I was listening to a recent conference call where a large fund manager quipped: “Volatility is a new investment category. We’d probably all better off if the markets offered a three-hour trading window one day a week.” A bit cynical, but perhaps not too far from the mark. How does a company cope?

Even experienced investors are frustrated by volatility and unpredictability of the markets these days. “Passive” investors include index funds and investors utilizing quantitative models to select stocks invest by the numbers. Buy and sell decisions are generally driven by purely quantitative factors and programmed trading, which can contribute to inexplicable volatility and movement in markets and individual company stocks.

There is nothing wrong with passive investing, and some quantitative models can generate outstanding returns, and many are incredibly accurate at assessing trends. But it is all about the math and the model. Based on past performance, algorithms and trends, these investing models are not about management, strategy, and some of the nuances that can differentiate a winner from a loser.

“Active” investors also make extensive use of technology, analytics and screening, but they also factor in qualitative information like management capabilities, forward-looking strategic conversations, and “intangible” factors that contribute to a company’s value-generating opportunity. Active investors tend to be more patient and loyal shareholders.

They aren’t always easy to reach, but finding these investors can pay handsome rewards for companies wanting to expand their ownership of committed, long-term shareholders. Financial messaging that "speaks" to them can make a real difference in attracting these investors. And there are still a lot of them out there. Just ask Warren Buffet how investing in good people, good practices, good strategy and good companies has worked for him over the years.

After a couple tough years, companies have the opportunity in 2011 to distinguish themselves by looking to the future.

Economic conditions challenged most companies in 2009 and 2010 to focus on capital preservation, expense control, balance sheet management maximizing cash flow. The good news: this will stand businesses in good stead when revenues begin to accelerate. The bad news: expense control, by itself, isn’t a long-term strategy.

Why do investors commit to ownership? To participate in growth and profit opportunity. While lingering economic uncertainty and a lack of visibility make it difficult to confidently lay out a three- or five-year strategy, sharing with investors even a modest game plan for the coming year or two can instill confidence among existing shareholders and generate interest among potential investors.

Even with the market recovery, many companies’ valuations are at or below their intrinsic value. This represents investment opportunity. By communicating to investors realistic goals for margins, growth, and market share opportunities, you set benchmarks by which the market can make decisions and measure your progress, even in a slow-growth economy.

By Eliot Stark - Debate continues over a potential $30 billion government-backed infusion of capital to small businesses. As I’ve noted in the media, the concern is whether this “no risk” funding will fuel loans to businesses that aren’t creditworthy enough to meet banks’ normal underwriting standards. And, if approved, who will be the banks willing to make riskier loans?

A very real issue is that it could be tempting for banks that don’t have sufficient size, resources and capital strength to win quality lending business without a governmental handout. And the government backing may tempt banks to make loans to companies that represent relatively high credit risks. If this funding resulted in higher default rates, taxpayers are going to be the losers.

And it won’t solve a fundamental problem – there are simply too many banks, and far too many weak, undercapitalized banks. Many institutions are now hanging on for dear life. Others are doing well but remain too small to attract the capital needed to grow and make quality loans as the economy strengthens.

My concern is the institutions most likely to take this government funding are the ones at greatest risk. If so, a capital infusion from Uncle Sam will only prolong the inevitable for these banks. Many bankers remain in a state of denial about their long-term prospects, thinking they can successfully stand alone without sufficient size or strength.

At Capital Insight, we strongly believe in the community banking model. But every sign points to the fact that troubled or capital-starved banks need to seek a partner for merger or acquisition. They may have numerous attractive aspects, such as a quality customer base or a good base of deposits, but they don’t have the size to withstand higher capital requirements and still have sufficient resources to profitable manage their businesses.

And community banks with less than $1 billion in assets that have emerged from the past two years in good shape need to seriously consider scaling up to remain competitive and have a sufficiently diversified lending portfolio to capitalize on quality lending opportunities.

But if the $30 billion capital infusion gets people talking and thinking about the real issues – the ability of healthy, well-capitalized community banks to make loans to strong credits – then it’s a productive conversation.

