Integrity Lost - Integrity Found
By Mike Doman
As a fourth generation banker, I literally grew up at our local bank in Pensacola, Florida, The Citizens & Peoples National Bank. I can't remember a time in my early childhood when I didn't dream about being the president of this great company. To follow in my fathers' footsteps and succeed him as president was the basis of that recurring dream. As a child, I would love it when my father or mother would take me to the bank. I would run around and speak to everyone and I considered many of those employees like my extended family. Everyone enjoyed working there and the warmth and hospitality they displayed impelled me to want to work there someday.
I joined the bank in 1982 and felt that I was well on my way to fulfilling that dream when something happened that changed everything. On October 6, 1986, my grandfather passed away. At the time, he was the Chairman of the Board of Directors and the former president of our bank. As an independent bank with a limited number of stockholders, and he being one of the largest stockholders, our future was pretty certain. We were at that time rated as one of the top 100 banks in the nation in safety and soundness. For a small independent bank, this was unprecedented.
After he died, there was clearly a change in attitude that was led by the Board of Directors to bring the bank forward to be a major player in the Pensacola market. To change how we did business in order to compete with the other national and regional rivals within our community. There was also a faction of stockholders and directors that were insistent to test the waters for a possible buyout although my father was against it.
On August 29, 1988, less than two years after my grandfather's death, the bank was sold to Bank South Corporation, a large regional bank with headquarters in Atlanta, Georgia. Our stockholders got what they wanted, a large paycheck, and our bank the promise of a bright future, better services and a decentralized style of management that would allow our bank to continue with its current management team and Board of Directors. The only difference was our company's earnings were being shipped upstream to our new holding company in order to bolster their own dwindling profits.
As a now publicly traded company and with Bank South's continued struggle to make earnings goals even though our local bank was still doing quite well, I watched my stock value in this new company begin to deteriorate. In 1993, our bank again was sold, this time in a swap between Bank South and Barnett Bank. Bank South was able to get a great deal on some of Barnett's branches in the Georgia market where Bank South had no presence and Barnett (one of our local rivals) was able to acquire our bank and become the largest bank in Pensacola.
This was the beginning of the acquisition and merger boom that was sweeping the nation. This was also the beginning of the mortgage boom that was happening across the country. As the high interest rates of the late 70's began to decrease, banks were creating separate divisions within their own institutions to market services normally handled by their staff of lenders and bank officers. Independent mortgage brokerage companies began springing up all over the country.
Then something happened that changed banking forever. I believe this was the beginning of our downfall and is what put our great country in this financial mess we are in today.
Banks and mortgage companies got the novel idea of providing incentives and commissions to their mortgage lenders in order to boost their loan production volume. They began to steer away from salaried positions to commission only positions. Today this practice has spilled over to every facet of banking including the most basic services. No longer are employees rewarded for customer satisfaction and great customer service, they are rewarded for pushing product.
These types of programs are great when times are easy, but when the ability to sell these products diminishes, many problems begin to surface.
Having worked on both commission and on salary, I have seen first hand the perils of this mentality. Not only have I watched friends lose their jobs, I have watched lenders falsify documents in order to make a loan so they can put food on the table for their family. I have seen a total disconnect from lenders in simple morality. "Sell at any cost" has replaced the Golden Rule.
When my hometown bank was gobbled up by a large corporate bank, I watched the principles with which I had grown up with get tossed out the window and substituted by words such as sales charting, sales referrals, cross selling and sales culture. "Trust" departments were being replaced by brokerage services.
The local banker has gone from a trusted financial advisor to the door to door salesman with financial products to sell rather than vacuums or encyclopedias.
In the late 90's, I worked for Norwest Mortgage, who at the time was one of the largest mortgage companies in the nation. One of our most successful producers out of the gate was a gentleman who had no lending experience at all. He was a salesman from a local real estate company who could sell swamp land to the Pope! The problem was he didn't give a darn about the customer. He would put people in adjustable rate mortgages that paid higher commissions and charged outrageous fees with no regard for the customers' needs. Needless to say, he never received a favorable customer satisfaction survey (which our company would send out after the closing) but he made a ton of money. So the company looked the other way.
At the time the sub-prime market was starting to swell. Driven by the higher yield, investors were beginning to come out of the woodwork. And when Fannie Mae and Freddie Mac started loosening their underwriting guidelines to get their piece of the pie, the whole sub-prime industry went mainstream. With Wall Street investors chomping at the bit to take advantage of these high risk high yield loans, anyone with a job and few hundred dollars could buy a house. Buying a home with 20% down was the rule, now it was the exception.
