You have to sell your target on your viability

 

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The recently published FDIC tabulation of problem banks at Sept. 30, 2010, reflected a continuation of a three-year-old trend of increasing numbers. The list now contains 860 problem banks, the highest level in 17 years. Increasing also was the number of relatively small institutions represented on the list, compared to larger ones. Larger banks appear to be healing from the effects of the recession more quickly, owing primarily to smaller concentrations of real-estate-related loans and their ability to more easily access markets for liquidity and capital.

 

These statistics confirm what I've been hearing from bankers for the last several quarters-namely that smaller institutions seem, increasingly, to be becoming an endangered species.

 

This is due to relentlessly increasing regulatory burdens and a cloudy outlook for community banks. The continued outlook for compressed net interest margins and difficulties in competing with larger, broadly diversified, and well-funded banks of regional and national operational scope appear to be the root causes of these concerns.

 

Knowing where your future lies

Industry observers and participants are raising questions about the long-term viability of smaller institutions, those lacking resources to compete on the basis of scale or lacking an increasingly specific geographical or product-specific niche.

 

This growing gap between large and small raises interesting opportunities among those banks that, while relatively small, do have the resources to mount and execute effective competitive strategies against companies of much larger size and scope. This perhaps begs the question of what we mean by "big" and "small." 

 

For the sake of this discussion, I'd like to emphasize the potential opportunities for banks in the $3 billion to $10 billion asset range, though special circumstances may well exist for banks larger or smaller than the limits of this size range.

 

Many community bank managements and ownership groups are reluctantly concluding that shareholder value may be preserved or enhanced by strategically merging with a larger partner. By choosing a successor organization, the thinking goes, the acquired bank may have a more prominent role in the long-term strategy of the combined institution and be able to choose a company that is more in line with its culture to include both the bank itself and the needs and expectations of its customer base.

 

From the point of view of the surviving institution, the real opportunity that the marketplace will present over the next few years is how to be viewed as an "acquiror of choice."  And this presents two challenges:

 

• What can the present ownership and management do to enhance its reputation as a desirable merger partner? 

 

• How can it avoid or more readily overcome many of the early obstacles to a smooth blending of cultures and strategic views?

 

Becoming an "acquiror of choice"

Here's a short list of what I think it will take to be a credible long-term survivor as an independent banking company and to be an "acquiror of choice."

 

1. Management quality and depth:

One of the most prominent, but least discussed, factors that influence a decision to merge is the perceived lack of management succession.

 

It's not just body count or experience of the top person that's important here. It's the strategic "gestalt" or view from the top of what it takes to survive as an independent banking company in an environment increasingly dominated by giants.

 

This is most often characterized by an organizational chart that fits the business model, current and prospective, rather than one that's crafted around particular individuals with their unique strengths, shortcomings, and experience.

 

2. Culture of quality:

Quality comes in many forms.

 

And they are all important.

 

They include the quality of the assets; the quality of the product line and processes; the quality of the execution of the business plan; and the quality of the staff that cumulatively flows from good hiring decisions and a firm commitment to training and career development.

 

3. Values driven:

These are the forces that animate the enterprise.

 

They represent the core principles of the organization. They include a deep and consistent respect for the individual; a commitment to personal integrity; and a sense of accountability for one's actions.

 

Most companies have their unique mission, vision, and values statements.

 

But it's a much smaller number of them that actually succeed in walking the talk.

 

4. Results oriented:

Most bank managements aspire to do well and perform for their shareholders in a credible fashion in terms of financial results.

 

It's the relatively rare company that has the internal discipline within its management ranks needed to consistently score in the upper percentiles of performance against peer.

 

Anything that interferes with sustainable, replicable performance of a high order is a form of organizational risk. Truly high-performance managements have a collective aversion to any form of organizational risk.

 

People-and improving their skills-rank as fundamental

This is my short list based on a long banking career as lender and community bank CEO, and informed over the years by my work in training and development through both internal programs and formalized continuing banker education.

 

Perhaps the most visible and important of all of these is the commitment (and the results of that commitment implemented consistently over time) to staff development.

 

A well-trained and educated staff is a more-loyal one and a more-productive one. A unified development process enhances and reinforces internal culture, particularly in the realm of asset quality and sales results.

 

Time for self-assessment

So, now that I've set out the criteria, which side of the equation do you find your bank on?

 

Do you see your bank measuring up as an acquiror of choice? 

 

Or do you see your bank as a victim of circumstance and perhaps neglect, benign or intentional, of contrary and contradictory forces that have caused so much pain and dysfunction in recent years? 

 

It's not too late to charter a different course that can produce a happier outcome.

 

About Ed O'Leary:

Veteran lender and workout expert O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending.

    O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools.
    Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and a frequent speaker in ABA's Bank Director Telephone Briefing series. You can hear free audio interviews with Ed about workouts here. You can e-mail him at etoleary@att.net. O'Leary's website can be found at www.etoleary.com.