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Slide 2: Planning for Recovery – Banking Beyond 2011 Katherine Koops & Rob Klingler Florida Bankers Association 2011 Annual Convention Orlando, FL
Slide 3: Lawyers? • • • • Of course! Big Picture Collective Experience Ideas to take home, ponder, and ultimately, implement Katherine Rob 3
Slide 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 4
Slide 5: Survey! 5
Slide 6: What Happened? • D-Day was 2005 • Sun-Belt Migration • Bank Profitability • Housing a Priority • Regulators and Bankers Thought Prepared 6
Slide 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 7
Slide 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 8
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Slide 10: Lessons Learned? • Banks Cannot Outperform Local Markets • Local Markets Cannot Recover Without Local Banks 10
Slide 11: Lessons Not Learned? • Overreliance on Models and Appraisals • Directors and Officers are Neither Stupid nor Evil • Micro-managing Access to Credit Counter-Productive 11
Slide 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 12
Slide 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 13
Slide 14: Future Regulatory Environment • Liquidity – No Tolerance for Concentrations – Reconsideration of “Core” • Sensitivity – Models are the Answer! – Greater Variance 14
Slide 15: Future Regulatory Environment • De Novo Banking – “Convenience and Necessity” 15
Slide 16: Future Regulatory Environment • Compliance – The Bureau 16
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Slide 18: A New Stress Test for Banks 18
Slide 19: 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? 19
Slide 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 20
Slide 21: Current State of the Industry • • • • • 2007 – 3 2008 – 25 2009 – 140 2010 – 157 2011 – 47 (through June 17th) 21
Slide 22: FDIC “Problem” Institutions 1000 800 600 400 200 0 2006 2007 2008 2009 2010 March 31 22
Slide 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 23
Slide 24: What Will Investors Expect? 24
Slide 25: 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? 25
Slide 26: The Ideal Community Bank as 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 26
Slide 27: 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 27
Slide 28: As of December 31, 2010 Asset Size >$1 Trillion $100-999 Billion $50-99 Billion $5-49 Billion $1-4.9 Billion $500-999 Million $250-499 Million $100-249 Million $50-99 Million $0-49 Million # Institutions 4 12 19 120 481 646 1,161 2,212 1,326 944 6,925 28 Risk Weighted Assets $4,097,582,006,000 $1,468,738,483,000 $988,292,605,000 $1,036,912,286,000 $637,780,117,000 $309,852,894,000 $277,997,761,000 $242,924,470,000 $63,333,059,000 $18,331,475,000 $9,141,745,156,000
Slide 29: As of December 31, 2010 Asset Size >$1 Trillion $100-999 Billion $50-99 Billion $5-49 Billion $1-4.9 Billion $500-999 Million $250-499 Million $100-249 Million $50-99 Million $0-49 Million # Institutions 4 12 19 120 481 646 1,161 2,212 1,326 944 6,925 29 155 Banks 83% of Banking Assets 6,770 Banks 4,482 Banks
Slide 30: Profitability • Size and Scale Matter • Have Banks Worked Through Existing Credit Issues? 30
Slide 31: 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% 31
Slide 32: ROE – Banks < $100 Million 10.00 8.00 6.00 4.00 2.00 0.00 2003 2004 2005 2006 2007 2008 2.20 0.13 2009 2010 2.73 7.97 8.45 6.77 7.10 5.69 32
Slide 33: ROE – Banks $100M - $1B 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00 11.71 11.75 12.30 11.32 9.44 3.11 -0.10 2003 2004 2005 2006 2007 2008 2009 3.23 2010 33
Slide 34: ROE – Banks $1B - $10B 15.00 10.00 5.00 -1.64 0.00 -5.00 -2.72 13.80 13.41 11.17 11.47 8.79 2.17 2003 2004 2005 2006 2007 2008 2009 2010 34
Slide 35: 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% 35
Slide 36: ROA – Banks < $100 Million 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2003 2004 2005 2006 2007 2008 0.30 0.02 2009 2010 0.95 1.01 1.00 0.93 0.75 0.33 36
Slide 37: ROA – Banks $100M - $1B 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 1.18 1.19 1.24 1.17 0.99 0.32 -0.01 2003 2004 2005 2006 2007 2008 2009 0.33 2010 37
Slide 38: ROA – Banks $1B - $10B 1.50 1.00 0.50 -0.18 0.00 -0.50 -0.29 0.24 1.42 1.44 1.28 1.22 0.99 2003 2004 2005 2006 2007 2008 2009 2010 38
Slide 39: 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 39
Slide 40: 2013 Projected Multiples Banks with Assets < $500 Million Banks with Assets $500M to $1 B Banks with Assets $1B to $10 B 1.00x book 1.25x book 10x p/e 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 Banks with Assets > $10 B 40
Slide 41: 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 41
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Slide 43: 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 43 • •
Slide 44: 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 44
Slide 45: 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 45
Slide 46: Are your Board and Management Team Ready for these Changes? 46
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Slide 48: 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 48
Slide 49: 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 49
Slide 50: Walt Moeling Partner - Atlanta 404.572.6629 Kathryn Knudson Partner - Atlanta 404.572.6952 Jerry Blanchard Partner - Atlanta 404.572.6804 Judith Rinearson Partner - New York 212.541.1135 Jim McAlpin Partner - Atlanta 404.572.6630 Katherine Koops Partner - Atlanta 404.572.6819 B.T. Atkinson Partner - Charlotte 704.749.8954 Beth Lanier Counsel - Atlanta 404.572.4571 John ReVeal Counsel - Washington, DC 202.508.6395 Lyn Schroeder Counsel - Atlanta 404.572.6904 Financial Institutions Practice www.bryancave.com/fi For the latest banking law updates, visit www.bankbryancave.com Margo Strahlberg Associate - Chicago 312.602.5094 Rob Klingler Associate - Atlanta 404.572.6810 Lauren Brown Associate - Atlanta 404.572.6769 Jonathan Hightower Associate - Atlanta 404-572-6669 Kristine Andreassen Associate - Washington, DC 202.508.6117 Amber Hall Associate - Atlanta 404.572.6829 Ken Achenbach Associate - Atlanta 404.572.6808 Mike Shumaker Associate - Atlanta 404.572.5908 50 Andy Brummel Associate – Kansas City 816.374.3352 Dustin Hall Associate - Atlanta 404.572.4573 Barry Hester Associate - Atlanta 404-572-6711
Slide 51: For further information: Katherine Koops | Katherine.Koops@bryancave.com Rob Klingler | Robert.Klingler@bryancave.com www.bankbryancave.com