Boardroom on Fire: A Bank Chairman’s Painful Lessons from the Financial Crisis


chairman-4-9-19.png“A sheriff’s car pulls up—the bank is on lockdown.” David Butler wistfully recalls that day in 2009; the day he lost everything.

“It was pretty traumatic,” he admits. “You have to ask tough questions. Can we survive it? What do we do? What’s our exit strategy?”

The events that transpired that fateful Friday afternoon send shivers down the spines of every bank director—the worst case scenario. No, not a robbery. The other worst case scenario.

“The FDIC comes in. They lock the doors and secure all our records before anyone’s allowed to go home.”

Butler was a founding board member of Western Community Bank. Western was big, state-chartered and publicly-traded. In 2007, they acquired a chain of banks with a sizable chunk of money tied up in Florida real estate. It was a ticking time bomb—and, spoiler alert: it was about to go off.

The early fallout of the housing market crash saw Western hemorrhaging $6 million a quarter, making Butler’s board an easy target for regulators.

“The FDIC wanted litigation wherever they could get it; half the time, even where they couldn’t,” he groans. “The public wanted heads to roll and we made perfect targets.”

Western had a clean public shell; no run-ins with the SEC—they were squeaky clean. But as the recession raged on, it became clear that “clean” didn’t cut it. “People were investigated, detained even, based on what? The suspicion of malfeasance? Yet we saw banks engaging in improper, verging on illegal activity walk away scot-free.”

This federal fishing expedition left Butler with a lingering paranoia; the fear that an army of pencil pushers sporting black suits and earpieces might knock on his door to have their Mission Impossible moment at his expense.

One month into 2009, Western’s shares plunged 95 percent. The finger of blame inevitably found a target. “Our CEO was a great guy, but the recession hit him like headlights on a deer,” Butler laments. “We asked him to resign. It was one of the most painful things I’d ever done.” The resulting shuffle in leadership landed David in the role of acting chairman.

“My job primarily became keeping morale up as we scrambled to find a partner,” he recounts. “We didn’t want depositors losing money, but we didn’t want to lose depositors. If they’ve got half a million in the bank, telling them to move it is hard, but it’s the right thing to do.”

Depositors weren’t the only people Western risked losing. The FDIC shot down attempts to offer retention bonuses, leaving Butler at the mercy of employees’ goodwill. “How do you ask someone not to jump ship when they’re waist-deep in water?”

As Butler fought to keep all hands on deck, Western’s board was rocking from the turbulence of days spent sparring over the bank’s balance sheet and late-night conference calls consumed by quarrels over how and where they would stretch its tier one capital.

“You can’t measure the character of your board until it’s been strained.”

“We had our share of those who didn’t stay the course,” he concedes. “Some resigned; some pointed blame—but then there were the ones who stuck it out. Even when it looked hopeless; even when tensions ran high, their commitment never wavered. I hold those people in the highest regard to this day.”

It was an act of bittersweet mercy when, in May 2009, the other shoe finally dropped.

A cease-and-desist order earlier in the year saddled Western’s board with a bureaucratic obstacle course of audits, reorgs, policy rewrites and loan appraisals; with no less than 15 deadlined reports to the state banking commission. One of the many hoops the board was forced to throw itself through required a reevaluation of Western’s loan loss reserves; an amount they determined to be $33 million. Butler was called to meet with the FDIC shortly thereafter.

“They sat me down and told me we needed $47 million,” he says. “I told them they were about to close my bank. We all sat there silently for a minute.”

Three months later, the state banking commission seized control of Western Community Bank, just $2 million shy of meeting its reserve requirement. The bank was turned over to the FDIC and sold to a local competitor for pennies on the dollar.

Where was Butler—the man who risked it all—that Friday afternoon when they came to take it all away?

“Our legal counsel advised us to stay away from the transition to avoid any situation where we might be questioned without an attorney present,” he explains. “So my wife packed a picnic basket and we drove to the beach.”

