Friday, September 23, 2016

Bankers: Bring On The Change

On the shores of the Ammonoosuc River, alongside the hotel where the famous Bretton Woods conference took place in 1944, I talk about the onslaught of change that has recently occurred, and will continue to occur in our industry.

Change: Is your institution ignoring it, trying to stop it, or adapting to it?

How much grief will I get comparing employees to beavers?

Saturday, September 17, 2016

Politics: Can We All Just Get Along?

I do not venture into politics much, either in this blog or in person. But our environment is so toxic, I would like to take a crack at identifying shared goals by most of us.

1. We all want to reduce the number of impoverished people. We have different ideas on how to do it. I think capitalism is a better solution than socialism, as the latter creates so much more of an underclass. Except for the bureaucrats. They tend to do well in socialism. The more you disperse economic power in a society, the better, in my opinion.

2. Many successful capitalists turn into jerks. I think, by and large, this is because they want to solidify their position, and the by-product is keeping others from achieving it. That is why in large corporations executives might make it difficult for up and comers, fearing they might be unseated by them. This is also why top executives get paid so much. I wouldn't stop companies from paying executives so much, but would insist on transparency and not allow a company to deduct executive comp that is greater than some multiple of company average compensation on their Federal taxes. But better to have many, many successful capitalists, than a few successful bureaucrats. Successful capitalists are the "do-ers" of society. They create jobs. Not government. If you don't trust me on this, study economics. At most colleges. Not all. I also want to encourage a society where capitalists do well, and give their excess to charitable endeavors. Like Warren Buffet is trying to make happen.

3. Our tax system is way too complex. I would make the personal and corporate marginal tax rate the same. Somewhere around 20%. I put a simple tax solution in a post way back in 2012. See it here. This will cause disruption among accountants and tax lawyers. Taxes would be so easy and transparent, these professionals wouldn't be needed by individuals or corporations. Think of all the tax compliance savings!

4. Government spending. Until we reverse the alarming trend of national debt to GDP, we must spend less than revenue growth, and balanced budgets have to be the norm rather than the exception. I wouldn't do a balanced budget amendment, because elevating infrastructure investments and spending during recessionary periods makes sense to me. But until that time, Federal spending growth should be less than GDP growth. Oh, and the last balanced budget under President Clinton was spurred, in part, by Pay-Go. That system where new "programs" would have to be paid for by eliminating other programs that cost the same or more. I would put that structural discipline in place right away.

5. Federal government operation. Our rules are ridiculous. Bills would be cleaner, and more linear. No slapping on stupid amendments for pork. If it has enough support, have the pork get its own bill. And bringing a bill to the floor for vote would be easier. One requirement I would insist on is having a litmus test for programs designed to help society. If they don't meet a pre-agreed upon social objective over a reasonable time period, they automatically die. No vote needed. We tried to fix a social ill. It didn't work. Let's move on. And not worry about those that lose funding sending out press releases that we don't care "for the children".

6. Speaking about lawmaking, there are way too many laws and regulations for society to follow. Nobody, and I mean nobody, knows them all. In fact, most if not all of us break the law every day. This creates a ripe environment for tyranny, that we see playing out in front of our eyes. Don't like someone? Figure out a law they broke and go after 'em. Think about it. If I were in charge, there would be less, and the objective would be far less, rules and regs to follow, reducing the ability of powerful law enforcement and government bureaucrats to move against its citizens. And making it easier to enforce and comply, both individually and economically. Watch the bureaucrats squirm about this one.

7. World relations. We want to influence societies to be free. But our own freedoms are being eroded by the growing body of laws and regs, mentioned above, and political correctness which has curtailed our ability to solve problems. So we should take care of our own problems to show the world that, as our society matures, we make corrections to enhance freedom. And create a worthy example that other countries would like to emulate. But dictators. We have to be active in keeping them in check. If we were isolationist, our world would be a different, and much worse place, in my opinion. But our international forays would be selective, proportional, and  given the resources and the fortitude to win. Isolated cells of terrorists need not worry about a US Army battalion. But they would have to worry if they actively seek to harm our citizens. Their end will not be pleasant. But it may not be all over the news media, either. Oh, and trade. Free trade works. Few economists believe otherwise. The rub is that they must be enforceable and punitive for cheaters, making cheating so unpalatable that parties to the agreements abide by what they signed. There is a lot of angst against free trade now, but as a society we voted for free trade by buying less expensive stuff that must be made by labor that is less expensive than our own. And lets face it, union work rules made us noncompetitive in manufacturing. Shame on us.