Because many of the sub-prime borrowers had less than perfect credit or the homes they were buying did not fit into the box of a normal conventional loan, many mortgage lenders were using this disparity to convince buyers into adjustable rate mortgages with higher rates and would charge excessive fees all the while telling these borrowers they would be able to refinance in a couple of years to a low rate loan.
However, many of these sub-prime loans had large prepayment penalties which many borrowers were unaware of until the day before closing. Many of the buyers would go through with the closing anyway due to the fear of losing their down payment they had made when they signed the real estate purchase contract. Thus, predatory lending was born.
Since these types of loans were being packaged and sold to investment groups in the secondary market and not held by the mortgage companies or banks, lenders were becoming less and less concerned for these borrowers ability to repay the loans. They were already moving on to the next sucker!
In the old days, banks did not have the luxury of selling their loans to investors with no recourse. If the borrower couldn't pay, the bank had to foreclose on the borrower and take back the property and re-sell it. That is why banks would require a 20% down payment, to insure that if they did take the property back, they could sell it at face value and use their 20% equity to cover legal fees for foreclosure and pay the realtor's fee and minimize the bank's losses.
Being disheartened by the mortgage industry and the direction my company was taking, I decided to go back into banking and in 2000, I joined a large regional bank. The bank was based primarily in the southeast at that time. I was hired as a branch manager. Although this was a large change from the small independent hometown bank where I had grown up, I immediately connected during my initial interview with the CEO, who was also the senior lending officer over the greater Pensacola, Fort Walton and Panama City markets. He was obviously cut from the same cloth as my father and grandfather and I admired his style of banking.
However, by 2002, he had retired and the bank's focus (like many of the larger banks) shifted to sales. By 2003, I was devoting over twenty percent of my day to documenting sales calls, referrals and cross sales that my employees and I were making on a weekly basis. The company ramped up its already aggressive sales program and incentive plans. The company also began to tie our employee's performance reviews to their success in achieving the sales goals set by the company. If you didn't meet the minimum standards set by the company, no raise! But if you exceeded your goals, big bonus!
While I was working as Branch Manager, from time to time, I would hire tellers and other employees that had previously worked in other branches within the company. One of the employees we hired had come from another branch and told us a story about one of the new accounts representatives from a neighboring town. How this employee would deceive her customers just to sell a product. How she would use her foreign accent to pretend she didn't understand when a customer tried to reject the sale of additional products or services. How she would tell them that she needed the money because her husband was in the hospital. She was consistently one of the company's top producers and would do anything to make the sale. Her supervisor would look the other way because she was getting large bonuses due to her employee's success.
By the end of 2002, I began to notice a trend that really began to make me question the tactics and motives of the senior management at our head office in Birmingham, Alabama.
As the year rolled on, the company would position themselves competitively in our local markets and many of my fellow commissioned employees (like myself) were able to push ourselves to reach the company's' lofty sales goals throughout the year because of a fear of losing our jobs. But like clockwork, around October, November and December of every year, our loan rates would increase and deposit rates decrease just enough to put our company at a disadvantage in our local marketplace causing many of our managers to miss the mark of reaching our sales goals by the end of the year or to some degree, decrease the amount of the bonus we would have expected had we maintained our ability to compete.
I would imagine that the company saved millions of dollars in unpaid bonuses each year by using this tactic. They would push loan and deposit growth by offering large bonuses, but make it next to impossible for the managers to reach their goals by the end of the year. By January or February, we would regain our competitiveness in our local market. Coincidence? You be the judge.
In this new age of banking, integrity and morality for the most part has become lost in this new generation of bankers. The senior management in most banks today is all about the money. They have grown up with different values than those bestowed upon me by my mentors like my father and grandfather. They have all since retired along with the respect, trust and admiration that the name "banker" represented.
Integrity Found:
So where do we go from here and how do we fix this problem? How do we get back the trust of the American people and restore the integrity of the nations banking system?
Step One: Repair Safety and Soundness.
To do this we must change the entire compensation structure of the banking system. This will need to be implemented not only on the lending side of the fence, but also the deposit and investment side as well. Although this will be a monumental task in itself, it must be done. We must remove the carrot in front of the horse and return to the days of performance based on customer satisfaction rather than production volume. We have to get back to quality over quantity, performance over production.