What about the anger, the resentment, the righteous indignation at the hopelessness of it all? “There was plenty of that to go around,” he admits. “The fact that we could fail was all they needed to treat us like we would. But you reach a certain age where you don’t have time to be angry. There’s no use holding onto all that bitterness.”

A decade has passed since that Friday afternoon when Butler lost it all. Murmurs of a looming recession seep from the rich vein of alarmist gossip to circulate amongst those with a finger on the pulse. “If those kind of whispers reach your ears, it means you’ve kept one to the ground,” Butler posits. “If you’re a bank director, you’ve got a choice. You can pick that ear up off the ground and look towards the future. Or,” he adds with a grin, “you can bury the rest of your head.”

The Flawed Argument Against Community Banks


deposit-4-5-19.pngA few weeks ago, The Wall Street Journal published a story that struck a nerve with community bankers.

The story traced the travails of National Bank of Delaware County, or NBDC, a $375 million asset bank based in Walton, New York, that ran into problems after buying six branches from Bank of America Corp. in 2014.

It’s not that things were going great for NBDC prior to that, because they weren’t. Like many banks in small towns, it had to contend with stiff economic and demographic headwinds.

“As in other small towns that were once vibrant, decades of economic change altered the fabric of Walton,” Rachel Louise Ensign and Coulter Jones wrote in the Journal. “The number of area farms dwindled and manufacturing jobs disappeared.”

“Being located in, and serving, an economically struggling community could bring any bank down,” wrote Ron Shevlin, director of research at Cornerstone Advisors, in a follow-up story a week later.

NBDC hoped the branches acquired from Bank of America, for a combined $1 million, would revive its fortunes. But the deal only made things worse.

The branches saddled NBDC with higher costs and $12 million in added debt. Even worse, half the acquired deposits quickly went elsewhere, provoked by a poorly executed integration as well as, ostensibly, NBDC’s antiquated technology.

“Technology is causing strains throughout the banking industry, especially among smaller rural banks that are struggling to fund the ballooning tab,” Ensign and Jones wrote. “Consumers expect digital services including depositing checks and sending money to friends, which means they don’t necessarily need a local branch nearby. This increasingly means people are choosing a big bank over a small one.”

This echoes a common refrain in banking: that smaller regional and community banks can’t compete against the multibillion-dollar technology budgets of big banks—especially JPMorgan Chase & Co., Bank of America and Wells Fargo & Co.

Community bankers took issue with the article, Shevlin noted, because it seemed to portray the story of NBDC, which was acquired in 2016 by Norwood Financial Corp., as representative of community banks more broadly.

“This is so misleading,” tweeted Andy Schornack, president of Security Bank & Trust in Glencoe, Minnesota. “Pick on one under-performing bank to represent the whole.”

“Community banks are profitable and thriving,” tweeted Tanya Duncan, senior vice president of the Massachusetts Bankers Association. “Most offer technology that makes transactions seamless.”

Schornack and Duncan are right. One doesn’t have to look far to find community banks that are thriving, with many outperforming the industry.

A textbook example is Germantown Trust and Savings Bank, a $376 million asset bank based in Breese, Illinois.

Germantown has generated a higher return on assets than the industry average in 11 of the past 12 years. The only exception was in 2013, when it generated a 1.52 percent pre-tax ROA, compared to 1.55 for the overall industry.

 Germantown-Bank-chart.png

Germantown’s performance through the financial crisis was especially impressive. While most banks reported lower earnings in 2009, with the typical bank recording a loss, Germantown experienced a surge in profitability.

Germantown has gained local market share, too. Over the past eight years, its share of deposits throughout its four-branch footprint in Clinton County, Illinois, has grown from 27.8 percent up to 29.7 percent.

This is just one example among many community banks with a similar experience. For every community bank that’s ailing, in other words, you could point to one that’s thriving.

Yet, there’s another, more fundamental issue with the prevailing narrative in banking today. Namely, the data doesn’t support the claim that the biggest and most technologically-savvy banks are gobbling up share of the national deposit marketTwitter_Logo_Blue.png

In fact, just the opposite has been true over the past five years.

Let’s start with the big three retail banks—JPMorgan Chase, Bank of America and Wells Fargo—which are spending tens of billions of dollars a year on technology.