By Tad Gage – It’s no secret the next few years are going to hold a lot of changes in the community banking sector. As we at Capital Insight Partners produce reports and updates on various regions in the U.S., one thing is clear: there are too many community banks. Capital issues, challenging loan portfolios and painful accounting-related revaluations of assets and goodwill have certainly had a powerful impact, even on long-established community banks.

But the real pain seems to be in store for the crop of banks that sprang up in the ‘90s through 2006. Without a doubt, there are a large number of successful de novos holding their own and even growing. The upside for many of these businesses is they started conservatively and didn’t have the capital or inclination to dive into the overheated real estate market. So they have been able to emerge in 2010 with minimal loan problems, good core deposits, minimally leveraged balance sheets and adequate capital.

Many of the banks we talk with, whether de novo or established, realize they’ll need a capital infusion at some point if they want to grow and take advantage of the many market opportunities that exist for the community bank model. The expansion opportunity for these healthy banks lies primarily with friendly mergers of relative equals, selective organic or acquisitive branch or location expansion, and acquiring smaller banks.

A large number of these very small community banks aren’t necessarily in trouble, but they don’t have the resources or access to capital to effectively do more than tread water. Realistically, these banks need to prepare to be acquired. And potential consolidators can also prepare to be effective and attractive acquirers.

Putting your financial house in order is the best way to prepare. For acquisition candidates, making it easy for potential acquirers to analyze the bank (under appropriate non-disclosure agreements, of course) can highlight the bank’s value and help potential acquirers identify the opportunities. For potential acquirers, having clear and transparent financials and a compelling game plan will make it easier to demonstrate to investors in a capital raise that you’re the horse to back.

Some key areas to analyze include:

·         Asset quality

·         Fair value of owned assets

·         Book value

·         Nonperforming assets and loan-loss reserves

·         Underwriting practices

·         Real estate loan participations

·         Net-interest margin

·         Capital adequacy

·         Management and board

You can find a detailed discussion of and rationale of these key issues in the Capital Insight-authored article in Bank Accounting and Finance. Just click on the logo link listed on the left side of this page for more detailed information.

By Tad Gage -- Just about every community bank has a functional website, facilitating customer logins, access, account management and so on. But taking more than a few turns around the Internet have shown me that beyond the purely function, a lot of community banks are missing a great opportunity to reinforce their name recognition, values, products and services.

Today’s reality is that people make a lot of judgments about companies (and banks) based on their websites. If your website is wearing jeans and gym shoes to a formal event, you’re going to be negatively categorized. An attractive (not glitzy) site with meaningful content can reinforce all the work you're doing to win and retain customers.

Here are a few ideas of places where your company’s website could work harder:

About the Company/Bank: Many community banks have interesting strategies designed to differentiate them from competitors and provide value, differentiated products and services to appeal to customers. Surprisingly, many community banks don’t take this essentially free opportunity to market itself to customers and potential customers. By compiling this information in one place, banks can demonstrate their practices and value. Highlight management’s strategy for growth and maintaining capital strength. If a bank has a long history, highlight it. If not, focus on how the bank has positioned itself for long-term success.

“Our People”: Use the website as an opportunity to highlight the experience and capabilities of the management team and board of directors. Rather than posting resume-like career accomplishments, put the team’s accomplishments and capabilities in context to illustrate the role they play. Be sure to include members of the senior lending and service teams, credit officers and technology pros. A few photos of team members (nothing fancy, just good quality candid shots) help put a face on the bank. This is particularly important for customers who rely heavily on web-based delivery of services and info. A community bank is all about the people, and the website can help deliver a more personal feel even if customers don’t frequent the physical locations.

Communication: Your website is the chance to communicate. Easy to access news releases, messages from executives, information about upcoming events such as financial planning seminars or community activities sponsored by the bank are all valuable ways to reach out to stakeholders and new business prospects.

Disclosure: Because all regulated banks are required to share financial information about their performance, why not include selective charts and information that highlight good financial performance, asset growth, and a few other basics?  Privately owned banks and even smaller publicly traded banks fail to do this. Especially with all the concerns about bank strength and solvency, people appreciate the reassurance of knowing their bank is financially sound and well-managed.

