However, in a community-banking climate in which there are fewer competitors and credit pricing is more rational, Wells Fargo's customer focus will serve it well, says Atkins. "A lot of banks got into trouble when they drifted away from focusing on doing the right thing for customers," he says. "We never drifted."
First Horizon: Shrink Positive
Meanwhile, in Memphis, B.J. Losch, former CFO of Wachovia's general bank, was joining First Horizon National, a bank that needed to quickly rein in past excesses.
The bank typified the wild ride of the mid-2000s. In its 2006 annual report, the bank's management lauded its national mortgage business, which originated tens of billions of dollars' worth of loans yearly and could generate "new banking customers and prospects irrespective of economic or business cycles." That proved to be a bit of an overstatement, of course, and soon the subprime crisis forced the bank, which had become a top-20 originator of mortgages and a lender to homebuilders as far away as Maryland, to ditch its retail and wholesale mortgage banking offices outside Tennessee.
In late 2008, the bank accepted $866 million in TARP funds; three months later, Losch signed on as CFO. His mission: shrink the business (its balance sheet is down 32%), keep the bank well capitalized and liquid, and overcome the severe deterioration and outsized losses in its portfolios. "We shifted the emphasis from growth to returns and profitability," he says. "We had to shrink; we had no choice. We had to reduce our exposures and come back to the core we were good at."
But profitability has had to wait. First Horizon's efforts at stabilization have focused on being one of the first banks to come out of the cycle, a strategy that has entailed aggressive loss recognition. The bank now writes down large commercial loans (more than $1 million) to net realizable value. "Not only have we written down loans when they were nonperforming, but in many cases we've taken delinquent loans or loans that were still paying and have written them down," Losch says. "It causes much bigger losses much faster, but we think it's the most prudent thing to do."
The bank has a new emphasis on transparency, providing granular information to investors, customers, and rating agencies, both in print and in person. Losch visits investors often, and the bank divulges in its earnings supplements metrics such as the lien position and loan-to-value characteristics of First Horizon's home-equity portfolio.
The bank also took a hard look at its risk-management practices. Basic credit-risk evaluation got a makeover, and the practice of originating consumer loans was rebuilt. First Horizon used to have roughly 200 people in its Tennessee footprint with consumer-loan decision authority; underwriting, risk management, and pricing often differed across markets. Now the bank has centralized underwriting, and this has resulted in better quality control and pricing standardization, expense efficiencies, and faster turnaround times to the customer.
Losch also found time to address something often ignored in the crisis: employee morale. He created an employee council for the finance department focused on such issues as employee engagement, internal communication, recognition, and professional development. "Finance people see all the tough numbers and have to live with that every day," says Losch. "You can't ignore the things that make people want to come to work daily." Loyalty surveys indicate that the council has made a positive impact.
Has First Horizon fully recovered? Not quite. While nonperforming assets, charge-offs, and provision expenses have lessened, the company still posted a $71 million loss last quarter, and foreclosure and loss-mitigation costs continue to suppress earnings. Fortunately, the bank is getting a boost from its fixed-income trading and distribution business, which presents little balance-sheet risk. And core deposits rose 4% last quarter.
Meanwhile, the company is talking with regulators about the timing and method for repaying the TARP money, and also trying to gauge the potentially higher costs of increased banking regulation. Even as he grapples with those challenges, Losch says he is now able to spend more time analyzing drivers of performance — net interest margin, fee income, and customer relationships, for example — instead of being solely focused on fighting fires.
UMB Financial: No TARP Needed
As it watches other banks grapple with when and how to repay TARP funds, UMB Financial can breathe easy: it never accepted the federal infusion, and it made sure its customers knew that. When TARP was announced, the bank issued a press release detailing why it was declining the capital.
Not that UMB came through the crisis unscathed. Regulatory expenses rose sixfold in 2009, nonperforming loans almost tripled, and loan-loss provisions climbed 80%.
But over the past two years, the Kansas City, Missouri-based financial services firm, which handles everything from commercial banking to mutual-fund servicing to wire transfers, has grown its commercial-and-industrial loan book, kept charge-offs as a percentage of total loans at 0.37%, and shored up its risk management, all while staying profitable. It resisted the siren song of easy profits by not directly booking mortgage loans or buying toxic assets. "We just surpassed $1 billion in equity for the first time," says CFO Michael Hagedorn, "and we did that in arguably the worst economy since the Great Depression — while acquiring companies, buying back our stock, and increasing the dividend."
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