COCHEO: Our first speaker is John V. Sawyer, chairman of the board of Union Trust, Ellsworth, Maine. I first came to know John when he attended one of these annual director breakfasts. John’s CEO is Peter Blyberg, a veteran banker.
John has had a varied career. He turned training and service in the Navy and Merchant Marine into a long career in marine insurance, winding up in New York City. Then in the 1970s he moved back to his hometown of Jonesport, Maine, to take over the family insurance business. John is a Certified Insurance Counselor.
SAWYER: What I want to do is tell you a little about our bank and our board of directors and then we can go from there.
We’re over 100 years old, having been in existence since 1887. Assets are around $350 million.
We had our first acquisition this past September. And prior to this our assets were around $260 million.
We have had steady growth over the years with good earnings. Our non-interest income amounts to about 25% of our total. Our return on equity is 11.7 percent and our return on assets is 1.4 percent. These have remained fairly steady over the past five years.
We have 729 shareholders. Ten percent of our stock is owned by our directors and senior officers. We encourage stock ownership and have 43 employees owning about 4,000 shares of stock.
Our market area is highly competitive. As an example, there are ten banking offices in our head office town of 6,000 people, a town of 6,000 people, and we’re all community bankers. In other words, we don’t have the competition of the large banks. They’ve sold their branches and pretty well pulled away from northern Maine.
We have 15 branches in 14 towns, ranging in population from 1,000 to 6,000 people. We are in five counties. The distance between our eastern and western branches is about 150 miles. It’s a long trip for one day.
Prior to our acquisition we were in just two counties and growth was slowing. We saw the need to expand and fortunately we were able to purchase a $75 million bank that was in a market similar to ours. This put us into three additional counties with good population and good growth potential.
We have a large board, consisting of 18 members. This might be contrary to recent trends, but it works well for us. As an example, we have a lobster pound operator, a wholesale seafood dealer–for those who don’t know it, a lobster pound is a big enclosure in a cove where they store lobsters in the fall, anywhere from 40,000 in a small pound to 150,000 in a large pound. And they purchase these lobsters in the fall when the shedders, as we call them, trap, and then they harden up. And what you eat in the wintertime is what comes out of these lobster pounds. The price will go up. It probably costs about $1 to feed them. And the price will probably go up at least $2 in that period of time. For the pound keepers it’s a big hazard. We loan a fair amount of money on these lobster pounds.
Our board has a wholesale seafood dealer, plumbing, heating and fuel oil dealer, insurance agent, real-estate broker, lumber yard and hardware store owner, auto parts and garage owner, a dentist, appliance store owner, general contractor, funeral director, a representative from the agricultural industry--we’re big in blueberries up our way, besides fishing. And right at this time we have the State Commissioner of Agriculture. He was on the board as vice chairman of the board of a small bank that we purchased.
We have two attorneys and our retired president and CEO is on the board as well as the retired executive vice president and chief financial officer.
Except for our former CEO and EVP, all of our directors are small business owners who fit well into their communities and know what is going on. They have a good relationship with our branch employees in their area.
Age-wise, we are in pretty good shape. We retire at age 72. At this time we have eight over 65, seven in their fifties, two in their forties, and one in his thirties. Two directors retire this year and we will be replacing them with younger people.
Our bank’s counsel does not sit on the board, nor does he attend our meetings. However, he attends our annual meetings and is introduced to our shareholders. Our general board meets once a month.
We also have an executive board which meets every Wednesday, except the last Wednesday of the month. The executive board also acts as a loan committee where all loans with a relationship of over $100,000 are presented by the loan officers.
Membership on this board consists of the CEO, chairman, five members of the general board, plus a rotating member of the general board. Each member of the general board serves one month.
Our committees consist of audit, trust, insurance, pension, retirement and benefits, and loan policy. Audit and trust are our two most active committees, meeting every other month. Half of our general board sits on one committee and the other half sits on the other. Large committees, but it keeps the directors tuned in to what’s going on on those two fronts.
Now, the chairman--me. I’ve been on the board since 1974, 27 years. I was selected because the bank was building a branch in my town of 1,500. As was the custom, there was to be a director from Jonesport and I fit the mold. I owned and operated an insurance agency serving the people in western Washington County, was active in many organizations, and had contacts with many people in our marketing area. In 1982 I was asked to serve on the executive board.
I became chairman in 1988. How did I become chairman? I feel it’s because I had an active interest in the bank, asked questions, and had a good relationship with the CEO and the board. My first reaction when asked was, "Why me?" I live 60 miles from my head office and I felt the chairman should be from the Ellsworth area. I also felt that if I was to be chairman I should know much more about the bank.