These three banks saw their combined share of domestic deposits swell in the wake of the financial crisis, climbing from 21.7 percent in 2007 up to 33.2 percent six years later. Since 2013, however, this trend has gone in the opposite direction, falling in four of the past five years. As of 2018, the three biggest banks in the country controlled 31.8 percent of total domestic deposits, a decline of 1.4 percentage points from their peak.

 Deposit-share-chart.png

The same is true if you broaden this out to include the nine biggest commercial banks. Their combined share of domestic deposits has dropped from a high of 47.6 percent in 2013 down to 45.6 percent last year.

Given the number of branches many of these banks have shed over the past decade, it’s surprising they haven’t lost a larger share of domestic deposits. Nevertheless, it’s worth reflecting on the fact that, despite the gloomy sentiment toward community banks that’s often parroted in the press, their current and future fortunes are far from bleak.

Exclusive: How U.S. Bancorp Views Expansion


bancorp-3-14-19.pngGreat leaders are eager to learn from others, even their competitors. That’s why Bank Director is making available—exclusively to our members—the unabridged transcripts of the in-depth conversations our writers have with the executives of top-performing banks.

Few banks fit this description as well as U.S. Bancorp, the fifth-largest retail bank in the United States. It has generated one of the most consistently superior performances in the banking industry over the past decade. It’s the most profitable and efficient bank among superregional and national banks. It’s the highest-rated bank by Moody’s. It’s also been named one of the world’s most ethical companies for five years in a row by the Ethisphere Institute. And it has emerged as a leader of the digital banking revolution.

Bank Director’s executive editor, John J. Maxfield, interviewed U.S. Bancorp Chairman and CEO Andy Cecere for the first quarter 2019 issue of Bank Director magazine. (You can read that story, “Growth Through Digital Banking, Not M&A,” by clicking here.)

In the interview, Cecere sheds light on U.S. Bancorp’s:

  • Strategy for expanding into new markets
  • Progress on the digital banking front
  • Perspective on the changes underway in banking
  • Experience through the financial crisis

The interview has been edited for brevity, clarity and flow.

download.png Download transcript for the full exclusive interview

Rodge Cohen: Are We Preparing to Fight the Last War?


risk-3-1-19.pngHis name might not command the same recognition on the world stage as the mononymous Irish singer and song-writer known simply as Bono, but in banking and financial services just about everyone knows who “Rodge” is.

H. Rodgin Cohen–referred to simply as Rodge—is the unrivaled dean of U.S. bank attorneys. At 75, Cohen, who is the senior chairman at the New York City law firm Sullivan & Cromwell, is still actively involved in the industry, having recently advised SunTrust Banks on its pending merger with BB&T Corp.

Cohen has long been considered a valued advisor within the industry.

In the financial crisis a decade ago, he represented corporate clients like Lehman Brothers and worked closely with the federal government’s principal players, including Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. His character even made an appearance in the movie “Too Big To Fail,” based on a popular book about the crisis by Andrew Ross Sorkin.

Eleven years later, Cohen says the risk to the banking industry is no longer excessive leverage or insufficient liquidity—major contributing factors to the last crisis.

The Dodd-Frank Act of 2010, passed nearly a decade ago, raised bank capitalization levels substantially compared to pre-crisis levels. In fact, bank capitalization levels have been rising for 40 years, going back to the thrift crisis in the late 1980s. Dodd-Frank also requires large banks to hold a higher percentage of their assets in cash to insure they have enough liquidity to weather another financial storm.

The lesson from the last crisis, says Cohen, revolves around the importance of having a fortress balance sheet. “I think that was the lesson which has been thoroughly learned not merely by the regulators, but by the banks themselves, so that banks today have exponentially more capital, and the differential is even greater in terms of having more liquidity,” says Cohen.

But does anyone know if these changes will be enough to help banks survive the next crisis?

