THE SIMILARITIES AND DIFFERENCES BETWEEN A BANK TURNAROUND AND A BUSINESS RESTRUCTURE

by Orrin D. Tobbe, CEO
Bank Advisory Services
www.BankAdvisoryServices.org

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After many years in the banking industry and serving on the senior executive team of two banks, as well as a former CEO of a Community Bank, I can discuss the similarities and differences between turning a bank around and restructuring a business as follows:

Similarities:

1. The Board and Management must show leadership. Shareholders and associates look to the Board and Management of either a bank or a commercial venture to show leadership qualities during difficult times. The steps that will show leadership are: assess the situation with a non political "eye", present alternative profit and restructure plans, present a plan that everyone can "buy into" and finally, execute meticulously. After the plan and action plans are agreed to, then the Board must monitor the effects against the expectations. An open line of communication up and down the organization and with shareholders is also necessary so everyone realizes what the plan will entail.

2. The Board should understand the financials. Management must do a meticulous job of making members of the Board understand and embrace the financials of the business. Too many times other agenda items take precedent and this does not allow the Board to analyze the financials completely, which is a disservice to Board members. The eyes of most members of a board of directors "gloss over" when reviewing monthly financials. Therefore, management must find a way to present a set of complicated financials in a simple and understandable format. As part of the monthly Board package presentation, the financials should be compared to the agreed upon yearly plan and a set of recommendations needs to be presented, which will get the bank or business "back on track." One of the critical areas of the revised budget is the control of expenses. Cutting expenses has an immediate effect, whereas other actions may take time to implement and results will not be immediate. Operating expenses must be compared to a peer group in order to measure the performance against the banks or businesses that operate in the same space. In banking there are many operating efficiency ratios easily available to make this comparison.

3. Develop a clear vision of the bank or company. When a bank is faced with a regulatory order or a business is faced with a loss of sales and profitability, one of the first items that require compliance is a three to five year strategic plan. Does the bank or company still have a clear vision of the future of the business and does the plan adapt to the external environment factors? The Boards of a bank or a business need to revisit their strategic plan periodically and make sure it is still relevant to the changes that are taking place in the industry.

4. Set down a clear set of action plans to turn the entity around. Once the direction of the bank and company are decided upon, then the next step is to develop a list of actionable items that can be implemented to achieve the plan. The items should detail not only the actions but also the person responsible for implementation and the time frame to complete. The best way to develop this set of action plans is to call a meeting of all department heads to brainstorm the actions necessary to achieve the plan. Finally, make sure that regular meetings takes place to review progress on the actions. The axiom to follow is, "what management reviews the associates will pay attention to."

5. Clear Communication is paramount. When a business is in the midst of a crisis, communication is a critical factor to success. Communications has to be free flowing down the organization and more importantly up through the organization. The more the people know about the situation and how the management and Board are addressing the issues, the more there will be a "buy-in" from all levels of the organization. Of course the downside of this is that those people who cannot deal with uncertainty will find other employment. It has been my experience that in most cases the key associates who have a history of achievements or have desirable skills will find other employment first.

   Periodic and open communications with shareholders and other major stakeholders can be important to avoid any legal issue later.

6. Meticulous Execution. Not only is it important to have the right strategy, it is very important to execute the strategy correctly. In a crisis situation there is no leeway for error. Therefore, make sure that action items are done right, done speedily, and are monitored for their effect.

7. Teamwork. In both situations having the right people in the right places and working together is critical to success. The formula for building teamwork is a combination of all the actions by management and the Board described previously, especially knowing where you are headed and communicating that direction to all constituents. A clear set of goals and objectives takes some of the uncertainty out of a difficult situation.

8. Get the right professional advice. When a business is in a turnaround situation it is the natural instinct to delay or not spend the money on professional assistance. However, the wrong move is to not hire the best. It is very important to hire experts in the areas of financial auditing, attorneys who specialize in turnaround and restructure, attorneys who have a history of dealing with regulators, and consultants. In the end it will save the bank or company money by having people who are experienced and can get to the heart of the matter and resolve the situation in an expedited manner.

9. CFO is a key person on the team. Everything in a restructure plan or dealing with regulatory issues depends on the financial person working closely with the CEO on developing actionable items, e.g. the strategic plan, the profit plan and the reporting on the action items, etc. The other most important people, for a Bank, that have to be on the restructure team are the Chief Loan Officer and the workout person. The people who have to assess the loan portfolios impact on reserves and ultimately on earnings are significant to a bank's recovery.

10. Capital and Earnings are king! This is the bottom line of the above nine suggestions. How do the above actions impact the bottom line and many key questions need to be asked: Does the bank/business have a plan that can work and in the case of a bank, will the plan give us the capital to be above regulatory requirements and also give the bank the ability to grow?

Now let's review the differences in a turnaround of a bank and the turnaround in a commercial firm:

1. Dealing with regulators are more difficult than creditors. From my experience, creditors in a commercial environment want the business to succeed and therefore will come up with plans to allow that to happen. Not so with bank regulators! Dealing with bank regulators can be frustrating and in many cases there is a difficulty in getting straight answers. This is because of the government's bureaucratic process and the number of people involved in making the decision. Also, the many different agencies that get involved in the process of dealing with a troubled bank may at times have different agendas. Finally, in a bank turnaround there is certainly more scrutiny by the regulators before a decision can be made and in many cases, there may be unclear answers.

2. Time frame limits. In turning around a business, the deadlines can be very flexible and in some cases indefinite. This allows the creditors and the business persons to work through their issues. In the case of a bank receiving a Cease and Desist Order from their regulator, there is a definite time frame to comply. Only in rare situations does that time limit get extended.

3. Regulatory process is exhaustive. A major difference in a bank turnaround is the amount of resources and time it takes to deal with the regulators. A large portion of the associates' time, management time, and Board involvement are involved in a bank restructure. Unlike a commercial turnaround, a majority of the Bank's time and resources will be spent on responding to the regulators' requests, which may include, an exhaustive analysis of the loan and investment portfolio, and the liquidity of the Bank.

   In many cases a Bank will have to carve out time to meet with potential investors if raising capital is required. Therefore, while the Board and management are dealing with the regulators' requests and also dealing with the potential investor's demands, a strong # 2 person needs to be identified in order to deal with the day-to-day operational issues.

Many lessons are to be learned from the commercial restructure world that can apply to a bank working out of a crisis situation. Some of the key concepts to remember is to have a plan that all constituents believe in and can support, be fully communicative with all involved parties, build a team atmosphere with management and the associates, and do not hesitate to get the best professional advice from people who have gone through the experience.

One final thought! The lessons to be learned in difficult times are more valuable than lessons learned when the business and bank are doing well.