Skip to site content

News & Insights

Podcast

Advisors offer legal, operational tips for banks looking ahead to 2021

In this episode, we discuss the current state of affairs for banks considering the effects of the pandemic and the fast-approaching presidential election. We focus on a few key areas. First, what is happening in the economy and how that is impacting banks. Second, how banks can embark upon the strategic planning process amid all these challenges and third implementing that plan. Today guests are Wes Scott and Kevin Tran, attorneys in Waller's corporate transactions practice group who work with a variety of financial institutions, and Jim Adkins from Artisan Advisors, a firm led by former bank CEOs that work with clients to navigate an increasingly complex operating and regulatory environment. 

Here is a transcript of the conversation:

Morgan Ribeiro 

Welcome to PointByPoint. This is Waller's Chief Business Development Officer and the host of the podcast, Morgan Ribeiro. On today's episode, I am joined by Wes Scott and Kevin Tran, attorneys in Waller's corporate transactions practice group who work with a variety of financial institutions, and Jim Adkins from Artisan Advisors, a firm led by former bank CEOs that work with clients to navigate an increasingly complex operating and regulatory environment. Welcome to the show, everyone. Today, we are going to discuss the current state of affairs for banks considering the effects of the pandemic and the fast-approaching presidential election. Obviously, this is a lot to cover. It's a big topic. So we will focus on a few key areas. First, what is happening in the economy and how that is particularly impacting banks. Second, how banks can embark upon the strategic planning process and third implementing that plan. To kick things off, I'd like to hear from each of you to better understand what the last six months or so has looked like for you and advising your bank clients. So Wes, I'll start with you.

Wes Scott 

As a capital markets and securities lawyer by trade, I tend to view the last six months in terms of three different buckets. One would be mergers and acquisitions, two would be the capital markets and offering work and three would be SEC reporting and compliance work. I would say what I've seen in the last six months is M&A has largely dropped off the table. Not seeing new deals hiring out, not seeing a lot of M&A activity continuing that wasn't close to the finish line before COVID hit and clamped the economy down. With respect to our framework, however, by the contrary, we are seeing quite a bit of activity in the capital market space. A number of offerings across our desk on a daily basis, whether we represent on the issuer side or as investors. Frequently, we will opine as to matters with respect to other placement agencies, banks, investment banks, but we're seeing quite a few offerings in those phases right now. Primarily senior debt, some of that and some variation of preferred depositary shares with respect to SEC reporting work. That is what I like to refer to as the "show must go on." The SEC has not granted any real reprieve for registrants and reporters during the pandemic. Rather, they actually ramped up their disclosure requirements for all issuers during this time. In fact, they released several different statements, in which case we've had to counsel our clients regularly regarding COVID, its impact and how those real-life operational impacts flow through to their reports into the marketplace. That all being said, while we are seeing an uptick in offering work, and part of the daily grind in respect to reporting work, I think, largely as much as banks want to talk to lawyers, really right now, I think they're focused on the blocking and tackling of running a successful bank. Two basic tenets, winning the creditworthy borrowers, gathering a deposit base where they can get it. So at this point, we're just trying to help our clients get through this and get out the back end successfully and in a sound capital position.

Jim Adkins 

Yeah, I think Wes hit some very good points. This has been an incredible six months for the banks. I mean, they have had to deal with their own balance sheets, they've had to deal with learning to keep employees safe during this time period, they've learned to deliver products during this time period. So it's one of those that you're going to tell your grandchildren about - this six month period. And going forward, we will have remaining challenges. But I think one of the biggest things that the banks have had to do is to learn how to deliver products in a new way. And it's been amazing to me, my clients, how creative they've been, some have gone to concierge services and drive-up appointments and just ramped up all sorts of technological capabilities that in many cases, I don't think they really understood how they worked. And so the banks have just done a yeoman's job. And on top of all this, besides dealing with internal issues and customer issues, don't forget the banks were a big part of the PPP program. And so as to help the country get through this pandemic, community banks really picked it up. Not only community banks, but all sized banks, the banking industry really picked it up and delivered tremendous value to the country to get through this pandemic. So it's one for the ages. And I think that's why, I'm very proud of the banking industry, to be honest with you, that they've done this, and I think they've grown tremendously and so it'll be really interesting to see how we go in 2021.

Morgan Ribeiro 

Kevin, your background and the work that you do with your financial services clients is more so on the regulatory front, I'd love to hear from you on what you've seen over the last six months or so.