Would an employee be willing to put his/her job on the line by bending the rules or falsifying documents to make a loan if there was no additional incentive or cash in their pocket to do so? I doubt it. We need to eliminate that temptation altogether.
It is also time to eliminate some of the ridiculous loan products that allow borrowers to finance 100% of the purchase price for a home. It is time to get back to the days of requiring borrowers to put a substantial amount of their "own money" into the purchase of their new home. No more free rides. No more deals where the bank finances 80% and the seller finances the additional 20% as a second mortgage so the buyer can purchase a home with no money down. The fact is, and the statistics prove, that borrowers with little or no money invested in a property are much more likely to default on their loan than someone who has put a substantial amount of their own cash into the purchase.
Step Two: Consolidation and Collaboration.
I was trained as a lender to make sound lending decisions in every aspect of lending: retail, commercial and mortgage lending. Today we have retail lenders, commercial lenders, conventional mortgage lenders, sub-prime mortgage lenders, leasing specialists and the list goes on and on. By consolidating some of these services and divisions back under one roof, the savings would be considerable. This would also make the job of oversight by regulatory agencies like the OCC, FDIC or NCUA a lot less complicated. The ability of a financial institution to hide its problems by splitting into different entities has created a smoke screen for troubled companies like Lehman Brothers and AIG.
It is also necessary that our financial regulatory agencies also be consolidated. These agencies essentially provide the same services but with no communication between themselves. Not only will consolidating these independent organizations eliminate a huge duplication of duties, it will allow this single organization to collaborate with each division more effectively to prevent gaps in oversight and to paint a clearer picture of our country's financial condition.
It is also imperative that these regulatory agencies hire experienced auditors that have a thorough knowledge of the lending industry. I've seen so many State and Federal auditors come through the system fresh out of school that frankly don't know what they are looking for. Our country must be willing to pony up and recruit experienced lenders to be the watch dogs and protect the public's money. The regulatory agencies must also be willing to take a harder look, review a larger percentage of a bank's loan portfolio in order to prohibit more bad loans from slipping through the cracks unchecked.
I also think it is high time that Credit Unions that operate outside the boundaries of providing the basic services of deposits and personal loans be taxed just like banks and any other for-profit financial institution. If they wish to maintain their current non-profit status, they must adhere to restricted more stringent guidelines for membership. These new tax revenues will help to subsidize the increase in costs for more stringent oversight by the regulatory agencies.
There also must be a fundamental change in the mentality of the owners of these companies (i.e. stockholders). As one of my good friends and local bank president, Ken Naylor said, "A bank was like a three-legged stool." "Each leg represented one of three principals: 1) Soundness, 2) Profitability and 3) Growth." "If a loan wasn't sound credit-wise, then that leg would be too short and the stool would fall over." "Or if a loan was good on credit but priced too thin (not sufficiently profitable), then the same result would occur." "As for growth, all of the legs had to grow simultaneously and at the same rate or one leg would grow too fast and the stool would fall over."
Stockholders along with Wall Street analysts have become consumed by growth and profitability. They have overlooked the need for safety, soundness and most importantly stability. More is not always better. Just ask the stockholders of Washington Mutual, IndyMac and Wachovia! As a stockholder, you need to take a serious look at the management team YOU vote for and place in power. Are they too walking out the back door with their pockets full of multi-million dollar severance packages while your company's very existence hangs in the balance? Stockholders will need to take a more active role in the direction their company is heading.
By following these steps outlined above, I believe that the banking industry can regain its integrity. It won't be easy, but it will be necessary if our country ever expects to win back the trust and respect of the American people. My ideas will not be popular with many senior management teams because it requires an admission of guilt and faulty decision making on their part. They have spent millions and millions of dollars developing these sales strategies in the hopes of gaining an advantage over their competition. They have taken their eyes off the ball!
I left behind my banking career in 2007 after devoting 25 years of my life to what I thought would be a lifelong profession. But I long for the day when the term "banker" again carries with it the connotation of trust, respect and admiration.
Mike Doman
Email: mike@gulfbreezefinancialconsulting.com
[http://www.gulfbreezefinancialconsulting.com]
(Mike Doman is a former bank executive and has worked in almost every sector of banking including retail, commercial and mortgage lending. Mike is the founder of Gulf Breeze Financial Consulting which specializes in restructuring and retraining financial institutions to recapture their image and trust in the marketplace. Mike lives in Gulf Breeze, Florida with his three children, Haley, Jordan & Reese.)
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