Wolf Etter seminar looks at management, taxes and more

Northwestern Financial Review, Dec 15-Dec 31, 2004 by Bengtson, Tom

While good planning is important, the success of a bank is much more dependent upon hiring good employees, Dr. Phillip White told bankers gathered in Mankato, Minn., Nov. 4 for the 24th annual bankers' seminar hosted by the Wolf Etter accounting firm. Using an entertaining story-telling style, White urged bankers to "get the best people in the bank that you can and keep them forever."

He said many bank boards are so focused on short-term cost containment that they fail to compensate good employees sufficiently to retain them over many years. While cost containment is important, White said it is only a short-term profit enhancer "that will not carry community banks into the future." He said the future of any good community bank is dependent upon its staff. Employees implement the strategy; White emphasized that good people are more important than good strategy.

"There are a lot of strategies for improving earnings," he said, citing free checking, credit cards, insurance sales, seniors' clubs, and other programs. "There is no shortage of strategies. What there is a shortage of is good people.

"There are good community banks of all sizes in all kinds of markets. So it is not these things which determine success," White said. "It is the people. The ownership and leadership of the bank determine its success."

White encouraged bankers to consider "golden handcuff" compensation programs that will retain the best employees. He said there is a shortage of good people and that aggressive banks are going after the best people in the industry. Community bankers need to protect their best employees from headhunters working for other banks, White said.

White said that a bank needs a "rainmaker" president, not a "caretaker" president. "Banks that are headed by a caretaker are vulnerable," he said.

Kevin Murphy, deputy commissioner of commerce for the state of Minnesota, told bankers White was on the mark. "We are seeing a shortage of competent managers," Murphy told the group. "We had a group come into our office with $8 million in capital ready to charter a new bank. We told them to come back when they have a management team in place. We haven't heard from them since. The competition for good people is ferocious, particularly in the Metro area."

Murphy said five new banks have been chartered in Minnesota in 2004, and that four more are expected to be chartered in the first quarter of 2005.

The condition of banks is generally sound. He said the list of problem banks in Minnesota has only five banks on it, all located in rural areas. The department's "watch list" has 20 banks on it. These are 3-rated banks; all but three of them are located in rural areas.

Seminar hosts Robert Etter and Linda Koerselman updated bankers on changes in tax law. Etter noted an error in the American Jobs Creation Act gives benefits to banks incorporated under subchapter S rules, but not to bank holding companies.

"It is a serious error in the bill," said Etter, referring to provisions that now allow only sub S banks to include IRA shareholders.

The pair of tax experts was joined by Scott Richardson of Clark Consulting, who offered an update on rules affecting nonqualified deferred compensation agreements. Because of scandals at Enron and other companies, the rules governing such compensation arrangements have been tightened. Richardson said virtually every plan is affected and will have to be modified.

Gary Stern, president of the Minneapolis Federal Reserve Bank, gave bankers an overview of the policy issues surrounding treatment of banks deemed "too big to fail." Stern recently co-wrote a book on the topic and told bankers now is the time to address the issue - while the economy is relatively good.

Too big to fail is a problem, he said, because it results in a misallocation of resources, which ultimately retards the growth of the economy. That means Americans are not enjoying a standard of living that is as high as it could be.

Although there have been relatively few bank failures since the early 1990s, Stern argued that the problem has grown worse during the last dozen years because there are more large banks, those banks have grown more complex, and they have concentrated greater levels of assets.

Although FDICIA dealt with the issue, he doesn't believe the 1991 law resolved it. "It hasn't been tested, thankfully," he noted, but he observed that resolution of the famous Continental Illinois bank failure in the mid 1980s would not have been any different if FDICIA had been in place.

Stern said the U.S. government needs to demonstrate to unsecured creditors at large institutions that they are at greater risk than they were years ago. He suggested, for example, that regulators conduct simulations that show the impact of particular bank failures on unsecured creditors. "These kinds of things should be publicized so that unsecured creditors know regulators are watching this," Stern said.

He said we need to send a signal that the environment is changing.

By Tom Bengtson