It’s ten after seven, starting to get dark. Parents are waiting to pick up their kids. The players have been pounding on each other for hours. They’ve run the drills, practiced hard, done their sprints.

Everybody is panting.

Coach runs down the field and whistles through his teeth to get everybody together.

“Look,” he says, “it’s getting late. We’ve run 20 sprints. That’s enough for any team to run. We’re playing Melville on Saturday. They might be off the field by now, or maybe not. I’m not sure. We can take a chance and go in, or we can make sure we’re in better shape than they are and we can run some more. What do you say?”
Everybody shouts, “Let’s do it.”

Coach smiles, thinking, “They get it.”

Two days later with the game on the line in the fourth quarter, coach goes out during a time-out to rally the troops.
“All right, listen guys. Look over at the other side. Look at them, they’re sucking wind. Remember Thursday night?”

“Yes, coach.”

“This is what we were running for, this next down. We’re not sucking wind. This is why we ran those sprints. Let’s punch ’em in the mouth and go into the end zone right now!”

When Brad Rock tells that story, complete with the whistle through his teeth, you feel like you’re on the field, even though you’re sitting in his office at Bank of Smithtown. It’s real because he’s done it. He was head varsity coach of Smithtown High School for five years. It’s real because he was a player himself, an All-American quarterback in high school. And it’s real because he’s still coaching every work day as chairman, president, and CEO of $1.06 billion Smithtown Bancorp, and its Bank of Smithtown subsidiary, based in Hauppauge, N.Y.

No, employees don’t run sprints around the office, but his whole approach to running the bank is to get everybody on the same page, to get everybody to buy into the Bank of Smithtown way of doing things.

Here’s an example. Once a week Rock, his two lending execs, and the other three commercial lenders meet to review loan proposals. They’ve been doing this for more than ten years.

“When I’m talking with a lender about one of his applications, everybody else in the room is learning how we think about the deal. I want everybody to hear everything. It builds collective knowledge.”

Commercial real estate lending is Bank of Smithtown’s earnings engine and Rock is very hands-on about it. In the accompanying story, “What drives those earnings?” (p. 35), he explains in detail how the bank averages 24% loan growth a year, with virtually no nonperforming loans or charge-offs.

Passionate about his team
Bradley E. Rock, soon to be the 122nd chairman of the American Bankers Association, loves what he does. Ask him a question—any question—about Bank of Smithtown and then sit back and listen as a detailed and passionate response pours forth in a way that only someone who has lived, breathed, nurtured, shaped, and toiled at a venture with the full measure of his energy can provide.

Not only does he love what he does, he cares deeply about the people engaged along with him in the venture—his players. He has the paternal zeal of the entrepreneur who has built something, even though he did not found the bank (it was chartered in 1910). In fact, he credits a large measure of his leadership training to the man who preceded him as bank president, Irving “Buck” Schechter, who, along with Rock’s father, James, and his high school football coach, Marv Weitz, Rock regards as his three touchstones.

Rock is a great believer that it’s not brilliant strategy that wins the day, but consistently good execution by the front-line and back-office people. This belief is why everyone participates in the bank’s incentive compensation plan, a program that consulting firms have offered to pay for the rights to sell.

A self-described “jock,” Rock is direct and competitive in whatever he does—work, golf, or advocating banking’s position. But his real passion is to get a group of people working together to the best of their ability. He’s articulate and has the analytical mind of a corporate lawyer, which he was for 14 years. He also has a very good memory for details, making him an effective witness at congressional hearings.

The people who work for him are crazy about “the coach.” Many of them, including his executive assistant, Judy Barber, have been working with him for 20 years or more. How can you not like a boss who walks around the office every couple of months blowing on a duck call, gathering people to follow him like the Pied Piper to present a $100 bill to the latest recipient of the “Lucky Duck” award? (“You’ve got to have fun at work,” says Rock.) There may be some who don’t like the coach, or his regimen, but they usually leave of their own accord.

The perfect meritocracy
A few years ago, Rock gave a presentation at a conference about his bank’s incentive compensation plan, which gives bonuses to proof operators and loan clerks in addition to managers and loan officers.

A banker rose from the audience and said, “You mean you have everybody in the bank on the plan?”
“Absolutely,” said Rock.

“That’s crazy,” the banker said. “Only the top five people impact your earnings. You’re just giving away the bank’s money.”

“Really?” replied Rock. “If you believe that, then try this: On Monday, when you get back, send home everybody for the week except those five executives. Then, on Friday, see how much business the top five have generated.”

