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Grant Thorton - The Sixteenth Bank Executive Summary

Financial institution executives across the country are determined to shore up their foundations and capitalize on strengths to survive the year ahead, despite massive challenges facing both their industry and the national economy. In 2009, the U.S. banking industry will undergo a seismic stress test—the result of which will determine the ultimate viability and resiliency of the nation's financial system. Few banks will emerge unscathed, yet the very turbulence that will crack the foundations of some institutions will present others with opportunities to grow—and even thrive. With these events as a backdrop, Bank Director and Grant Thornton LLP collaborated once again to produce the 16th Bank Executive Survey, a comprehensive study of bankers' opinions and plans for the year ahead. The results that follow provide an assessment of how bank executives are managing the turmoil around them and outline the strategies they will take in the months to come.

THE OUTLOOK FOR BANKING AND THE ECONOMY

During the first quarter of the year, bankers experienced a flurry of legislative announcements and federal programs designed to jump-start the economy and bring about financial stability. In February, the Obama administration announced the American Recovery and Reinvestment Act of 2009 (ARRA), which authorized stimulus spending for nearly every industrial sector, and soon after, publicly detailed its Capital Assistance Program (CAP), which provides capital funding for qualified institutions. These plans are coexistent with last fall's Capital Purchase Program (CPP), administered under the $750 billion Troubled Asset Relief Program (TARP), which provides Treasury-funded infusions of capital to institutions.

Broadly stated, the government's core philosophy is to offer various avenues for assistance in improving banks' balance sheets by injecting muchneeded capital and removing troubled assets. However, the acceptance of TARP funding also means restrictions on bonuses and incentive compensation, dividend payouts, and stock buybacks, as well as possible restrictions on the uses of that capital, such as for M&A transactions. In some cases, banks that applied for TARP funding initially are rethinking that decision in light of these considerations, and in the hope that a turnaround will be evident in the coming months.

Restoring confidence and optimism—A linchpin to stabilizing the markets will be bolstering consumer confidence, which plummeted in the first quarter. Moreover, as shown through results of the Bank Executive Survey, it's not just consumers who have the doldrums.

When the survey asked respondents at the close of last year about their outlook for 2009, nearly nine out of 10 bankers (86%) were pessimistic about the U.S. economy, and more than threequarters (76%) were pessimistic about the business of banking. For the second year in a row, both sets of data represent a significant increase from the year before, when 56% were pessimistic about the national economic outlook and 54% were pessimistic about the national banking outlook. The results are even more dramatic when compared to 2007 when only 13% were pessimistic about the economy and 21% held a pessimistic outlook for the national banking picture.

A renewal of confidence, experts agree, will lay the groundwork for a positive chain reaction, but so far, that spark has not ignited."For the first time in the history of the survey, not a single banker was highly optimistic about the outlook for the U.S. economy for 2009, nor the national business outlook for banking in 2009," says John Ziegelbauer, national managing partner of Grant Thornton LLP's Financial Institutions practice. When asked whether additional leadership is needed in this area, only 15% agreed that the Federal Reserve is doing a good job of managing the current crisis and 37% disagreed; 17% think Treasury is handling the situation well while 46% disagreed with that position. In a separate question, more than threequarters (75%) of CEOs polled believed consumer confidence in the industry has diminished—a key factor in banks' ability to regain strength and capital to serve customers in the months ahead.

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