“I don’t think it is possible to calculate this precisely, but if you look at the banks that did get into trouble, none of them had anywhere near the level of capital and liquidity that is required now,” says Cohen. “Although you can’t say with certainty that this is enough, because it’s almost unprovable, there’s enough evidence that suggests that we are at levels where no more is required.”

It is often said that generals have a tendency to fight the last war even though advances in weaponry—driven by technology—can render that war’s tactics and strategies obsolete. Think of the English cavalry on horseback in World War I charging into German machine guns.

It can be argued that regulators, policymakers and even customers in the United States still bear the emotional scars of the last financial crisis, so we all find comfort in the fact that banks are less leveraged today than they have been in recent history, particularly in the lead up to the last crisis.

But what if a strong balance sheet isn’t enough to fight the next war?

“I think the biggest risk in the [financial] system today is a successful cyberattack,” says Cohen. While a lot of attention is paid to the dangers of a broad attack on critical infrastructure that poses a systemic risk, Cohen worries about something different.

“That is a very serious risk, but I think the more likely [danger] is that a single bank—or a group of banks—are hit with a massive denial of service for a period of time, or a massive scrambling of records,” he says. This contagion could destabilize the financial system if depositors begin to worry about the safety of their money.

Cohen believes that financial contagion, where risk spreads from one bank to another like an infectious disease, played a bigger role in the financial crisis than most people appreciate. And he worries that the same scenario could play out in a crippling cyberattack on a major bank.

“Until we really understand what role contagion played in 2008, I don’t think we’re going to appreciate fully the risk of contagion with cyber,” he says. “But to me, that is clearly the principal risk.”

And herein lays the irony of the industry’s higher capital and liquidity requirements. They were designed to protect against the risk of credit bubbles, such as the one that precipitated the last crisis, but they will do little to protect against the bigger risk faced by banks today: a crippling cyberattack.

“That’s why I regard [cyber] as the greatest threat,” says Cohen, “because a fortress balance sheet won’t necessarily help.”

Exclusive: An Interview with Brian Moynihan


bank-of-america-2-14-19.pngBank Director’s writers and editors talk with the best bankers in the United States to inform the stories we publish on BankDirector.com and in Bank Director magazine. But these conversations often go deeper and extend beyond the subject matter of those stories, leaving a lot of immensely valuable information on the cutting room floor, so to speak.

With this in mind, we are making available—exclusively to our members—the unabridged transcripts of these conversations. It is our belief that the insights found within them can help bankers gain knowledge and improve their own institutions.

For the cover story in the fourth quarter 2018 issue of Bank Director magazine, Executive Editor John Maxfield interviewed Brian Moynihan, CEO of Bank of America Corp., at the bank’s New York City offices.

While the story focused on how Moynihan, who has led Bank of America since 2010, transformed the bank’s culture and performance, the conversation also delved into his views on growth, risk management and other topics of interest to bank leaders.

In this lengthy interview, which has been lightly edited for clarity and brevity, Moynihan shares:

  • The sources of his philosophy on banking
  • The principles that inform Bank of America’s revamped growth philosophy
  • How history informs his view of the future
  • Lessons learned from the financial crisis
  • How Bank of America deepens relationships with existing customers
  • Why operating leverage helps the bank better manage risk

Larry De Rita, Bank of America’s senior vice president of corporate communications, is also quoted in the transcript.

download.png Download transcript for the full exclusive interview

Prepare Your Portfolio for an Economic Downturn


portfolio-11-12-18.pngAs we reach the 10-year anniversary of the inflection point of the 2008 financial crisis, it’s the perfect time to reflect on how the economy has (and hasn’t) recovered following the greatest economic downturn since the Great Depression. If you’ve paid the slightest attention to recent news, you’ve probably heard or read about the speculation of when the nation’s next economic storm will hit. While some reports believe the next downturn is just around the corner, others deny such predictions.

Experts can posit theories about the next downturn, but no matter how strong the current economy is or how low unemployment may be, we can count on at some point the economy will again turn downward. For this reason, it’s important that we protect ourselves from risks, like those that followed the subprime mortgage crisis, financial crisis, and Great Recession of the late 2000’s.

