Western Independent Banker - March/April 2009 - (Page 27)

The sooner a bank can detect risks such as problem assets, over-concentrations to higher risk loan categories and negative microeconomic trends (e.g., local employers under fi nancial pressure, increase in bankruptcy fi lings, median income decreasing), the faster and better it can react appropriately. Investors want to know that the bank has sufficient liquidity and capital to manage through economic cycles. Banking is a confidence-sensitive business and institutions should maintain adequate liquidity, capital and access to funds to meet all obligations as they come due, without disrupting the daily business. Active asset-liability management is essential in assessing a bank’s interest rate risk and exposure to changing asset prices. Investors want to know that a bank’s liability structure is continuously adjusted to match changes in asset composition, and makes efficient use of all funding sources. Also, the cash flow element to bank management (e.g., stable pre-provision income) must be sustainable to ensure ongoing operations and provide for loan loss absorption. Is the bank analyzing the crossover between borrowers and depositors (i.e., requiring that more funds be deposited by loan customers)? Investors want to know that a bank invests in its credit monitoring and workout processes. Proper oversight of the loan portfolio, including close client relationships and updating fi nancial information, leads to the early identification of asset quality problems. Strict oversight can help reduce the severity of potential credit losses in the portfolio, as can a capable asset workout team. When did the bank last review LTVs and asset coverage on real estate and other collateralized loans? Has the bank recently verified the fi nancial standing of its borrowers and updated its loan collateral coverage? Investors think about these points now more than ever and are trying to assess the effectiveness of a bank’s monitoring process in managing risk. Once there is an emergency, make sure you act immediately and prepare to survive. Management should take Western Independent Banker March/April 2009 every precaution to survive a credit or liquidity emergency, because you will only know what was actually necessary after the emergency ends. This lesson is very clear to investors: make sure you have sufficient capital and liquidity to support unexpected losses and diminished access to capital. Shockingly, even after the market began to crack, many bank management teams seemed unwilling to acknowledge the stress and take the necessary precautions. We have heard management teams say “asset quality is fine and we are already well reserved” or “we only need this amount of capital,” when to an outsider it was clear that the bank would need substantial capital. Banks that insist they are not headed for an emergency, and therefore are not preparing for trouble, will turn off prospective investors. Investors respond better to a management team that expresses a sense of realism, and explains the proactive steps they are taking to address the market stress, less you risk loosing investor confidence. In summary, private equity investors are looking for one of two types of investments: (1) inexpensive banks that require restructuring, substantial capital and replacement of management, or (2) well managed banks that can weather difficult markets and gain market share when other competitors are floundering. You do not want to be the fi rst type of bank, but rather strive to become the second type by being prepared for the unexpected emergency, ensuring your risk management systems are current and in working order and demonstrating to investors that if an emergency occurs, your bank is “equipped” to take action to ensure survival. Investors will respond favorably if you demonstrate that you are realistic about the situation and proactively preparing for what could potentially be a difficult time for your bank. Joshua S. Siegel is the managing principal of StoneCastle Partners, LLC (www. stonecastlepartners.com), a non-control private equity investor specializing in community banks throughout the United States. He can be reached in 212-354-6500 or at jsiegel@stonecastlepartners.com. continued from page 25 significant profit potential or with strong “annuity stream” revenues (e.g. from fees, core deposits, other recurring “relationship driven” revenues), diversified customers, and strong credit portfolios and asset/liability management. • Opportunity to improve operations. Operating metrics that can be improved (NIM, non-interest income, efficiency ratio) to best-in-class levels with disciplined revenue and cost strategies. • Outstanding executive team. Typically proven executives with a strong focus on value creation; can be existing management, or new management teams introduced by Belvedere to build franchise value. • Attractive buy-in price. Belvedere seeks attractive buy-in prices through creative deal structuring, privileged access to deal flow, and its unique position as a financial investor with bank holding company status. In addition, the large majority of Belvedere’s transactions are sole-sourced directly by the firm and Belvedere will rarely engage in auction processes. • Many liquidity alternatives. Belvedere typically seeks to sell an investment when the value of the bank is greatest, typically five to seven years from the initial investment. Each of the characteristics above can help to generate exit alternatives, such as a sale to a strategic investor, a public offering or through a recapitalization process. These characteristics have been at the core of Belvedere’s community bank investments over the past 15 years. Now is an exceptional time to be investing in the community banking sector and working with management teams to build valuable franchises. Alison Davis is managing partner for Belvedere Capital in San Francisco. She can be reached at 415-434-1236 or adavis@belvederecapital.com. 27 http://www.stonecastlepartners.com http://www.stonecastlepartners.com

Table of Contents Feed for the Digital Edition of Western Independent Banker - March/April 2009

Western Independent Banker - March/April 2009 Contents A Message from the President & CEO Profitable Liquidity: Yes, You Can Non-Performing Assets: The Keep Versus Sell Decision Is BOLI the Way to Go? The Troubled Asset Relief Program and Its Eff ect on Executive Compensation TARP Money or Not, Secondary Offerings Belong in Your Plan 52nd Annual Conference Private Equity: Another Capital Option Strengthening Your Bank’s Bottom Line by Adapting to Difficult Times Managing Your Branch Network Capital Dealing with a Hard Insurance Market WIB Service Corporation Report WIB Calendar New Members Index of Advertisers Advertiser.com

Western Independent Banker - March/April 2009

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