With this in mind, I took the position with the understanding that I had much to learn. I requested that I sit on all committees and that the CEO keep me informed. I’ve been on salary ever since I have been chairman. Several years ago we increased our directors’ fees, and at that time the directors voted to pay me a fee equivalent to their increase. So I received $50 for each meeting I attend.
Steve Cocheo worked out an outline for us to consider, and one of his categories was chairman’s role versus CEO’s. I like to think of Peter [Blyberg, the bank’s CEO] and I as a team. We spend considerable time together discussing many subjects. If either of us has anything on his mind, we have always felt free to bring it out. We have an excellent relationship and or goal is to do what is best for the bank.
I want to make it very clear, I do not get involved with managing the bank. Managing the bank is the CEO’s responsibility and directors should abide by this. Most usually if a director has anything on his or her mind he or she will discuss it with me and I will take it from there. As mentioned, The CEO and I have a strong cooperative relationship and I attribute this to good communication.
Our CEO presides at all board meetings. This works very well for us. Our executive board meets the day of our general board meeting and the CEO goes over his agenda. Financials, minutes of the previous general and executive board meetings, and important reading material are mailed to board members prior to the general board meeting. Minutes of the meeting are taken by the secretary of the board.
In addition to the board and committee meetings I attend, I make it a point to have good communications with our relationship managers, be active in community affairs, and recommend our bank to prospective customers when the occasion warrants. I try to keep up with what is going on in our industry and attend all strategic planning sessions with our senior management. If the CEO wants me at the bank or at a bank function, I’m available.
I have not had much involvement with the bank examiners. When things are going well there is not much need for the examiners to involve the chairman.
Steve asked the question with regard to conflict among board members. I attended a session here several years ago where there was a couple who were both directors and they said, "We get outvoted every single time we have a board meeting." And they were very upset about that. And I just can’t imagine something like that occurring.
Living up north, we all like to come down here for some of this nice summer climate. And some like to stay for an extended length of time. We feel very strongly with regard to board attendance, and this has only created a problem twice in my years as chairman. In both instances I discussed this with the CEO and the problem was resolved with the director resigning.
Being a director is serious business and attendance should be nearly mandatory. If a conflict or a problem occurs, I feel it is the chairman’s duty to be sure it is rectified. However, it should be discussed with the CEO before any action is taken.
Board self-assessments. I feel that this is a very touchy subject. Our board has not been involved in any self-analysis. And, to be frank, I’m not exactly sure how to handle it. If something like this is not handled properly, it could cause conflict and division within the board.
A short time ago we put out a directors’ questionnaire and the top four issues selected were succession planning, stock liquidity, having a planning session, and board structure. We have already appointed a succession committee which will not only be looking at the CEO but succession of the senior officers and the chairman. We will be scheduling a planning session and we’ll be reviewing our board structure. Perhaps we will get into board assessment at that time.
To wrap up, I feel it is important that the chairman have good rapport with his board and CEO, keep the communication lines open between all and have a good handle on the operation of the bank. I thank you for your attention.
COCHEO: Our second speaker, Ralph Slater, has served as chairman of the board of directors of The Wilton Bank, in Wilton, Conn., since 1986.
Ralph is an attorney. He serves as president of the Gregory & Adams professional law corporation, also of Wilton. He specializes in trust and estates work and has served as chair of the estates and probate section of the Connecticut Bar Association. He is also a member of the bar association’s banking section.
Ralph’s CEO is Nicki Brown, also a veteran banker.
SLATER: My president isn’t here because she was too nervous about what I might say, so she said, "I’ll rent the tape so I can listen to it in private." So that’s for her just to get her nervous and startLed.
Our bank is a lot different from John’s. We were founded in 1986, opened our doors in 1987. So we’re only about 14 years old this spring. A very young bank.
In terms of how we got started, two little anecdotes. One, as Steve Cocheo indicated, I’m an attorney, and a client of mine who was a real-estate developer and probably owned half of Wilton, had things organized very well in the 1970’s, where real estate throws off tax losses and you show no income on your tax return. He applied at the big bank in town for a $500 MasterCard and promptly got turned down.
I, in the same time frame, was moved up from an associate in the law firm to being a partner. I thought, "I’ve made it." And about that time in ‘79 there was a gas crisis. And you couldn’t get gas except by waiting in line for about an hour in our town.
But you could get diesel fuel out of your oil tank in the ground at your home. So I thought, "I’m going to get a diesel car," and the only diesel dealer in town was the Gulf station. So I applied for a Gulf credit card. I was turned down. They looked at me and said, "You’re self-employed for less than a month, you’re a bad risk."