Graphics: A bit of color and style go a long way. Keep backgrounds white or light colored, but use photos and design elements to liven up the site. Make sure it's easy to use with handheld devices. Use the bank’s logo frequently to enhance awareness and reinforce awareness when people pass the physical locations. Many banks have LPOs and facilities that have no signage. A website can be particularly useful to supplement minimal signage. Replace free stock photos (you know the ones – smiling people shaking hands, generic pictures) with real photos. Stock photos are easy to identify, and many people find them a turn-off. Scenes from your community, pictures of actual employees, interior photos of your bank, etc. add veracity.

Easy to Navigate: If tabs and hyperlinks are difficult to locate and use, people check out. Make them large, easy and clear. And NEVER have a link that takes a user away from the site by replacing the current link with a non-site link. If there’s an appropriate need to utilize other sites such as stock market info, alliances with financial planners or financial calculators, make sure the link opens a new window but keeps the original window open.

Keywords:  I often find when I enter a bank’s name (or part of a name) in a search engine, I get a lot of sites not related to the bank I’m searching. Invest in Search Engine Optimization (SEO) to move your bank to the top of the search engines with a minimal amount of information. It’s relatively inexpensive and there are a lot of web consultants who specialize in SEO.

An informative, attractive, easy-to-use website is something any bank can offer. Call me at 312-466-7646 for more information on this cost-effective way to enhance your communications.

By Tad Gage -- Although overall employment stats continue to lag, at least one sector is demonstrating robust growth: the market for FDIC regulators and staffers.

I can almost hear the collective groan from the banking community. But hold on – maybe this isn’t an entirely bad thing.

The FDIC has announced it will increase its total examination staff by about 25% in 2010, which includes a 31% increase in risk management staff, according to data provided by the agency to FinCri Advisor, which has become one of my favorite “insider” news sources for banking and regulatory issues. The publication notes that would equate to a 69% staff increase at the FDIC since 2007. Scarily, a lot of these hires are temporary.

I can’t imagine an inexperienced full time hire or temp would do much more than keep lock-step with whatever the bosses dictate. The OCC is also upping staff – about 3% in 2010.

No doubt, more regulators will mean more reviews, more hassles, more questions, and more time spent on compliance. An influx of auditors and examiners who are wet behind the ears will probably result in even less flexibility than in the past, and more adherence to strict interpretation of regulations than ever. By nature, no bureaucrat (especially a new hire) has the experience or incentive to interpret individual circumstances.

What could be the possible upside? Well, maybe a little more pain up-front might get the whole thing over that much faster; like ripping off a sticky bandage versus pulling it off slowly. It’s going to hurt either way, but one way is faster.

To-date, examiners (no matter how experienced they are) haven’t been all that flexible or forgiving, anyway. The days of negotiating with examiners ended in 2008. Many forcibly closed banks in 2009 were initially given 18 months instead of 12 months until the next exam because they were deemed by the regulators to be in good shape. Then, in swooped the regulators. Negotiation and forbearance really hasn’t happened since 2007.

A larger staff potentially means more exams, but reviews and any results or directives may at least go faster. Any directives from Capitol Hill (if, indeed, legislators can ever figure out something mutually beneficial for the banking industry and the public) may be implemented faster and more fairly. We can only hope the efforts of bankers to make the case for some clear and fair directives from Washington will be heeded.

And consider that more examiners (and increasingly fewer banks to regulate!) may mean more careful and thoughtful analysis. Let’s face it: the majority of banks that have failed had some pretty serious issues.

Setting aside the conflicting messages regarding lending and capital adequacy that confuse everyone, expanding the ranks of examiners will probably accelerate the demise of struggling banks and perhaps accelerate and facilitate the process for banks with the ability to survive.

I don’t know if throwing more regulators at the “problem” will result in a quicker cure. But we can nurse hope that adding examiners is a first step in getting all these issues behind us so bankers can get back to banking in a more predictable regulatory environment.