It was cold and rainy in Chicago in early April when a group of bank chairmen, directors and CEOs gathered to compare strategies, share problems and swap stories—fitting weather for an industry that is feeling the deep chill of margin compression and rising capital requirements.
This was the fifth year Bank Director has held the Bank Chairman/CEO Peer Exchange, which is built around a small number of presentations and three peer exchange sessions where the participants (representing 43 institutions) were able to share their thoughts in a private, off-the-record setting. And if I came away with one overriding impression, it’s that the attendees are determined to run successful organizations regardless of the challenging business climate they must operate in.
And the operating environment for banks is very challenging, to be sure. In a comprehensive review of the state of the industry, Stifel Vice Chairman Ben Plotkin laid out a good-news bad-news scenario. The good news: Improved profitability (due to under-provisioning for loan loss reserves, so this might be bad news for the future), a strong revenue flow from home mortgage lending, capital levels that are at a 70-year high and a significant improvement in bank valuations. The bad news: Slow economic growth and slow loan growth (which typically go hand-in-hand), increased regulation and net interest margin compression.
While the sessions were confidential, I think I can share a couple of things that came out of the three peer exchange sessions that I sat in on.
- The directors and CEOs embraced the concept of enterprise risk management (ERM) as a risk mitigation tool rather than because regulators are forcing them to adopt it (although the bank regulatory agencies are big ERM proponents). Many of the attendees have also hired chief risk officers and set up risk committees. One CEO described ERM as a profit enhancement tool since every dollar saved through risk mitigation falls pretty much to the bottom line.
- Many of the banks have responded to the margin pressure by expanding their lending activities into (for them) new areas. Examples include municipalities, mortgage warehouse funding, auto loans (including something that sounded very much like subprime), hotels (so-called non-destination hotels rather than resorts) and franchise companies. The point is that they are experimenting with new loan categories in an effort to protect their net interest margins, particularly since C&I lending has become extremely competitive. One participant commented that C&I loan pricing has become so irrational (both in terms of loan rates and duration) that he wondered if some bankers learned anything from the financial crisis.
- Most of the participants seemed to have adopted a stoic attitude toward regulation. Many of them feel that they are overregulated, but they don’t waste a lot of time complaining about it because compliance is not optional. It is better to focus on something that can have a positive impact on, like margin compression.
The most poignant session was unquestionably a joint presentation by Citizens Republic Bancorp CEO Cathy Nash and Chairman Jim Wolohan. Citizens was acquired by FirstMerit Corp. last fall—in fact, the deal closed on April 12—after a long, tough fight by Nash, Wolohan and Citizens’ executive management team and board to recover from wounds inflicted by the recession. The bank had regained profitability and was making good progress on its long-range strategic plan, but the FirstMerit deal gave Citizens’ shareholders a quicker payoff than the board and management would have been able to deliver. That’s a difficult position for any board of any target company. Whose interests do you put first, those of your shareholders, or management and the board?
“You do what’s best for the shareholders,” said Nash.
While Nash and Wolohan are not staying on with FirstMerit, I think they are two very talented and highly principled individuals who will resurface in major roles very soon. Cream always rises to the top, as the old saying goes.