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Directors' Compass
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COURAGE AND LEADERSHIP For the last several years we’ve written numerous
Directors’ Compasses on the topic of “leadership” since
what differentiates the good banks from those banks that have issues
and challenges is often leadership of the Board and Management. We
believe that this element is so critical to the success of not only
community banks, but also other businesses and also our own families.
As part of advancing the importance of leadership, for over 20 years
we’ve been writing and preaching our core values of “loyalty,
courage and honor.” As we’ve discussed “leadership,” we have profiled the leadership styles of various different leaders such as Abraham Lincoln, Robert E. Lee, Attila the Hun, John Wooden and even Mr. Rogers. A recurring theme of each of these leaders is that they possessed courage, provided leadership in a difficult time and had core values. From our readings and experiences, courage may be the single most decisive trait in a leader, because leadership comes often most during times of crisis. Winston Churchill wrote, “Courage is rightly esteemed the first of human qualities … because it is the quality which guarantees all others.” We have long stated to Boards and Managements that courage is not the lack of fear but it is the ability to face one’s fears with an open heart, open mind and a dedication to the bank. We want to focus on this important trait, and this month we begin a three month multi-piece article about courage and core values utilizing the book, “Courage the Backbone of Leadership” by Gus Lee, Jossey-Bass. In these difficult and challenging times, directors and executive officers of banks require courage. Gus Lee defines courage as, “The mental and moral strength to venture, persevere and withstand danger, fear and difficulty. It comes from the Latin and Middle English word for “heart.” Courage is the tip of the spear of integrity and the spark plug for principle conduct. It is integrity at its highest.” The premise of Gus Lee is that long before the invention of corporations and business, we were all hard wired to show courage regardless of risk to ourselves. As we have learned from our leaders in the past, no individual organization or society comes to character without struggle, and that dealing with these struggles requires courage. You only have to look at the leadership of Abraham Lincoln or other exceptional leaders in times of extreme crisis to see this first hand. The banking industry is in crisis and this is the time for Boards and Managements to step forward with real courage that will be the backbone of true leadership. When we can master the skills that are the competence of courage, we confidently enact bold leadership practices, translating the first human quality (courage) into effective and inspiring actions of true excellence. Excellence within the bank and excellence within our lives! Gus Lee emphasizes that to demonstrate courage requires three base skills: courageous communication; courageous leadership; and courageous problem solving. Over the next few months we will look at these three base skills, but before discussing these three concepts of courage, we have to look within ourselves and ask the question - what are our core values? Demonstrating courage in today’s world is only part of the challenge. We have to be able to demonstrate courage in coordination with high corporate values and an alignment of those behaviors with those core values. A critical portion of Gus Lee’s book focuses on defining our core values. “Everyone has core values. We live them in our actions, decisions and relationships, and we display them publicly when we are under pressure. Admirable or not, a core value is a non-negotiable practice that is most obvious in times of stress. Some core values are excellent, many are venal, and most are neither because they are often a little of both.” While the Findleys have focused on three core values of: Loyalty, Courage and Honor, we also recognize that many banks have their own core values. However, we also find many boards and managements do not know what their core values are, and if they do have core values identified, an important question is - what is the alignment of your leaders with those core values? It’s important to first understand core values and whether
those core values are high, middle or low core values. Gus Lee breaks
down the three core values as follows: low core values are common
habits; middle core values are visible but best business practices;
and great values suggest high core values which are the highest principles.
A critical exercise for all leaders, which include not only the CEO,
but the board and executive managements, is to really understand
where your core values lie. The rest of this month’s Directors’ Compass
focuses on the identification of these core values and where they
lie in the scheme of things. This requires significant effort and
soul searching as to where they fit. Gus Lee emphasizes that low core values are common habits. They are not best business practices. Behaviors of low core values can be found in all common organizations by the most unperceptive observer. Yet most people refuse to admit that they follow lower core values. Low core values are seductive and emerge from base human instincts which most often can only produce short-term results. They inevitably fail because they contravene the principles that invite and sustain true success and can’t fulfill high order needs. Gus Lee, in his book, identifies thirty-three core values. In reviewing these low core values, we see some of these issues within our own organization, but also realize that there are a number of banks, inclusive of Boards and Managements, that unfortunately possess a number of these core values that impede their long-term success. Some of the low core values that we see over and over again are: ruthlessness; short-term planning; disrespect; pride; arrogance; egotism; manipulation; self-interest; backstabbing; greed; and misrepresentation. Take a look at the full list but when reviewing these low core values it is obvious that these are not the qualities that one hopes to possess. While some of these low core values can have some immediate short-term results, they don’t produce long-term results, long-term success and can often result in long-term problems. In difficult and challenging times, it’s often easy to fall back on low core values: however, for Boards and Managements to truly succeed they need to push toward middle core values and high core values, since they are the basis on which long-term success can be driven. Premier Performing Banks do not possess many low core