In an interview with USA Today, Mark Zandi, chief economist for Moody’s Analytics, explained, “It’s just the time when it feels like all is going fabulously that we make mistakes, we overreact, we over-borrow.”

Zandi also noted it usually requires more than letting our collective guard down to tip the economy into recession; something else has to act as a catalyst, like oil prices in 1990-91, the dotcom bubble in 2001 or the subprime mortgage crisis in 2006-07.

As the number of predictions indicating the next economic downturn could be closer than we think continues to rise, it’s more important to prepare yourself and your portfolio for a potential economic shift.

Three Tips for Safeguarding Your Construction Portfolio In the Event of an Economic Downturn

1. Proactively Stress Test Your Loan Portfolio
Advancements in technology have radically improved methods of stress testing, allowing lenders to reveal potential vulnerabilities within their loan portfolio to prevent potential issues. Technology is the key to unlocking this data for proactive stress testing and risk mitigation, including geotracking, project monitoring and customizable alerts.

Innovative construction loan technology allows lenders to monitor the risk potential of all asset-types, including loans secured by both consumer and commercial real estate. These insights help lenders pinpoint and mitigate potential risks before they harm the financial institution.

2. Increase Assets and Reduce Potential Risk While the Market’s Hot
If a potential market downturn is in fact on the horizon, now is the best time for lenders to shore up their loan portfolios and long-term, end loan commitments before things slow. This will help ensure the financial institution moves into the next downturn with a portfolio of healthy assets.

By utilizing modern technologies to bring manual processes online, lenders have the ability to grow their construction loan portfolio without absorbing the additional risk or adding additional administrative headcount. Construction loan administration software has the ability to increase a lender’s administrative capacity by as much as 300 percent and reduce the amount of time their administrative teams spend preparing reports by upwards of 80 percent. These efficiency and risk mitigation gains enable lenders to strike while the iron’s hot and effectively grow their portfolio to help offset the effects of a potential market downturn.

3. Be Prudent and Mindful When Structuring and Pricing End Loans
As interest rates continue to trend upward, it’s crucial that lenders price and structure their long-term debts with increased interest rates in mind. One of the perks of construction lending, especially in commercial real estate, is the opportunity to also secure long-term debt when the construction loan is converted into an end loan.

Due to fluctuations in interest rates, it’s important for financial institutions to carefully consider how long to commit to fixed rates. For lenders to prevent filling their portfolio with commercial loan assets that yield below average interest rates in the future, they may find it more prudent to schedule adjustable-rate real estate loans on more frequent rate adjustment schedules or opening rate negotiations with higher fixed rate offerings (while still remaining competitive and fairly priced, of course).

Though we can actively track past and potential future trends, it’s impossible to know for sure whether we are truly standing on the precipice of the next economic downturn.

“That’s one of the things that makes crises crises—they always surprise you somehow,” said Tony James, Vice Chairman or Blackstone Group, in an interview with CNBC.

No matter the current state of the economy, choosing to be prepared by proactively mitigating risk is always the best course of action for financial institutions to take. Modern lending technology enables lenders to make smart lending decisions and institute effective policies and procedures to safeguard the institution from the next economic downturn—no matter when it hits.

How One Top-Performing Bank Explains Its Remarkable Success


strategy-10-5-18.pngThe closer you look at U.S. Bancorp’s performance over the past decade, the more you’re left wondering how the nation’s fifth biggest commercial bank by assets has achieved its remarkable success.

Here are some highlights:

  • It was the most profitable bank on the KBW Bank Index for seven consecutive years after the financial crisis.
  • It emerged from the crisis with the highest debt rating among major banks.
  • Its employee engagement scores are consistently at the top of the industry.
  • It has been named one of the most ethical companies in the world for four consecutive years by the Ethisphere Institute.

How has the $461 billion bank based in Minneapolis, Minnesota, accomplished all this?

If you ask Kate Quinn, the bank’s vice chairman and chief administrative officer, the answer lies in its culture.

“There’s a reason that sayings like ‘culture eats strategy for lunch’ are stitched into pillows,” says Quinn.