Kevin Tran 

No, absolutely. Thank you again for having me. I want to build on Jim's comment about PPP and how involved banks are on in that program. Over the past six months, I think a lot of banks have been trying to navigate, not just PPP, but pretty much all of the emergency relief that the regulators have provided through Congress, and a lot of that took the form of separate lending facility. And each of these facilities has their own gauntlet of regulations and terms that a lot of banks had to really understand themselves and make sure that their borrowers and customers understood as well. And there was another consideration of - given all of these requirements put forth by regulators - is it even worth our time to participate in certain programs. The PPP was a little different because all of the loans were forgiven, but in other lending facilities like the Main Street Program, that certainly wasn't the case. Each of these lending facilities had enough variation in terms that banks had to be really thoughtful about how they approached these programs. And since that's been dominating a lot of banks for the past six months, recently, you can get a sense that they're somewhat tired of this process, and understandably so. I mean, they've been devoting a lot of their time day in and day out dealing with these programs. Despite the fatigue, though, I think there's some excitement that eventually dealing with PPP dealing with a lot of this emergency relief goes away. And they have to go back to not only the traditional business of banking but given all the things they've learned implemented over the course of the past six months like Jim indicated, how are they planning to innovate, especially given the what the regulatory landscape how that shakes out post-election?

Morgan Ribeiro 

Jim? So I want to go back to, you were mentioning obviously, this is such a historic time and the banking industry and something that we'll look back on for decades, Artisan Advisors has recently launched a series of webinars titled "Survive or Thrive," where you cover topics and explore key issues facing community bankers as they work to survive or thrive in this post-pandemic economy. Can you give us just a quick overview of the topics that you have covered in the first two episodes and generally what you're hearing from banks in terms of the lay of the land?

Jim Adkins 

We felt it was important to put this out because a lot of our clients have these questions. The reason we did this was because our clients were really coming to us and asking these questions. And so we decided, let's make a seminar series out of this. But in the first one, we wanted to lay the groundwork to set the stage. We wanted to show everybody, here's where we are, here's the shape of the economy, here's the shape of the industry. And this is the lay of the land that we have to look at, and what are the expectations of the experts and the soothsayers around the country of what's going to happen in 2021. So the first hour was kind of an economics presentation of where we are. So with that in mind, we wanted to build on that first one, and go to the second one, which was starting the strategic planning process during a downturn. When you're doing your own planning, you have to have a thesis of what your future is going to look like. In the second one, we encourage institutions to come up with their own thesis, what do you think the economy is going to look like? It may be different for me, I may think it's going to look like this, or I may think the industry is going to go through a different type of process or a different kind of road. But you have to come up your bank has to come up with its thesis, how does it perceive what it's going to do? And then the other thing that we try to handle in the second one is strategic planning in a downturn because I think most experts think we're going to have a difficult 2021. It's a matter of how difficult how does that differ in a downturn? How does it look normally in a lot of banks will do this, they'll fall into a little bit of a routine when they strategic plan. Okay, we got to get our plan done. Let's get it ratified. And we're done for one year. Well, that certainly shouldn't be the way it is anyway. But definitely in 2020-21, it shouldn't be like that, because you have a very serious and very difficult road ahead in my opinion. As a banker, you have to come up with that. And so that second seminar series talks about coming up with your own outlook. And then it explores also why could that be different if you're challenged capital-wise, your strategic plans gonna look different than if you have if you're sitting on a lot of dry powder. So we talked about that issue? We also talked about regulatory issues, how do the regulators' attitudes change and how do their actions change? Certainly, we change, the banks change and do different things in a period of downturn, the regulators are the same way. They're gonna change their attitude, they may become less agreeable at some point. They may not want you to change and do something very different with your plan. So there's a lot of things that the regulators can do. And then we also talked about what opportunities there might be for you. Because in adversity, there are opportunities. And we will see some banks take advantage. And I don't mean that in a negative way, but take advantage of vacuums that other banks are not filling. And I think that's important. So we talked about that. And then we talked again, about capital planning in a downturn. So those are the first two, the next two we're going to talk about the third one that we're going to be doing with Waller is: Are you ready? Do you think you're ready? And we're going to explore that question. And then, of course, the last one, we'll talk about the election, which we're all very excited about introduced, interested to see how that will do.

Morgan Ribeiro 

So you recommend that financial institutions go through a SWOT analysis, and in light of their view of the economic condition of the U.S. economy and the banking industry over the next 12 to 24 months or so, considering the effects of the pandemic and just the number of unknowns, the election being one of those unknowns? How should banks analyze and prepare for the future?