I’m sitting there like, you know, I thought I just made partner. This is supposed to be a good thing.
So, with that as background, about five local entrepreneurs, including myself, got started and said "we need a bank in town that understands us," got our charter going, and we’ve been going ever since.
That’s unusual in our neck of the woods, however, because about that same time frame we had 12 banks open. It was like community banks were the "in" thing. Let’s have community banks all over. And one by one they folded in the real-estate crisis we had in Connecticut in the 1980’s. Just so you won’t think it was all community banks, a few large banks in the area that had been around for a couple hundred years--Mechanics and Farmers, City Trust, Merchants Bank--all went under as well.
So one of the things we learned was humility. And we said, why are we still here? I think there were two factors. One--again, since Nicki Brown [Wilton Bank’s president and CEO] isn’t here I can offer her a compliment and she can listen to it on the tape--she turned to us at one of the first meetings and said, "This bank will not make loans to directors." And we all looked at her like, "What? Are you nuts? Director loans are a good source of business and, frankly, we were expecting to be treated like royalty. That’s why we’re directors."
And she says, "No. You don’t get preferential treatment. The examiners wouldn’t like that. And if you can’t get your loans at another bank, I frankly don’t want to make them to you."
And I thought about that and it made sense. And in hindsight I look at the banks that went under and there were a number of them that were making loans of $1 million or more, unsecured, to the directors. And these were all big real-estate developers, wheeler-dealers, and they would kind of come in and say to the president, "I’m going to let you lend me $1 million, unsecured. And you know what, I’m even going to draw on the line. I’m doing you a privilege." And that was the attitude.
Many of them went under; they went under, their banks went under.
The other thing I think we learned was, watch the other banks, grow, but grow at an intelligent rate. As I said, about 12 banks in Connecticut all started the same time frame. We were the smallest. Every year you’d watch and they hit $100 million. We’re only at $40. They hit $200 million. We’re only at $60. Next year they were gone and we were still there. So one of the things we learned was, grow at a pace you’re comfortable with, understand what you’re doing, and if you’re growing too fast just stop. Don’t let your ego get in the way and say I’ve got to grow as fast as everybody else.
In terms of goals for ourselves, we peaked at $100 million in assets on June 30th of last year. And we’ve since declined back to around $92 million. That’s okay. If there isn’t a need for the money, I don’t want to grow just for the sake of growth and do something foolish and risky.
We typically try to have a ROA about 1.8%, 1.9%. ROE somewhere in the 15% to 20% percent range. We started with a dividend of about 10 cents and we just said, "Let’s grow it 10 cents every year." So it’s 10, 20, 30, 40. Very boring, but it works.
In terms of current use of earnings, we’ve got a formula that says we’re going to spend about a third of it on dividend, about a third of it we’re going to use to add back to capital for growth, and a third we’re using for a stock buyback program to provide liquidity for our bank. We only have a little over 400 shareholders. When someone wants to sell there may not be much of a market in the stock. And that can make it very volatile. So the bank is kind of a stopgap. That stock buyback program works very well.
In terms of our current market, it’s almost like we’re seeing the 1980s about to replay, perhaps. Two-acre building lots in our area go for about $500,000 and up. If a builder wants to build a new home when you’re buying a lot for $500,000, you just about can’t price a new home for less than $1.5 million. And some of them go up to $2.5 or $3 million.
I look at my own home and think that if I wanted to sell this nice four-bedroom colonial I could probably sell it for about $550-$600,000. But if I burned it down I could probably get $450,000 for the replacement insurance and then sell the vacant lot overlooking the lake for about $500-$600,000.
When my house is worth more as ashes than it is as a house, that makes me nervous about the state of our market again. I’m getting kind of scared. I look at the situation with our builders because the builders are a large portion of our loan portfolio. And I say, well, as long as NASDAQ stays over 5,000, we’re okay. So I just keep hoping for that.
In terms of our board situation, we have been very static. We started with our five founders, added four directors, including the bank president when we opened in 1987, and until 1998 there wasn’t one bit of change. That worked well but it also caused problems. It works well in that when we formed the board every one of us knew the other people on the board. We were all friends. We all get along well. I don’t think we’ve had a serious disagreement. Sometimes somebody will say on something, "Well, I’m going to vote no just because it’s always sickening to see these unanimous votes." There just haven’t been any contentious issues.
In terms of background, we have three lawyers, two real-estate brokers, one car dealer, one person from financial industry, and one person who has indicated he owns half the town.