Quinn doesn’t talk about U.S. Bancorp’s culture from a distance; since joining the bank in 2013 to oversee its rebranding campaign, she has led the charge on articulating and capturing the bank’s culture in a series of value and purpose statements.

“When I was starting to do the work of building the brand, I looked into the history of the company, its genealogy, to figure out our core attributes—the attributes our customers and employees associate with us,” says Quinn. “What I found was this unique thing about us. Any company can say ‘we bring our minds to our customers,’ but there aren’t many companies that can credibly say ‘we bring our hearts to our customers,’ and we can say that. It is real.”

Given that executives at all companies will tell you the same thing, the challenge is to differentiate between companies that pay lip service to these ideals and those that genuinely embrace them.

“The real insight you get about a banker is how they bank,” Warren Buffett has said in the past. “Their speeches don’t make any difference. It’s what they do and what they don’t do [that defines their greatness].”

One way to gauge what a bank does and doesn’t do is to look at its financial performance over an extended period of time. It’s an imperfect proxy, admittedly, but a revealing one nonetheless, as businesses built on unethical or immoral foundations simply aren’t sustainable. At one point or another, the chickens always come home to roost—just ask Wells Fargo & Co.

This is why U.S. Bancorp’s performance, since its current leadership took control of Cincinnati-based Star Banc in 1993, is so significant. It didn’t commit mishaps that caused it to fall prey to a larger competitor in the consolidation cycle of the 1990s. A decade later, it sidestepped the accounting scandals surrounding Enron, WorldCom, Tyco and others that tarnished the images of so many bigger banks. And it steered clear of the worst excesses in the mortgage and securities markets in the lead-up to the financial crisis.

Anyone who knows U.S. Bancorp’s former chairman and CEO Richard Davis will tell you that he embodied principled leadership, adopting an approach that wasn’t only ethical and rational, but also one that embraced balance. He never sent emails to his employees at night, for instance, because he didn’t want to interfere with their home lives. He was also known to call his employees’ parents on their birthdays.

When it came to bottling U.S. Bancorp’s culture, then, one of Quinn’s objectives was to capture Davis’ approach.

“As I was getting my head around what do we do and what are we trying to do, I realized that it isn’t about the products and services,” says Quinn. “When you think about what a bank does—and this came from Richard—it’s really about powering human potential. I told him that I wanted to build his DNA into the company—the culture, the purpose, the core values. That is the part of Richard that has become the fabric of this company.”

But Davis’ influence is just one element of U.S. Bancorp’s broader culture. Other elements come from Davis’ predecessor and successor.

His predecessor, Jerry Grundhofer, was a tactical operator with few equals. He was the dean of efficiency, one of the valedictorians of banking throughout the 1990s.

“Jerry brought a set of values and capabilities to the company that was needed—scrappiness, cut to the chase, financial discipline,” says Quinn. “When Richard came in, he didn’t change that piece of it, he built on top of what Jerry did by adding the human dimension. Jerry had always put the shareholders first. Richard came in and put the employees at the top.”

The same is true of Davis’ successor, the bank’s current chairman and CEO, Andy Cecere, who adds another element into the mix. Cecere’s reputation is that of a practical innovator who’s pushing the bank to focus on change, innovation and technology. His favorite presentation slides, for example, compare the Old Western TV series Bonanza to the Jetsons.

Again, things like this are easy to dismiss as vacuous corporate-speak. But one lesson you learn after spending enough time with top-performing bank CEOs is that just because something sounds trite doesn’t mean it isn’t true.

Quinn understands that. It’s why she’s writing these cultural attributes into U.S. Bancorp’s DNA with revamped value and purpose statements. Facile notions of efficiency and operating leverage may excite analysts on quarterly conference calls, but the true source of U.S. Bancorp’s competitive advantage lies in its commitment to doing what’s right.

Knowing When It’s Time to Sell


nash.pngWhen the board of Citizens Republic Bancorp named Cathy Nash president and chief executive officer in early 2009, shortly after the bank recorded a nearly $400 million annual loss, she knew it would be an uphill battle. The then-$13-billion asset bank holding company based in Flint, Michigan, was grappling with bad loans and the results of a disappointing acquisition of Republic Bancorp in 2006.

