term returns for a bank below $500 million in assets.” – Chris Marinac, FIG Partners

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As of December 31, 2010Asset Size # Institutions Risk Weighted Assets

>$1 Trillion 4 $4,097,582,006,000

$100-999 Billion 12 $1,468,738,483,000

$50-99 Billion 19 $988,292,605,000

$5-49 Billion 120 $1,036,912,286,000

$1-4.9 Billion 481 $637,780,117,000

$500-999 Million 646 $309,852,894,000

$250-499 Million 1,161 $277,997,761,000

$100-249 Million 2,212 $242,924,470,000

$50-99 Million 1,326 $63,333,059,000

$0-49 Million 944 $18,331,475,000

6,925 $9,141,745,156,000

2929

As of December 31, 2010Asset Size # Institutions

>$1 Trillion 4

$100-999 Billion 12

$50-99 Billion 19

$5-49 Billion 120

$1-4.9 Billion 481

$500-999 Million 646

$250-499 Million 1,161

$100-249 Million 2,212

$50-99 Million 1,326

$0-49 Million 944

6,925

4,482 Banks

6,770 Banks

155 Banks83% of Banking Assets

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Profitability

• Size and Scale Matter• Have Banks Worked Through Existing Credit Issues?

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2013 ROE – Survey Projections

Banks with Assets < $500 Million

Banks with Assets $500M to $1 B

Banks with Assets $1B to $10 B

Banks with Assets > $10 B

6-8%

8-10%

12%-15%

15%

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ROE – Banks < $100 Million

7.97 8.45

6.77 7.105.69

2.20

0.13

2.73

0.00

2.00

4.00

6.00

8.00

10.00

2003 2004 2005 2006 2007 2008 2009 2010

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ROE – Banks $100M - $1B

11.71 11.75 12.3011.32

9.44

3.11

-0.10

3.23

-2.000.002.004.006.008.00

10.0012.0014.00

2003 2004 2005 2006 2007 2008 2009 2010

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ROE – Banks $1B - $10B

13.80 13.4111.17 11.47

8.79

-1.64 -2.722.17

-5.00

0.00

5.00

10.00

15.00

2003 2004 2005 2006 2007 2008 2009 2010

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2013 ROA – Survey Projections

Banks with Assets < $500 Million

Banks with Assets $500M to $1 B

Banks with Assets $1B to $10 B

Banks with Assets > $10 B

0.50-0.85%

0.70-1.00%

1.00-1.25%

1.25-1.30%

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ROA – Banks < $100 Million

0.95 1.01 1.000.93

0.75

0.30

0.02

0.33

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2003 2004 2005 2006 2007 2008 2009 2010

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ROA – Banks $100M - $1B

1.18 1.19 1.241.17

0.99

0.32

-0.01

0.33

-0.200.000.200.400.600.801.001.201.40

2003 2004 2005 2006 2007 2008 2009 2010

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ROA – Banks $1B - $10B

1.42 1.44 1.28 1.220.99

-0.18 -0.29

0.24

-0.50

0.00

0.50

1.00

1.50

2003 2004 2005 2006 2007 2008 2009 2010

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M&A Multiples

• Primary Driver of Community Bank Shareholder Value Creation over Last Two Decades

• “1.5x book will be the new 2.5x book value of a few years ago. Sellers should be focused on relative value of the pro forma company rather than the headline in the newspaper article. This has always been the most difficult concept to get across to a board, but it is necessary in creating a good stock and good returns, prospectively.” – Peyton Green, Sterne Agee

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2013 Projected Multiples

Banks with Assets < $500 Million

Banks with Assets $500M to $1 B

Banks with Assets $1B to $10 B

Banks with Assets > $10 B

1.00x book 10x p/e

1.25x book 10x-12x p/e

1.25x-1.50x book 10x-12x p/e(1.75x-2.00x book for the best)

1.50x-2.00x book 12x-15x p/e

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Drivers of Profitability

• #1 Answer – Deposit Mix

• Growth vs. Risk Management

• Product Mix and Innovation – Diversification

• Expense Controls

(Pool and Outsource Compliance and Operational Resources?)

• Rational Branch Structure

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Profitability

• “It’s all about NIM – consistent, reliable low cost funding is critical, as is a higher percentage of earning assets.”

– Stephen Curry, Everett Advisory Partners• “Considerable efforts will be made by all banks to achieve

economies of scale. With the menu of products shrinking and price controls coming in on fee income, the only escape hatch to restoring profits is lowering expenses through size and scale.”

– Curtis Carpenter, Sheshunoff• “For the next few years, capital support, a strong low cost

deposit mix, and improved diversification and performance metrics of the loan portfolio will be key to improved profitability.”

– Angela Holguin, Integrated Bank Solutions

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The Winners

• Solid Management

• Growth Market or Dominant

Position

• Core Size

• Consistent Earnings Power

• Core Deposits

• Diversified Loan Portfolio

• Diversified Fee Income

• Tight Expense Controls

• Strict Risk Management and

Credit Controls

• Economies of Scale

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Bryan Cave Perspective

• Organic Growth Will Be Much Slower• Focus on Profitability & Expense Controls• Core Deposits and Core Customers Drive Value• “Excess Capital” is once again a Non-Sequitur.• Capital is King• Agility will be a Valuable Trait• Consolidation, but Viable Communities will Continue

to Support “Local” Banks

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Are your Board and Management Team Ready

for these Changes?

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Corporate Governance

• Deal with the Issue of “Director Liability”

• Provide the Board with Information, not Data

• Adopt a Meaningful Agenda

• Encourage Board Participation

• Make the Committees Work

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Corporate Governance

• Use Directors in the Examination Process

• Move Executive Sessions to the Board Room

• Use Nominating Committee to Keep Board Engaged

• Develop Real Board Leadership

• Consider Distributing Do’s and Don’ts

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Walt MoelingPartner - Atlanta404.572.6629

Kathryn KnudsonPartner - Atlanta404.572.6952

Beth LanierCounsel - Atlanta404.572.4571

John ReVealCounsel - Washington, DC202.508.6395

Jerry BlanchardPartner - Atlanta404.572.6804

Judith RinearsonPartner - New York212.541.1135

Lyn SchroederCounsel - Atlanta404.572.6904

Jim McAlpinPartner - Atlanta404.572.6630

Katherine KoopsPartner - Atlanta404.572.6819

B.T. AtkinsonPartner - Charlotte704.749.8954

Jonathan HightowerAssociate - Atlanta404-572-6669

Amber HallAssociate - Atlanta404.572.6829

Ken AchenbachAssociate - Atlanta404.572.6808

Mike ShumakerAssociate - Atlanta404.572.5908

Dustin HallAssociate - Atlanta404.572.4573

Margo StrahlbergAssociate - Chicago312.602.5094

Rob KlinglerAssociate - Atlanta404.572.6810

Lauren BrownAssociate - Atlanta404.572.6769

Financial Institutions Practice

www.bryancave.com/fi

For the latest banking law updates, visit

www.bankbryancave.com

Andy BrummelAssociate – Kansas City816.374.3352

Barry HesterAssociate - Atlanta404-572-6711

Kristine AndreassenAssociate - Washington, DC202.508.6117

For further information:

Katherine Koops | Katherine.Koops@bryancave.com

Rob Klingler | Robert.Klingler@bryancave.com

www.bankbryancave.com