The issue we are facing, though, is aging on our board. We’ve got about five directors who are either 70 or up or about the retire. And facing that situation I kind of said, you know, we can’t keep sticking our head in the ground. This is going to come to a head pretty soon.
So we decided to start planning for succession and trying to avoid this problem from happening in the future. So we took on the issue of mandatory retirement and said, "Okay, let’s consider the idea that at some point it’s difficult to tell somebody it’s time to retire. So if we just make a general rule you retire at a certain age, that might work well."
So they thought about that and said, sounds good, sound good. And they said let’s make 72 mandatory retirement age. "But, of course, we grandfather the existing board, don’t we?" And the others went, "Oh, of course, that goes without saying. Absolutely."
So I said, "Okay, well, that’s going to solve the problem down the road for the next chairman, maybe. But I’ve still got to deal with these guys."
And sometimes that can be difficult. We had one person who retired and she moved to Maine but still liked to come down and visit her daughter, who lives in the area. So she’d come back for board meetings once a month and I kind of said to her, "Really, is it appropriate for somebody from Maine to be on the local community bank board in Connecticut? It might not look right."
And she said, "Why not?"
I said, "Okay, we’ll deal with this." So I just kind of sent a memo out to my succession committee saying, "It’s going to be a change next April. This person is no longer in the community, shouldn’t be here. We need to find a replacement." And sometimes you have to be that blunt with people and just let them know it’s time to move on. But it’s a difficult issue.
Another issue we’re facing is retirement planning. I approached Nicki and said, "Nicki, I need to know about your plans, too." Because the one thing I don’t want to be doing is adding a bunch of brand-new directors right before she retires and have all that turmoil going on, and I don’t want to add directors right after she retires. If I have a new president, that will be enough challenge to deal with.
And Nicki is 39. So she surprised me when she said she was going to retire in 2007, potentially. She said, "Well, it will be the 20th anniversary of our bank, so that might be an appropriate time to retire." And she’s not really 39, by the way. But I said, "Okay, I’ve got a plan for that." Because that means if she’s going to retire in 2007 and I don’t want to add directors from like 2005 to 2009, I’ve got to replace quite a few directors before 2005. And I don’t want to add four directors in one year because that will upset the dynamics.
So we started with a plan to add two new directors in ‘98, which we did, another one this year in 2001, another one 2003, another one in 2004. And that became a whole plan.
Then we started identifying people on our advisory board who we might want to bring onto the board of directors. Because if we want somebody with certain skills and we don’t have that, we’ve got to go find it and get them on the advisory board before we move them up to the board of directors.
Because one of the biggest mistakes I think you can make in choosing directors is who do we know, who’s our good buddy, who’s a friend.
We started down that road but then we said, "Let’s retreat a bit and rethink this." Let’s figure out what the current strengths and weaknesses of our board are. What are the strengths we’re going to need in the next four, five, or ten years? What are we lacking? And then determine who in our community has those strengths we want to find. And it may not be the people we were initially thinking of as our friends and buddies that we wanted to invite onto the board.
One of the key things we did in terms of trying to keep the dynamics of the board going and the friendship was to say, "After each board meeting, let’s just go out for drinks for an hour or two and just chat. Anything that went on at the board meeting that you didn’t understand or you had a problem with, I want to hear about it right now. I don’t want to let it fester for two weeks or four weeks. I want to get these new directors out for some drinks, loosen them up, and hear any concerns or problems they’ve got right away."
In terms of dynamics on the board, we own 60% of the stock. That makes it very easy. Whenever there’s a concern, if we vote for something, I don’t have to worry about what the shareholders think. I’ve already got a majority of shareholders right at the table.
As I indicated though, however, it can also create some problems, where it’s a very insular board. We’ve been together for a long time and we have to be aware of that problem. We have to be sure that we’re reaching out to the community and that we’re not missing some problems that we’re overlooking.
We also do not let bank counsel sit on the board of directors. As an attorney, it pains me to say this, but sometimes attorneys make mistakes. And if they make a mistake, one of the last things I want is to have my bank counsel on the board of directors. I want to be able to talk about him behind his back.
And that’s one of the reasons I made it a point fairly early, much as Nicki said, "No loans to directors," I said, "I don’t want any bank business going to my law firm. Because if we make a mistake on anything, it’s going to be such an awkward situation, I don’t want to deal with that problem." So for the little bit of money that might be involved, I just make the rule, my firm will not get any business from the bank. Avoids a lot of conflicts, avoids a lot of awkward situations.