Jim Adkins 

You have to have a really good self-assessment. It has to be brutally honest. You have to go through your strengths, your weaknesses, assess what opportunities could be out there. And certainly the threats, one thing that a pandemic or any kind of variable, any kind of especially a black swan kind of event that we have is going to really test whether your strengths are really strengths. And it's going to test whether how weak your weaknesses really are because it could possibly exacerbate those types of things. So you have to start with a really good self-assessment of what you do well as a bank, because what you do well as a bank, now may not be that great in 2021. If you really like commercial real estate and are really into financing strip malls and things like that, that world is going to change. So that strength that you have that underwriting strength that you have is going to be in jeopardy, and that strength actually could become a weakness, because right now, as a lot of our bankers on the line will know is that if you have a strip mall or a retail-type property, those are under pressure, rents are very difficult in those situations. So as really strong self-assessment of your strengths, weaknesses, opportunities, and threats. And then you're going to have to basically look in your crystal ball and see how those are going to be affected by this pandemic. We've got six months, we have some baseline, we know how things work with the pandemic, we know which industries are very sensitive to this. So it's not like we don't have any information, we do have a bunch of information that we can take and apply to our self-assessment. So that's where I would start in the planning process.

Morgan Ribeiro 

I think that's a good segue into my next question, which is, obviously, the pandemic has caused financial institutions to rethink how their work is done, especially when it comes to things like staffing and branches and bank operations. How might institutions address these areas?

Jim Adkins 

There are always unintended consequences of when things happen. And I think one of the unintended consequences of the pandemic, as terrible as it is, it has forced banks to really look at how they operate from a cost basis and how they deliver product. And I've seen, as I mentioned a little bit earlier, I've seen banks do things that I don't even think they thought they could do well, I've seen a number of our clients cutting costs. This pandemic has led to a round of cost-cutting that I think is going to continue. I see banks moving ahead in their digital platforms, and they're in their fintech-type opportunities. And I think that this pandemic has pushed that effort with community-based banks, especially. It's probably pushed up at least five years because banks have been adopting these types of things. But banks have been slow, especially with maybe some of the smaller banks now with this pandemic, and all the things that they've had to deal with. And now the bankers and the community bankers especially, understand we're in this digital thing too, and as a result of this pandemic, I think we really push this along. And so I'm going to think we're going to come into a period - after we get through 2021 and we'll get through it, I think we're in for a period of tremendous innovation for the banking industry - even the smaller banks, which sometimes have a tendency to lag. So it'll be interesting to see 2022 and 2023. How those years come out because I think we're in a very exciting time for banking at once. But we got to get through 2021.

Morgan Ribeiro 

Wes, I want to move over to you. Accessing the capital markets can be risky, especially in a time of an economic downturn. Are you seeing that raising capital right now the opportunities are out there?

Wes Scott 

Absolutely. I have seen some real-time reports. One of the more recent ones I saw was from May of this year. During the month of May, financial institutions have raised roughly around $21 billion in equity capital, which is actually up about $15 billion year-over-year from May 2019. It's actually, according to the report that I saw, the highest level of capital raising activity since about May 2009. Primarily, what we're seeing there are issuances of senior debt coming in at number one ranking, followed shortly thereafter by some form of preferred equity or depositary share. And then somewhat surprisingly, to me, rounding out the third-place position was that common stock issuances have largely been the best in this period of time, and almost don't even register for moving the needle at this point. A lot of that activity is driven by the fact that you have willing and active purchasers who are willing to invest in community bank debt, because those purchasers are seeing those investments as relatively safe and stable investments are getting the capital regulatory requirements placed on these banks, the regulatory oversight of the banks, etc, coupled with a little bit higher coupon than they might find in other forms of investments for fixed-income products. So I think right now, especially in the last couple lines, we've seen quite a bit of activity that have the market swing back, I guess, in my practice, I'm seeing anywhere between three or five of these deals across my desk in some way, shape, or form, whether we're on the issuer-side, investor-side or on behalf of a placement agent. I would also say, beyond simply the capital markets, and this is to round out a discussion I talked about a bit ago, I think you're going to see quite a bit of M&A activity, maybe late this year, early next year. Given the disruption and dislocation of certain banks, I think there'll be plenty of opportunities for M&A activity. And we reached the latter part of the year and round 2021 into next year. So these capital-raising activities largely are putting dry powder on the books, and strengthening the balance sheet, which will open up various avenues of opportunity for banks to deploy that capital in various fashions later this year, next year, whether that's through acquisition, whether that's through organic growth, whether that's reinvestment in technology, branches, etc. But right now, I would certainly say it is quite an active market. And what advice are you giving to your clients right now, as they're thinking about capital considerations?

Kevin Tran 

Number one, you need to assess your risk tolerance. You don't need to go out and raise a bunch of capital that you are going to have to repay if you're not in the financial condition to do so. So based off of your risk tolerance, at this time. Number 2 - what is the cost of capital in today's economic environment when rates are historically low? The cost of capital, this one is relatively cheap, which is why you're seeing what these types of offers. Number three, what's the impact on your regulatory capital leverage ratios? Really, that's always in constant consideration. And you need to take that into consideration before you launch it all for it. In these times, this is the time to be light on capital. In fact, I think, if anything, you would want to err on the side of having too much capital. I tend to tell people when investors are willing to put money in your hand, you close your hand, and that's one of these times. So now's a good time to get in. If you want to get in, it's a good time to raise capital for a rainy day that you can use to perpetuate during the pandemic. So I would say now's a good time to get in.