values! Middle Core Values Middle core values are defined by Gus Lee as visible best business practices. Practiced purely, they are rare, but a good observer can see them in an operation. Middle core values are defined as good value, but unfortunately they can seduce an executive or a corporation into thinking that it is achieving genuine excellence when it is only generating acceptable performance. Middle core values are admirable and desirable, but they are only the by-products of high core values. Middle core values are produced by highest principles, but are not principles themselves. Gus Lee identifies twenty-four of these middle core values, which include: creativity; innovation; leadership; respect; service; honesty; encouragement; honor; loyalty; teamwork; and duty. Many of these words appear in the core values and mission statements of banks and many Boards believe they are the driving factors behind their success. However, as Gus Lee emphasizes, middle core values are produced by highest principles, but are not principles themselves. What is fascinating to the Findleys is that two of the three high core values that are important to us, honor and loyalty, are considered to be middle core values by Gus Lee; therefore, it is time, even for the Findleys, to reconsider their principles going forward. However Gus Lee does emphasize that it does make sense for an organization to adopt middle core values, but only if they are accompanied by at least one high core value. Guess we are partially safe. High Core Values Gus Lee emphasizes that great values suggest high core values. They are the highest principles. They are the platinum standard, but there are only three high core values as defined by Gus Lee. They are: integrity, courage and character. “These are the biggest words in organizational theory. They should be used with discipline. That begins with understanding what each of these words mean.” These three words can make the difference. Let’s look at these three words and what they can mean to your bank going forward. Integrity. Integrity is acting for what is right. When we do this, we feel whole and uniquely powerful. Integrity comes from the Latin for “complete” and “incorruptible.” Gus Lee emphasizes that integrity has three parts: (1) Discern right from wrong. An interesting question: does your bank and those in positions of authority have integrity? Many banks state they stand for integrity. However, do they really display integrity when dealing with their partners - whether it’s their shareholders, officers, employees, customers or even the regulatory agencies? Integrity means walking the walk, talking the talk and doing it all. To focus on the basic issue of right versus wrong Gus Lee emphasizes three parts to determining right from wrong: (1) Honor your conscience. If you can’t determine right from wrong then how can you really make a difference? How can people follow you? How can you be a long-term player? Can you look deep within yourself and within your bank to uplift the importance of integrity? Easier said than done and must be lived 24/7. Courage. Gus Lee believes this is the mental and moral strength to venture, persevere and withstand danger, fear or difficulty. Courage begins by facing strong, negative, gut-wrenching feelings. It requires the direct and robust facing of fear. But the opposite of courage isn’t fear. Fear is simply the internal condition that courage overcomes. The opposite of courage is indifference. Courage comes from commitment, care and love whereas allowing wrongs in others leads to others’ mistreatment and suffering. That is why being courageous for rightness is superior to being “a good person” who keeps his own nose clean. Character. Character is the result of sustained integrity and courage. It derives from a Greek word that means “engrave, impress deeply and permanently.” It is possessed by a person with fixed habits of moral firmness and excellence who acts spontaneously for what is right. A person of character has consistently demonstrated the behaviors of courage and integrity over a lifetime. Character is the most challenging core value because it requires a lifetime to fulfill. In reviewing one’s own core values, it is important to recognize that some people are “good people” and some people are “courageous people.” The good people are honest. They don’t cheat or steal and seldom cause serious problems, but they don’t solve the tough moral ones either. This suggests that such people cannot effectively lead. The courageous people stand to the right. They boldly take risks for principles and for others. Gus Lee focuses on a character matrix and a river of fear that exists between good people who have honesty, honor, ethics and morals, and those who are courageous who possess integrity, courage and character. Important self inspection is whether you as a leader possess the good qualities or the leader that possess the courageous values. Not all possess the courageous values because of the river of fear that exists. As we look at courageous leadership, going forward, it’s important that we all look at our core values to determine where we fit and what work lies ahead. While this is not the easiest exercise, if one is true to themselves and also true to their bank, then there is time for improvement. It’s not too late. However, it starts by knowing oneself and also being honest with oneself. Next month we will start looking at these core values and how to implement them into courageous communication. However, you can’t go down the path of courageous leadership until you know that you have the right core values to start with. DE NOVO REBOUND? Attached to this Newsletter is an insert with the March 31, 2010 financial performance numbers for de novo banks that have opened since January 1, 2005. While we had previously stated that this regular feature of the Newsletter would be on a semiannual basis rather than quarterly – we felt we needed to share the numbers because for several of these banks – there appears to be a rebound and some real first quarter performance. Any positive news is good news for the industry! When we looked at the first quarter of 2010 we wonder – and maybe with some lethal optimism that maybe several of the banks have turned the corner and some income performance for 2010 is possible. When over 60 percent of the California banks lost money in 2009 (a larger percentage of the de novo banks due to age) some of these numbers are promising. However let’s hope that the banks that have shown good numbers are not waiting for later in the year to clean the house and make higher provisions to loan loss reserves. The Federal Reserve Bank of San Francisco in the first quarter review of all banks in the 12th District was recognizing some promising