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Quote of the week:

"I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed." Michael Jordan (and Sandy Prisby).

Thanks to all of you who responded to my happy Holidays message. I so enjoy the personal contact this gives us, and am glad you noticed the bottom dessert picture, which caused some raised eyebrows...

Just before our entire family is off for a week to some warm weather and fun in the sun, I dare share my perspective on 2009. It's not much different from the general doom and gloom feeling that is the air, except that I do see some opportunities amidst the rubble. One bright spot in this evolving landscape is the changing perception of financial institutions in the last 6-12 months. Community banks are viewed most favorably (31% positive momentum), relative to national banks (37% negative momentum), Investment management firms (same), regional banks (26% negative momentum) and brokerage firms (a huge 46% negative momentum). For the first time in a long while, consumers are viewing community banks more positively than all their competitors; take advantage of it!

Article synopsis: A tough year ahead, but opportunities still exist.

Looking Back and Looking Ahead

As 2008 comes to a close, I can safely say that our industry is now navigating uncharted waters. Earlier in the year I, and others, said this smacks of the '80s to us, especially in Texas, but I don't think this does our situation justice. We have encountered the perfect storm:

• Liquidity for many financial instruments with huge volumes dried up on a dime. Markets shut down within hours, which means banks' balance sheets became saddled with mortgages, auto loans, SBA loans and other financial vehicles for which they didn't budget

• The cratering of the real estate market swept with it residential and commercial real estate, leaving borrowers with no equity in their homes or properties, and many banks holding the bag

• The real estate tsunami inevitably swept with it the rest of the US and the global economy toward a serious recession which is threatening to turn into stagflation

• Capital raising activities ground to a halt as private equity and other investors got third degree burns from the "bargain" investments in National City, WaMu and others

• "Safe" investments proved devastating, including FNMA and FHLMC stock, as well as Trust Preferred securities

• Funding became even more constrained with depositors' flight to quality, further shrinking bank margins as deposit costs did not follow massive reductions in Fed Funds and related rates

• The regulators, alarmed at the pace of deterioration, are acting swiftly, often pre-empting banks' failures

• Existing regulatory tools, such as mark-to-market, never envisioned the current crisis and are taking additional tolls on bank capital

• In face of these unnatural disasters, global governments invested $8 trillion in various bailouts, yet the mavens tell us it's not enough.

What will next year have in store for us, besides additional bleak news, bank failures and economic hardships? My crystal ball is as good as yours, but my willingness to put my foot in my mouth may be greater...

• Most folks I know predict no recovery in 2009. Industry observers' anticipated turnaround time has moved rapidly from the 4Q08 to mid to late 2010. I join the rest in anticipating a very difficult 2009, but with some exceptions.

• Excellent banks will continue to perform well, but their numbers are few and their performance, which continues to outstrip the industry, is less impressive than it has been during the boon years.

• Market observers' and analysts' differentiation among banks will continue to be minimal, as most major investors are withdrawing away from the sector wholesale. Rewards for outstanding banks will continue to be small relative to their lesser performing brethren.

• TARP money, the tool that was going to separate the survivors from the terminally ill, has been given to both, and will therefore artificially prolong the industry crisis in some markets and for some institutions.

• A wave of consolidations will commence shortly, especially for small banks, thanks to FDIC intervention. TARP funds will put more arrows in the quiver of both good and poor performers toward assisted deals and additional consolidation, thereby slowing the process down.

• The biggest challenge for all will be core deposit growth. Banks have been slow to retool their sales forces to focus on deposits, but this year has finally brought the point home. Continued regulatory pressure on funding strategies and differentiation between core funding and "pretend" core funding provide further impetus to mobilize the entire organization toward building a strong, core deposit base. At the same time, the acquisition of some large irrational players has helped deposit pricing somewhat. It remains to be seen whether the trend persists.

• Loan growth has been robust in the third and fourth quarter of 2008, but not due to aggressive loan originations. Lines have filled up quickly as prospective borrowers avail themselves of unused credit lines, with banks growing outstanding loan balances by 20%+ in many cases. Next year banks will have to clamp down even more on loan growth without correspondent funding and full relationships vs. transactions, since, even with TARP money, many banks must keep their powder dry as their local economies deteriorate further.

• The lending business will become more profitable, as the industry is returning somewhat to getting paid for risk. Compensating balances, prepayment penalties, proper pricing, stronger terms and covenants, are all finding their way back into the business in most parts of the country, and the trend will continue in 2009.

In such tough times, where are the opportunities?

• Hire available talent

• Pursue "names" and prospective customers you didn't have access to in the past; lending opportunities (which should be parlayed into relationship building opportunities) are opening up daily

• "ventilate the company" by reducing costs of unproductive resources and reinvesting some of them in human resources, technology and other resources that will contribute to longer-term profitability. The minimal differentiation between stars and slugs in the capital markets makes this suggestion more palatable

• Limit your goals for the coming year to 3-4 major initiatives. This is always a healthy step, but it is essential as resources continue to be strained

• Take a fresh look at your balance sheet, and set long-term direction for needed tweaks (or full transformation) on either side (e.g. reduce dependency on wholesale funding; improve loan portfolio diversification; reduce loan concentrations in large borrowers etc.)

I understand survival is the prime directive today, and that some of my comments are aimed at longer-term aspects of your operations. Time and time again we see how companies that think longer terms survive and prosper during both good and bad times. It's tough to change when times are good. 2009 will present an outstanding opportunity to initiate and effectively execute change!