Within months, she had to face angry shareholders whose stock had tanked and were demanding to know why she didn’t recover the departing CEO’s millions in pay and pension benefits.

“It was a contract and I was going to lose,’’ she explained during an interview recently. Instead of focusing on the past, she decided to forge ahead with her plan: rebuild pre-tax pre-provision profits so that after Citizens had dealt with its bad loans, it would have a strong core banking business at the other end of the economic cycle. The strategy worked. Citizens returned to profitability six quarters ago.

On the other hand, economic and political forces had other ideas.

By the summer of 2011, Nash had begun to see the writing on the wall. The Federal Reserve had stated publicly that it intended to keep interest rates low until 2013 (the Fed later said it would keep rates low through 2015) and organic loan growth was slim. Plus, the bank was near the $10 billion asset threshold where it would start getting regulated by the new Consumer Financial Protection Bureau and also see interchange fees from debit cards cut in half under provisions of the Durbin Amendment.

Nash and her management team modeled different financial scenarios. The cost of capital was 12 percent, and the bank would need to get a better than 10 percent return for shareholders, Nash says. In the second quarter of 2011, the bank’s return on average equity was 10.5 percent (it has since fallen) and its return on average assets was 1 percent. The net interest margin was 3.56 percent.

The bank had slimmed down during the crisis to $9 billion in assets, but it would need to quickly get to at least $12 billion if it wanted to return a reasonable profit to shareholders. Strategic planning sessions in 2011 with the board analyzed the prospects: could the bank acquire another bank? It could take a year to get regulatory approval as a new acquirer with a new management team, Nash says. Could the bank increase fee income? Could it shrink its branch system and use the savings to reinvest in the bank? The board decided to look around and see if there were any possible combinations with other banks.

By the spring of this year, not much had changed. The bank was trying to figure out how to buy back its $345 million of TARP preferred stock from the government. Raising common equity would dilute shareholders.

Nash says she went to Citizens Chairman James Wolohan and told him she didn’t see a way clear in the current economy.

“We cut this in every way we could to not come to this conclusion that we needed a partner,’’ she says. “But my job is to offer my shareholders the best long-term returns I can give them. You have to fish or cut bait here.”

The bank was in a strong position to sell. It was profitable and well capitalized. It had exited a consent order with regulators. It had dealt with its problem loans and the bank was on strong financial footing.

The deal with Akron, Ohio-based FirstMerit Corp. was announced in September as a stock-for-stock exchange worth $912 million at the time of the announcement, with Citizens’ shareholders receiving 1.37 shares of FirstMerit stock for each share of Citizens. The price to Citizens’ tangible book value at the time of the announcement was 130 percent, according to SNL Financial.

The combined entity would have $24 billion in assets across five Midwestern states, 415 branches and more than 5,000 employees. There was little geographic overlap and FirstMerit had been looking to expand in Michigan and Wisconsin, Wolohan said in an interview.Nash believes that the combination, which is expected to close in the second quarter, will deliver significant value for shareholders, while allowing them to participate in “tremendous” upside potential of a stronger bank with increased scale.

The stock market wasn’t as enthusiastic, and both banks have seen share prices fall since the announcement. Citizens’ stock price has fallen to less than $18 per share from about $20 shortly before the announcement.

Nash says she can’t control the stock market.

Wolohan agrees.

“We feel very good about the opportunity with FirstMerit,’’ he says. “It’s just a terrific organization. Paul Greig is just a terrific CEO. It’s a strong franchise. It’s a top quartile bank in terms of financial performance the last five years. It pushed through the financial crisis with continued profitability and continued to pay a very nice dividend.”

For Nash, she’s likely negotiated her way out of a job. Greig won’t need a second CEO on staff.  And instead of feeling sorry for herself, she noted that many members of her team had made significant sacrifices to strengthen the organization during the last few years.

“Many of them know they are not likely to have a job,’’ she says. “We’ve all been through this before. These are the people who made sure we had value to give to FirstMerit and they’re going to end up without a seat at the table.”