8. Elections. Any candidate that wants to run for office, must complete a two-page resume to a non-partisan website. Page one denotes the candidate's experience. Page two has the candidate's answers to five key questions for the office sought (i.e. federal questions for federal office), in 50 words or less for each question. This is so voters like me can review candidate's qualifications and positions before getting into the voting booth. In PA, where I live, there is a tough US Senate race underway, and the ads the candidates run are ridiculously irrelevant and designed to stir up emotion, and not make us better voters. I say ignore that idiocy. Read the two-page, vote smartly.

9. Safety Net. I'm all for a transitional safety net to help our fellow citizens pick themselves up and get on their feet again. I'm all against turning families into lifelong government dependents, which I think is the consequence of a safety net without the transitional philosophy. If someone hurts their elbow and can no longer do the manual job they once did, we don't re-train to do other jobs not dependent on the elbow. We put them on disability for life. C'mon. This makes so much common sense, that the cynic in me thinks those that support lifelong government assistance (either in word or deed) are just bribing people for their vote using other peoples' money. And relegating the lifelong "drawers" to the lower economic rung for life. Sad.

Why doesn't the media cover much of the above? Instead, they assemble a panel of talking heads to discuss a tweet. 

Not sure there would be many that object to the above. Ok, accountants and lawyers, and union leaders. Other than them, why is everyone else shouting at each other?

Who's onboard?

~ Jeff

Monday, September 05, 2016

Board Composition: What Does the Best Bank Board Look Like?

In April 2016, Delaware Place Bank in Chicago was placed under a Consent Order (CO). One article within the order read as follows:

"the Bank shall retain an independent third party acceptable to the Regional Director of the FDIC’s Chicago Regional Office (“Regional Director”) and the Division, who will develop a written analysis and assessment of the Bank’s management needs (“Management Study”) to evaluate the management of the Bank."

This is a common article and my firm performs several of these annually. The CO went on to say:

"As of the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size."

In the same article, the CO compelled the bank to elect an additional director with banking experience. And there lies the rub. By including this provision, the unwritten assumption was that appointing a director with banking experience will make this bank more safe and sound.

Will it? Is there evidence that proves it is so?

What makes an effective banking board? Is there one recipe?

We are often asked this question, either formally (through a Management Study or Board evaluation engagement) or informally, And the answer is, it depends.

It depends on the bank's strategy, geography, risk parameters, and personalities of existing board members. I have seen banks with former regulators on the board fail, and banks with farmers on their board thrive. I do not think there is one answer for all.

To further my point, I evaluated publicly traded, SEC registered banking companies between $500 million to $3 billion in total assets. I searched for the best, and not so much, ROE banks based on their five-year average ROEs. I excluded banks that had negative ROEs, recently converted during that five years from the mutual form (which elevates their "E"), or had standard deviations greater than 4 from their five-year ROE. In other words, they were consistently good, or consistently bad.

Then I reviewed their board composition. The top six results are as follows.

How does this differ from the bottom six? See their board composition below.

There were retired bankers in three of the six top performing banks. Wait! There were retired bankers in three of the six bottom performers. CPAs, another common piece of expertise desired on a high performing board, were on all six bottom performing banks. CPAs were only on two of the six top performing banks (assuming the CFO was a CPA, which was not mentioned in their bio). Attorneys were on four of six top and bottom performing bank boards.

The prize for most board billable hours goes to Robert Gaughen Jr., and Randy Black, CEOs of Hingham Institute for Savings and Citizens Financial Services, respectively, for having the most attorneys on their board. Perhaps the answer is not only have an attorney on the board, but lots of them.

There were no former regulators on the boards of the above banks. At least they wouldn't admit to it in their bio.

The point of this review is that there is no one answer as to what makes a good functioning board. In my experience, a board that maintains management accountability for business performance and ensures management operates within the risk guidelines established by the board and commemorated in bank policy, is a good performing board. It doesn't matter if that board includes a baker or candle stick maker.

What do you think makes a high performing bank board?

~ Jeff

P.S. I received an e-mail from a banker asking me the insider ownership of the above banks. So here you go! The bottom performing banks have a greater level of insider ownership. And from eye balling it, the bottom performing banks have a greater level of institutional ownership too.