Embrace change, and other tips for success

Philip K. Smith, president of Gerrish McCreary Smith, Consultants and Attorneys, urged bankers to redefine success, noting that the traditional standards for return on assets and return on equity may be out of date.."Fifteen percent ROE and 1.5 percent ROA were the old metrics," he said. "Most banks do not have an earnings stream that strong any longer. The old metrics may simply be old." Smith said bankers should think about success using a long term view, and he said bankers need to incent the things they want. In the past, some banks compensated staff in a manner that encouraged risk-taking. "Incent earnings, safety and capital, not excessive risk-taking." he said..Smith, whose firm is based in Memphis, Tenn., spoke to bankers in Orlando, Fla., at a workshop conducted at the annual convention of the Independent Community Bankers of America on March 18. His presentation was titled "Ten new things community banks should know to be successful.".In addition to "redefining success," here are Smith's essentials:.Understand the regulatory environment. While regulators are making unrealistic demands on bankers that are leading to enforcement actions, Smith said most regulators believe bankers are in denial over the condition of their loan portfolios..Have a renewed vision of strategic planning. Bankers need to recommit to planning, he said, and "when a bank gets into trouble — that is not the time when planning needs to happen." Planning should not be an esoteric process for the board. Planning and budgeting are different tasks; boards should plan, leaving budgeting to management, he said. .Overcome the fear of new capital. Sometimes shareholders resist issuing new shares because they fear dilution of the value of their own shares. "If shareholders complain about low price, then encourage them to buy more stock," Smith advised. He said often shareholders who control the bank own enough that they can absorb some dilution and still retain control..Get back to basics. Deconstruct the financial statement and reconsider pricing on loans and deposits. Carefully consider non-interest income. "Don't try to be competitive on fee income," he advised, saying most bankers over-estimate customer sensitivity to fees. He said many "side" products, such as insurance and securities brokerage ultimately contribute little to the bottom line..Embrace change. In areas such as technology, operations, board and management, and succession planning, change is unavoidable, Smith said. Mobile banking is a service that all banks eventually will need to offer, he said..Some board members may no longer be a good fit for the bank. "There are no more ceremonial board positions," Smith said. Furthermore, he said, banks should evaluate board members, basing mandatory retirement on performance rather than age..And banks need to establish layers of management for succession purposes. Many banks kid themselves about having "a No. 2," he said. "They pretend to have a back-up when in fact they know that person isn't capable of running the bank." Smith said regulators don't look favorably on banks that bring in new talent from the outside in times of crisis. "You do not curry favor with the regulators by getting new management, even if you got a 4 on management," he said..Create a better board. Director education has never been more important, he said. Directors need to be involved, not passive. "The days of showing up at meetings without reading the materials ahead of time are over," he said..Seize acquisition opportunities. There are numerous opportunities to purchase assets at historically low prices, Smith said, although most smaller community bankers are not particularly active in the failed bank market. The FDIC loss-sharing agreements make purchases attractive, although the complexity of those arrangements often makes them unrealistic for smaller banks..Banks that get into trouble have difficulty finding buyers because most potential acquirers know they can do better simply waiting for the bank to fail. However, Smith said in some situations it might make sense for a small bank to reach out to a struggling bank with a merger proposal before it fails..Get in the right structure. Smith encouraged bankers to look at their incorporation structure to make sure it is the best for their situation. He said considerable advantages remain for banks that qualify for subchapter S incorporation..Be a community bank. "It is still a great time to be a community bank," Smith said. "We are in a tough time now but we will get through this." He said the hallmarks of community banking — high level of personal service, community involvement, providing services that people will remember — all remain highly valued.