Still, she’s adamant she’s done the right thing.

“I still believe we’ve made the best long-term recommendation for our shareholders,’’ she says.


To hear more from Cathy Nash, check out this video from her keynote presentation from Bank Director’s 2012 Bank Executive & Board Compensation Conference.

How Risk Management Is Changing


One inescapable truth about the post financial crisis: far more sophisticated, future-focused risk management is required going forward. New capital—and good business sense—demand it.

human-camera.jpgWhat does this have to do with credit culture, often associated with the practice of making sound loans? A great deal, at least as banking evolves beyond the financial crisis. To accomplish this requires a changed mindset, and credit culture is largely a mindset. Despite its traditionally esoteric nature, credit culture must not only be felt but enumerated. No longer should the former Supreme Court Justice Potter Stewart’s famous line about knowing obscenity when you see it be operative in defining your bank’s credit culture. To define credit culture, this leads us to the spectrum of qualitative versus quantitative, concepts known to every lender and credit officer. We believe it’s time to take this dichotomy beyond classic credit analysis, which most of us think of when hearing those terms, and project it onto the broader spectrum of optimal, future bank-wide portfolio risk management.   

Qualitative analysis implies subjective judgment—and in the greater scheme of things can also encompass the transactional, tedious loan-by-loan assessment of risk. We know transactional risk sensitivity is particularly important in relationship to the size of the bank. If one big loan goes down, that can have a huge impact on a small bank, for example. On the other end of the spectrum, which we can label quantitative, we have aggregated portfolio risk assessment, often combined with financial models used to predict outcomes. Many believe excessive dependence on modeling lead to the financial crisis in the first place.

Therefore, one could argue that on one end of the spectrum of optimal credit risk management, we have transactional risk (individual loan analyses and servicing) and on the other end, aggregated risk (modeling and forecasting). Worshiping exclusively on either end of the spectrum is problematic. Understanding only individual loan risks is like losing sight of the forest for the trees. And at the other end, we all know models are only as good as the integrity of what informs them (i.e., the transaction-based discreet data points, tediously mined from underwriting). There’s a sweet spot somewhere between the two polar opposites. But in the end, there must be a bottom line, a sum of all the parts to accurately project a bank’s risk profile, both present and future. Each stakeholder needs that profile depicted in summary fashion.              

How does one accomplish this blending of the theoretical qualitative and quantitative disciplines? Ideally, a bank should begin with an underwriting process that ensures adherence to its policies and guidelines—while cataloguing exceptions. Concurrently, it needs to have a complementary process that aggregates the individual loan data, and performs multiple portfolio-wide tasks, including stress testing, and calculating the allowance for loan and lease losses (ALLL), risk grade migration and potential credit losses (beyond the reserves), etc. Products have been developed to perform these tasks, on both ends of the spectrum, and frankly at costs far less than what some of the national providers of analytic tools are quoting.   

Lastly, much of credit culture jargon is historically, or backward- focused. That leads to statements such as “We grew this much in loans,” or “We had this percentage of past dues,” or “Our yield improved to this.” Regulators and investors read the call report. They are focused more on the future, as bank boards and management should be.  Boards need to ask questions such as, “Where are we trending in the various quality, growth, and profitability measures?” or “Where’s the next bubble in the portfolio?” or “Where will our non-performing loans likely be in one year?”

Success in banking going forward will be defined largely by institutions’ shifting from this traditionally historic to a forward-looking focus—and not just within a strategic planning or budgeting context—but embedded in the credit culture itself.  Simply put bank management and boards will have to be as conversant in PD (probabilities of default) and EL (expected losses) as traditional acronyms such as DSC (debt service coverage) and LTV (loan-to-value) ratios. With the widely anticipated high level of bank mergers and acquisition activity in the next few years, an additional premium will be placed on being informed and credible with these more macro and predictive concepts. They don’t replace the old reliable transactional measures; they just partner with them to quantify the risk going forward. The investors, the regulators—and common sense bank management—will mandate this.