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Survival of the Fittest

By: Bill Poquette, Kari Taylor

It began with this sober assessment by American Bankers Association President and CEO Ed Yingling: “We are all engaged in the determining fight for the future of the banking industry.” During a panel discussion by ABA leaders at the opening session of the association’s National Conference for Community Bankers last month in Phoenix, Yingling raised the specter of legislation that will be 10 times more onerous than Gramm-Leach-Bliley and make Sarbanes-Oxley look small.

Then Yingling sounded a battle cry that could have served as a theme for the rest of the conference. “There are tremendous misunderstandings about what’s going on,” he said, and there is a four-part message bankers must help get across to Congress, the media and their communities:

From there the conference took on a positive — almost defiant, “we didn’t do it” —tone, as speakers in general and special interest sessions explored growth and profit strategies for community banks in the face of the pummeling the industry is taking from the media and Congress.

One of the keynote speakers, Forbes Publisher Rich Karlgaard, suggested the current downturn is more like 1973–1974 than the Great depression of the 1930s. The 1970s had an upside, he pointed out, in that it might have been the best entrepreneurial decade of the 20th Century, spawning such success stories as Microsoft, Southwest Airlines, Apple, Genentech and Oracle.

“I think it will happen again,” he said, and suggested that small and mid-size cities can benefit when entrepreneurial types team up with cooperative bankers, citing Duluth, Minn., and Bozeman, Mont., as places where the strategy has worked well.

In more than a dozen special interest sessions, the ABA community bankers heard about ways to enhance performance even in a troubled economy. Massachusetts-based South Shore Savings Bank, for example, is taking advantage of changes last year in FHA rules to expand its mortgage business.

With conventional mortgage lenders tightening underwriting standards and requiring larger down payments, and private mortgage insurers tightening their guidelines, FHA may be the only viable alternative for many borrowers, particularly first-time home buyers, said Chris Dunn, executive vice president and chief operating officer of South Shore Savings.

“We are not willing to concede this business to the mortgage bankers and brokers,” he said.

Key FHA loan features, he pointed out, are low down payments — 3.5 percent for purchase transactions; cash-out refinances; no minimum credit score; non-traditional credit; non-occupant co-borrowers; and no pre-payment penalties. Positive changes in the FHA reform package, he added, include simplified appraisal and down payment requirements; simplified closing costs along with customary reasonable fees and costs; higher overall loan limits and higher limits for high-cost loan housing markets; elimination of many repair requirements.

In a session on board and management succession, it was pointed out that this was ranked as a top issue for both public and private companies three years in a row in surveys by the National Association of Corporate Directors. Major concerns today, according to Susan O’Donnell of Pearl Meyer & Partners, are CEO tenures are down, with 40 percent of top leaders failing in the first 18 months; we are in a highly competitive business environment; and we have an aging work force and many retirements.

The risks of not having a continuity plan, she pointed out, include loss of continuity and productivity, stress on business, reduced employee morale, negative impact on revenue, and shareholder concerns.

Likening succession planning to strategic planning, O’Donnell suggested aligning leadership criteria with the future vision, strategy and goals of the bank; not focusing on what’s been successful in the past, as the future may require different skills and capabilities; thinking 3–5 years out; and brainstorming the strategy and leadership needs on a regular basis.

Regulators expect a more formal contingency funding plan that integrates with other risk management systems, according to Michael Guglielmo, managing director at Darling Consulting Group in Newburyport, Mass. He told attendees to his session on liquidity that they must be prepared to explain and justify their actions to the regulators.

Guglielmo suggested bankers determine how much liquidity they have and how much they need, then create an early warning system, such as a scorecard, and stress test different liquidity scenarios. Guglielmo suggested that there should be an outlined response from management and these processes should be documented.

According to Guglielmo, the warning system should include key warning signals or risk indicators (triggers); it should be institution specific; it should match the bank’s operating activities and philosophies; management should take into consideration both local and national market elements; and it should be commensurate with complexity of balance sheet/risk profile.

The liquidity scorecard should include loan vs. investment collateral levels; deposit trends (compared to loan growth), municipal, retail repos; forced asset sales at losses/impairment, asset quality, which includes cash flow, loss provisions and net operating losses; and the deteriorating condition of the balance sheet.

Maximizing your current technology investment was part of a session by Eric Hoghaug, marketing director at My Rewards. Hoghaug asked how many attendees offer remote deposit capture. Several people raised their hands. Then Hoghaug asked how many of those offering RDC are tracking the number of customers they are stealing from the competition because of RDC? Few bankers raised their hands. Similarly, Hoghaug asked how many attendees have an account acquisition strategy. Again, several people raised their hands. Then he asked what percentage of the accounts are active. No one in the audience volunteered an answer.

Hoghaug explained that community banks typically use between 30 percent and 50 percent of their existing technology, but high-performing banks use between 65 percent to 80 percent of their existing technology.

Before purchasing more technology, Hoghaug suggested bankers look at the current processes and structure to see whether the old system’s parameters and work flows have merely been layered on top of the new system. He said to make sure the original reasons for implementing the technology are being realized, and ask if your current vendors trained your employees on fully using the technology.

Nearly 1,000 bankers, vendors and guests were registered for the conference Feb. 15–18. The 2010 conference is scheduled for Feb. 21–24 at the Westin Diplomat in Hollywood, Fla.

Click here to view photos from the conference

Bill Poquette is editor-in-chief of BankNews and Kari Taylor is associate editor.

Copyright © March 2009 BankNews Publications