In terms of my relationship with the president and CEO, we’re very good friends. But we both know that neither one of us will ever abuse that trust and relationship and that friendship. If there wasn’t that trust, we couldn’t be friends. My office is about a quarter of a mile from the bank. I like to walk, so I probably walk over there three, four times a week, say "hi" to Nicki. Anything that’s on her mind, it comes up right away. Nothing gets to fester. It’s a very nice relationship. Obviously it wouldn’t work if I was 150 miles away. There you’ve got to work out a different kind of procedure. But for our situation it works just fine.
In terms of board self-assessment, we also do not do that. Again, that would be a prickly subject, but it’s one that you kind of do informally. My job as chairman, I think, is dealing with eight very successful businesspeople–who all have very strong egos. They’ve done very well or they wouldn’t be on the board, and they’re all very wealthy or they wouldn’t be on the board. So to suddenly be able to sit there and say, "Let me critique you and tell me what you’re doing wrong" would not go over well.
It kind of reminds me of a guy who used to work in my law firm. And he would always start a conversation by saying, "Well, you’re wrong and I’ll tell you why you’re wrong." And I’d come over to him and I’d say, "Eddie, you know, that doesn’t work well as an opening. It probably doesn’t get a warm response when you go in and talk to people like that. Could you change that?"
And he goes, "Well, Ralph, I think you’re wrong and I’ll tell you why."
I said, "No, forget it, forget it. You’re obviously not listening."
So board assessments are very crucial. And in our case it’s more like Nicki and I will sit down and it’s like if she’s got a problem with somebody she may hint at the problem to me and I’ll try and talk to that person outside of a board meeting informally. Sometimes the problem can be with me, because when I’m that close to Nicki it can be a situation where I’ll come in and say, "Can I see this loan file that went bad and let me evaluate it?"
And she’ll say, "Ralph, I think you’re micromanaging." And the good thing is she has the strength and we have the strength, in our relationship, when I need a slap on the wrist she can sit there and go, "Get away. You’re micromanaging." And I have the respect for her that I will say, "You’re right. I’m backing off on this one."
But usually, if I’ve got a good comment to make, she’s willing to listen. And that’s been very important. And as John Sawyer indicated, I can’t imagine not having a strong relationship with the chairman and the CEO. It would just be beyond believe to say that, if those two people can’t work together, how that bank is going to thrive. It just isn’t.
Q & A
COCHEO: Both of the boards that you describe are fairly close. Do you do anything offsite, retreats, things like that to help build that spirit? John?
SAWYER: We haven’t done it very much. We did a couple of years ago have an all-day session with senior management. I do think that this is something that Peter and I have talked about this and I think we have to do this. We have strategic planning within the management realm, which I attend. And of course we report that to the board and so on and so forth. We’re getting the strategic planning into the middle management area also.
Peter has a good thing going with the staff and so forth and so on. But I do think the directors are crying a little bit for a little more involvement, good or bad.
SLATER: That’s a situation we probably don’t face because we’re a small bank in one town. Everybody knows each other. We go out to lunch together, we socialize, so that didn’t really come up as an issue. We do go away for strategic planning periodically. When we do, we make it like a long weekend. Morning sessions, afternoon golf, dinner in the evenings. And if I had a board that was spread out over a couple hundred miles, I’d probably make sure I’d do that at least twice a year because I think it’s very important for the board members to know each other on a friendly basis, especially if difficult problems ever arise. If there’s a recession, we have problems, you want friends around that table.
MODERATOR: Thank you. Questions from the audience?
QUESTION: Ralph, could you elaborate a little bit on your advisory board. I’m interested in that concept. It sounds like it’s somewhat of a feeder program. Is that the gist of it?
SLATER: It started out as a program where we said we’re a very small board, we’re all the same. We’ve got to reach out to different areas. So let’s bring in some advisory board members. It gives them a little title, some prestige, makes them a good customer of the bank.
But then, as we thought about it, we said we start adding directors, one of the first things you want to see is how does somebody behave in a meeting. And sometimes you can get a bad surprise where you think somebody’s going to be a great director and they’re not. So we said this would be a good way to start observing them at meetings. We have the advisory board meetings once a quarter. They’ll be like in three of them, each with about anywhere from ten to 15, depending upon attendance. We’ve got about 15 on the advisory board itself. And, A, it’s a great source of ideas, but it’s a great way to see these people in action and find out how they’re going to work on the board.
So, yes, it’s a feeder program.
QUESTION: Ralph regarding your advisory board. Are they paid or are they volunteers?
SLATER: My advisory board is strictly volunteer at this point.
