Banking quandary: Sell, merge, go it alone – what’s your strategic plan? | submitted by John T. Reichert
Bank executives and directors have a lot to think about in light of the current state of the banking industry. If you’re in the majority, your bank has been downgraded during the past 18 months, and you probably have a Memorandum of Understanding, Consent Order, or other enforcement action. You are probably struggling with asset quality issues, and losses and reserve allocations are making net income and a meaningful ROA elusive.
For many, the challenges don’t end there – you also have to take that baggage into this market and attempt to raise capital to reach constantly changing capital target ratios (for many, now 9 percent Tier One and 12 percent total risk-based). Oh, and don’t forget about the uncertain costs and burdens of Dodd-Frank and the Consumer Financial Protection Bureau.
Fatigued, exasperated, and unsure of how to tackle these challenges over the next three to five years? You’re not alone. What you and your board do in 2011 may determine whether you control your future or whether it’s dictated by your regulators, your shareholders, or worse, your competitors. Every bank in this state should have a written, well-reasoned, and realistic strategic plan that addresses certain issues and articulates how the bank will position itself over the next one, three, and five years. Such a plan should establish goals for asset growth, capital levels, and net income, but also contain steps and contingencies to address how you will achieve these targets. If you have followed and updated such a plan, it will buy you time and increase your credibility with your regulators and shareholders.
Perhaps equally important, a meaningful strategic plan will help you evaluate potential strategic opportunities and assess the franchise value and potential return to shareholders that will result from the three most likely scenarios: sell, merge, or remain independent.
Consider how you would answer the following questions with regard to your bank and whether you’re comfortable with your response:
• Do you have appropriate resources to properly work through troubled credits and non-performing assets? (Follow-up: Will you need more or fewer resources devoted to these challenges between now and 2014?)
• Where will the growth come from in 2011, 2012, and beyond? (Follow-up: Are you expecting the same staff to handle workouts, nurture existing relationships, and cultivate new ones? To do those jobs well typically requires very different skills and mindsets.)
• Is your board sufficiently engaged and does it offer the necessary skills and perspectives to help you navigate your current and upcoming challenges? (Follow-up: Are you doing a good job of adding new directors to the board and transitioning out directors once their contributions decrease?)
• How much longer do you want to run the bank, and do you have a well-defined succession plan? (Follow-up: Would the shareholders’ interests be protected if something happened to you or one of your key lieutenants?)
• Does your bank have the critical mass necessary to ensure that you have a realistic chance of maintaining appropriate compliance and credit programs, while still offering a meaningful return to shareholders? (Follow-up: Are you this size now? If not, how will you get there? Where will the capital come from to support your growth?)
• With new laws and regulations dictating and limiting the various products, fees, and rates banks can deploy and increasingly fierce competition for the shrinking number of creditworthy borrowers and core deposits, how will you grow revenue in the coming years?
• Will your bank (and its shareholders, employees, and customers) be best served if you remain independent, sell, or partner with one or more similarly situated banks?
If you and your board discuss and answer these questions, you are well on your way to having a meaningful strategic plan. Bankers who can quickly and concisely articulate responses to these questions will have a competitive advantage in attracting investors and customers and will be able to proactively manage the various relationships with regulators.
Attorney John T. Reichert is a member of the Financial Institutions Practice Group at Godfrey & Kahn, S.C.
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