performance that if sustained is definite good news for the industry. Let’s hope so! In reviewing the financial performance numbers for the de novos for the first quarter of 2010, you will see that many did pretty well (all things considered), but there still are some stragglers and weakened banks that made additional large provisions to reserves and increased non-interest expense that impacted their bottom line performance. We also saw some softening in the capital ratios as well as increases in the non-performing assets. While we did not insert the Texas ratios in this report, we note that the Texas ratios for a number of the de novo banks remain at critical levels and may signal a hard exit in 2010 or early 2011. Capital, capital and capital remains the game and those who have it are better off then those who do not. Below are some brief thoughts with regard to the Classes of 2005 through 2009. We state brief since no matter what is written – there will be some comments – normally from those who are at the bottom looking up. While in this article we will continue to refer to the “dog banks” as “danks,” we are looking for a new label going forward since there are a number of readers (often “danks” themselves) who do not like the term. Therefore, please provide your suggestions, and if your suggestion is used we will provide the credit to the creative artist among you. Class of 2005 There were 23 banks that made the end of 2009. Two of the banks that started the year were placed into receivership during 2009. However, we note that six of the banking institutions have an allowance for loan and lease losses below 2%, which seems to be a new benchmark from a regulatory perspective for FAS 5. This is down from ten as of year end. It appears that many have gotten the message as to the right number. We are pleased that thirteen of the banks made money during the first quarter, up from the six who showed a profit for 2009. Only one of the banks actually showed a zero or positive undivided profit. Loan to deposits ratios for most of these banks remain in the 90% range. There are a few that are in excess of 100% that are probably getting some pressure from a regulatory perspective. We see a significant number of non-performing assets for several of the banks and hopefully the ALLL is adequate. We continue to see some definite winners in the Class of 2005 – at least five! We now see ten mediocre banks (up from eight); and we have lowered the number of “danks” to 8. That is an improvement. Expect some hard exit potential here from a few and still a lot of shareholder emotional depression. There continue to be opportunities that present themselves in these banks for potential alignment. Class of 2006 There were 23 banks that opened for business in 2006 and, again, the first quarter for ten of the banks was positive! This number is up from six banks that made money in 2009. Some of the income numbers look pretty good. Still only one of the banks had a positive retained earnings and continues to build its franchise up in the Northern California market. That is banking the old fashioned way! We are also pleased that several of the banks have continued to increase their ALLL and only nine were below 2.0%. Most of these banks grew a small degree during the first quarter. Of the Class of 2006, we now see five winners; eight mediocre banks; and unfortunately still ten “danks.” We have stated on several occasions that several of these banks should never have opened. This has not changed; however, several of these banks provide opportunities for others that could take advantage of opportunities in this marketplace. Class of 2007 In 2007 there were 20 banks that opened and we are pleased that seven actually showed profitability during the first quarter. We were anticipating that a couple more will be added to the profit list during the second quarter. For the most part the ALLL looks reasonable for most and only a few have increasing non performing assets. This appears manageable at this time. For the most part, most of the banks in this class showed a reasonable growth during the first quarter. However, we are still concerned with the reliance on non core or brokered deposits at a few of these banks. Overall, the capital ratios for most of these banks looks relatively strong and have the capacity to grow; however, we are not certain the regulators are feeling comfortable with any significant growth now that the de novo status has been extended and business plan modifications have to be submitted to the regulatory agencies. This is the “Mother May I” game. We see three clear winners; nine mediocre banks (up from seven); and have reduced the number of “danks” from ten to eight. Hopefully we do not get a lot of restatements or adjustments through the rest of the year. We still believe that for some it was realignment time and an enlightening experience to be visited by the regulatory agencies. Class of 2008 There were seven banks that are still in business that opened during
2008. One of the banks that opened during 2008 voluntarily liquidated
in 2009. For the most part it is remains too early in the game however
one of the seven did make money in the first quarter. Congratulations!
The ALLL is building for all of these banks and only one has brokered
deposits. Class of 2009 There were two banks that opened during 2009 and it is too early to tell. We still continue to wonder – why? We suspect that there are some shareholders wondering the same. A tough time to open a new bank and also a tough time to create an operating platform that can sustain long term profitability. Time will tell. Beauty remains in the eye of the beholder. While there still remains several of these de novo banks, their boards and managements who believe that they are very strong and viable entities … we may differ. There are some real winners here as there are throughout California landscape. But there are others who are just playing for time. The good news is the performance continues to improve for several and that is reason to celebrate. The numbers are difficult to argue with, but in this de novo group, we see some strong winners that have been focused on the fundamentals and didn’t make mistakes. They are really tied to being community banking institutions and have a viable future. Unfortunately, we still see a large percentage of the de novos that are challenged not only by the economy but also by the regulators. Changing from a “dank” to a winner may be as hard as turning water into wine. That would be neat if it could be done and also a lot of fun to drink the profits. But not likely. Gary Steven Findley, Editor URL: http://www.Findley-Reports.com/compass.html E-Mail info@Findley-Reports.com
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