What a Difference a Year Makes: Bank Executives’ Optimism Fades on the Economy


Bank executives are often in the unique position to get a first-hand view of their local economies, and if the most recent Bank Director and Grant Thornton LLP Bank Executive Survey is any indicator, they do not like what they see.  Only 28 percent of respondents expect an improvement in the local economy in the next six months compared to 44 percent at this time last year, and around twice as many respondents this year expect their local economy to get worse—13 percent compared to 6 percent last year.  The same trend holds true for the national economy with only 13 percent of respondents expecting an improvement compared to 39 percent last year.

The annual survey was emailed in June and July to CEOs, CFOs, and audit committee members from U.S. banks with more than $250 million in assets.  More than 170 bank executives completed the survey, which polled respondents on both the current state and future direction of the banking industry.

With the two year anniversary of the Dodd-Frank Act recently passed, the survey reveals that a slight majority of U.S. bank executives feel they are currently equipped to handle the increased compliance demands brought on by the historic legislation. Still, regulatory compliance burden is the number one concern among survey respondents for the second year in a row—94 percent this year compared to 91 percent last year.  Dorsey Baskin, a partner at Grant Thornton LLP, says that the 54 percent of respondents reporting they are equipped to handle the legislation to date are likely more concerned with the myriad of rules yet to be written.

Fortunately, bank executives as a whole appear to be preparing for whatever is to come.  Sixty-eight percent of respondents have strengthened their loan review procedures in the past 24 months, 59 percent have adopted an enterprise risk management structure, and 21 percent have hired a chief risk officer.  A full 78 percent of respondents are conducting stress testing on an ongoing basis, with 8 percent more expected to start this year.  Additionally, 33 percent of respondents are planning to hire additional staff and 21 percent are planning to hire an advisory firm to meet increased compliance demands. Only five percent of respondents have not begun planning for increased compliance demands.

In what might be attributed to hiring additional staff for compliance, 90 percent of executives expect the number of people they employ at their bank to increase or remain the same in the next six months compared to 85 percent last year. 

The increasingly pessimistic outlook on the economy might explain another chief concern of respondents this year, organic loan demand. Over 90 percent of respondents expect to find growth in organic loan origination in the future, but 67 percent list organic loan demand as a concern for their institution. Baskin says that even though bankers are currently seeing a demand for loans, they are rightly concerned with how long it will last and how far the economy will grow.  “A point might be made that contrary to all of the political discussions of loan growth and lending by the banking industry, the bankers don’t feel like they have enough loan growth opportunity,” says Baskin. “The bankers who are accused of not making loans are sitting here worried about not having loans to make, and that’s how they hope to grow.”  

While bank executives cannot be certain where the economy is headed, they do seem to agree on their presidential pick. When we asked respondents who they are supporting in the upcoming election, they chose Mitt Romney over Barack Obama by a wide margin—79 percent to 8 percent, with 13 percent undecided.   

For access to the full survey results, click here.

It’s not over ’til it’s over


FDIC contractor says more bank failures on the way

closed-sign.jpgMichael Sher has a first-hand view on the nation’s bank failures. He is managing director of RSM McGladrey, which has various contracts with the Federal Deposit Insurance Corp., including assisting the FDIC in shutting down banks, and assisting them with managing and selling the assets. He discusses where FDIC-assisted deals go from here, and what mistakes bankers make when buying failed banks.

What do you do for the FDIC?
To date, we and our strategic partner The Corvus Group, Inc. have assisted the FDIC in shutting down 59 failed financial institutions. Additionally, we are a contractor to the FDIC providing due diligence services to assist them in disposing of the assets that have been retained from the failed financial institutions. The first large deal was a $1.7 billion structured sale involving substantially non-performing acquisition and development loans. With a structured sale, the FDIC enters into a partnership with the buyer of the assets and typically, the FDIC retains a 60 percent ownership interest. The other transaction that we were involved with was a securitization backed by approximately $394 million of performing commercial and multi-family mortgages from 13 failed banks.

Do you think the FDIC will do more securitized asset sales in the future?
As we move ahead, I think that the FDIC will focus more on securitizations. The cost of due diligence for buyers on a structured sale is substantial and the size of the loans pools historically have exceeded a billion dollars in unpaid principal balance. It is apparent that the interest in such large transactions has waned.  The pricing received from the securitization sales is potentially higher than the other methods that the FDIC uses in disposing of assets from failed financial institutions. In addition, with a securitization, the FDIC does not retain an ownership interest that requires on-going monitoring. With structured sales, there is speculation that the size of the transactions will get smaller to encourage more participation.

Where do you think we’re headed in terms of bank closures?
I don’t believe it’s over. If you look at the number of banks on the watch list, it’s roughly 10 percent of the banks in the country. How can this crisis be over when we have not seen an overall increase in real estate values? That being said, in my opinion, the number of banks going into receivership will decrease as I think that the FDIC will encourage banks to merge prior to a failure. A benefit to this is that the directors and officers may avoid being investigated by the FDIC subsequent to failure, and may avoid possible legal ramifications.

What’s really the demand for banks in hard-hit areas such as Georgia and Florida and Illinois?
This is no different than the savings and loan crisis in the late ’80s and early ’90s. A lot of individuals and organizations made plenty of money buying distressed assets when others thought it was ludicrous to do so. I think that those who are not taking advantage of the distressed times now will be kicking themselves in the coming years because they missed the opportunity. Yes, you have to be cautious about what you buy, but those who get involved have the potential to make a lot of money.

How does the FDIC view the community banks who want to buy these failed banks, versus the big institutional investors?
In my opinion, the FDIC views this banking crisis as the banking industry’s problem and is looking to the healthy banks to resolve it. Most of the institutional investors don’t have the experience or the know-how that the FDIC is looking for. I think the FDIC is somewhat reluctant to get these money players involved. The key is to have the right team in place to manage and dispose of the assets.

What sort of mistakes do buyers make in buying failed banks?
I think one of the biggest mistakes made is buyers not having a full understanding of their rights and obligations under the loss share agreements that they have entered into with the FDIC. The acquiring banks have a short time-frame to truly understand what they have acquired and their reporting responsibilities under the loss share agreement. This results in the acquirers not fully understanding how to manage and/or dispose of the assets that they acquired.

A Turnaround Year?


For the third time this week, I found myself on the FDIC’s website to start my day. A glutton for regulatory punishment? More a curiosity to see the agency’s latest report card. On the bright side, it shows that the banking industry checked in with an $87.5 billion profit in 2010 (up from a net loss of $10.6 billion a year earlier). Less rosy, four points worth noting as a follow up to my post on Monday about FDIC-assisted transactions:

  • Last year, the number of failed banks reached 157, an 18-year high.
  • The number of institutions on the FDIC’s “Problem List” rose from 860 to 884.
  • Total assets of “problem” institutions increased to $390 billion from $379 billion in the prior quarter, but are below the $403 billion reported at year-end 2009.
  • While the problem banks has grown for the fifth year in the row, it expects the number of failures to be fewer than last year.

Additionally, the report shows that lending remains weak: total loans and leases fell again during the fourth quarter. Not surprisingly, the agency’s chairwoman, Sheila Bair went on record with her expectation that “industry to take the next step, and begin to build their loan portfolios. The long-term health of both the industry and our economy will depend on a responsible expansion of bank lending.”  While not a surprising position, some might be reminded that the banking industry remains under considerable pressure from financial regulations that impact lending activity.