Morgan Ribeiro 

Uncertainty is the word right now. And of course, with that uncertainty comes a lot of institutions needing to be incredibly flexible. So when we go back to the conversation around strategic planning and SWOT analysis, I mean, having to be flexible in your strategy and what direction you're heading your organization. And that's just such a challenge right now, as we think about this. And I think so many of you have offered up sort of practical tips throughout. But I always like to end these sessions with any practical advice that you could give. Wes, you provided a number of tips earlier as it related to capital considerations, but any kind of closing remarks, practical tips or advice that you would offer up to your banking clients, given all of this uncertainty? Kevin, I'll start with you.

Kevin Tran 

As a former regulator, I'm most likely biased here. But my advice has been to communicate and work with your regulators, as you navigate this time, it should come as no surprise that in a heavily regulated industry, it's imperative that you have and maintain a good relationship and open lines of communication with regulators. Because again, we weren't out to get anybody. The mandate was always to preserve the safety and soundness of the financial environment. And that involves every player within the environment, community banks, regional banks, large banks, regulators. It's so important that you don't operate in a black box and go about thinking or predicting or acting on assumptions when you can talk to your regulator and have them help you navigate the landscape. I mean, they're not going to do your job for you. But again, having open lines of communication to better understand how regulators are approaching exams, how they're interpreting certain regulations, and how it will help you not only comply from a compliance perspective but help inform your business decisions as you go forward.

Morgan Ribeiro  

Jim, any advice from your end?

Jim Adkins 

Well, I think that we're going into a planning season right now. It's starting in October, and a lot of banks get into planning. I think going into your planning session with eyes wide open, starting your plan with a really strong self-aware, self-assessment, if you will. Making sure you really understand what you do well, what you don't do well, there are going to be a lot of changes in 2021. And so what you do well now may not be what you do well next year, so you really have to understand how sensitive your strengths are to possibly economic issues related to the pandemic. You need to make sure that you have a high degree of flexibility. Plans don't always work out according to the way you'd like them to. But what you can do to have good flexibility in your plans is to focus and make sure you have capital, which I think was what Wes was talking about. Capital makes everything a lot more flexible. When I look back at 2010 and 12 during the Great Recession, the banks that thrived - the banks that made it had capital - and I think was made a point earlier that capital is cheap. And you just don't want to go willy-nilly, but I'd rather have more capital than less. And so if it's a good time, and your institution is in a situation that you can raise some capital, and that capital could be used not only for offensive things like taking advantage of opportunities that are going to be out there. But also you never know. I mean, there you may need that capital for negative things. I remember going back into 2010 and 12 and there some banks, clients of ours raised TARP, remember the old TARP thing, as we all remember, and they thought they were going to buy banks with it and do all sorts of things. Well, some of these banks need to debt to cover loan losses. So capital is always good. I agree with Wes and Kevin, that a prudent strategic plan should assess the capital levels that you have. And those capital levels have to support their plan and also not only support that plan but also support those possible negative instances or things that may come up that you just weren't aware of. So that's my suggestion, have a good strong plan - assess your strengths, weaknesses, opportunities and threats. If you need some help doing that, you've got to find people out there that can help you do that. And then I think to make sure that the capital component is looked at, and again, if you can get some capital at an inexpensive level, I vote yes. I mean, I think it's a wise thing to do. So that's my suggestion.

Morgan Ribeiro 

Great. Thanks. And, Wes, anything you would add to that?

Wes Scott 

If it works for you, if it works for your bank, now would be the time to strike while the markets hot. Capital is king. It's never a bad thing at this point in time to have capital. But as Jim said, it provides you the flexibility that provides you avenues to survive. I think we'll start to see opportunities to percolate later, maybe later this year, probably more so late spring and by the end of next year, hopefully as we start to exit the pandemic. And then they can we get some certainty around the presidential election. But at this point in time, we haven't tapped markets and you need to or you want to make sense. Now's the time to do that, and having that insurance in your back pocket, so to speak, is always a great thing to have.

Morgan Ribeiro 

Wonderful. Well, I want to remind our listeners again that if they're interested in learning more on the topics, go to Artisan Advisors website and to register for the next two webinars sessions, one being on October 29, and the last one being on December 5. Thank you all so much for joining me today. Really enjoyed our conversation.

KEY CONTACTS

Morgan Ribeiro
Email | Bio

We want to hear from you.

Whether a current or prospective client, we are here to help your business thrive. Please send us a message and we will respond to your needs as soon as possible.

Send us a message