Many people pay lip service to the “worker bees,” but Rock puts his money where his mouth is, which is why everyone is eligible for a bonus. He’s been doing this for 13 years, tweaking the plan year after year to make sure it’s as fair as possible.

Bank of Smithtown’s incentive plan is not about transactions. “We never pay on a widget basis—say, $5 for every checking account,” says Rock. “That just produces a lot of churning and unprofitable accounts.”

Instead, the plan focuses on what is important to the bank, which varies by department. In the case of a branch, it’s the average deposit balance, because that’s what feeds the bank’s lending engine. Thus each branch is a team and is measured on the amount of deposits generated, interest expense, and other factors.

The plan has three components—individual, team, and bank—with a formula linking all three. The formula is the same for everyone, including Rock. That is the key to the plan.

That doesn’t mean everyone’s bonus is the same—the more skilled person gets a higher salary and would be eligible for a higher bonus, if they perform well—but the formula for calculating it is the same.
Rock cites his assistant, Judy Barber, as an example. Her bonus has nothing to do with how much paper she churns out.

“What’s her job?” asks Rock. “She supports me. I can do my job better with her help. So her incentive formula should be the same as my formula.”

In every case the individual’s bonus depends not just on their efforts, but on every one else in the team. If someone doesn’t do his job, therefore, he affects other people’s bonuses.

The effect of this, over time, has been very significant. It tends to weed out mediocre performers.

“Co-workers,” says Rock, “will make it clear you’re not pulling your weight, because it’s affecting their bonus.”

Also, Rock says that at annual review time, “your boss sits down with you and says, ‘you were eligible for a $9,000 bonus. But you didn’t do this and you didn’t do that. You’re one of the weaker cogs in the department.

Therefore you’re only getting a $3,000 bonus.’

“There are only two possible results from this,” says Rock. “One, the person says, ‘The heck with this, I’m leaving.’ And I’m delighted. The other is that they think, ‘I’m not having that happen to me again,’ and they immediately get a whole lot better. Now, I’m even more delighted because we’ve turned a low performer into a high performer.”

Over time, says Rock, people realize this is how the bank operates, and that, “we’re all in this together.” The CEO or the head of lending can’t get a big bonus, he says, and the people under him not get a bonus. “If the bank does poorly,” says Rock, “everyone’s bonus is affected.”

Small fish with a big following
That scenario—the bank doing poorly—has been strictly hypothetical for the last 13 years. The reality has been consistent success. The tables at right show some of the highlights. Others include a ten-year average return on equity of 23.24% (through Dec. 2006), and 12 consecutive years of record earnings.

Shareholders have done very well. As stated in a recent analyst presentation, “If you had invested $100,000 in Smithtown Bancorp stock on Jan. 1, 1995, 12 years later on Dec. 31, 2006 that investment was worth $2,643,700.” That number takes into account five stock splits.

When Rock became president in 1990, Bank of Smithtown was already a public company, but with only 447,955 shares outstanding. Thanks to the recession that hit its market, the bank had a backlog of bad loans to work out. It had also become inefficient.

Over the next couple of years, Rock worked through the bad loans, reengineered the operations, instituted the incentive plan, and expanded the bank’s lending footprint to include all of Long Island, New York City, and southern Connecticut. He also added branches, and, beginning in the late ’90s, began rethinking what a branch should be (described in the sidebar on the previous page under the heading, “Bank Pros”).

For years the bank’s stock had traded on the “pink sheets” and then on the Over-the-Counter bulletin board. It was thinly traded and mostly held by local people, though Bank of Smith-town had never been a family bank. But with its problems behind it, the bank began to grow its earnings significantly and by the mid-1990s had attracted more trading volume than many NASDAQ-traded banks.

In 2002, Rock agreed to list on NASDAQ for the sake of increased visibility and liquidity. Both the number of shares and the bank’s market cap had reached the millions by then, far above what was typical for a bank that didn’t reach $1 billion in assets until 2006.

Institutional investors love the stock. According to recent SEC filings, Smithtown Bancorp had 33% of its stock owned by these investors, whereas most banks its size, Rock notes, would have about 6% institutional ownership.

Smithtown Bancorp’s stock performance largely neutralizes two risks that keep CEOs of public companies awake at night—agitation from activist shareholders and threats of unwanted takeovers. And as for the investor/analyst pressure managers sometimes complain about, Rock shrugs it off. “There’s pressure to perform well around here all the time,” he says. “A self-imposed pressure.”

Buck and his shadow
Though it’s only 50 miles east of Manhattan, Smithtown, N.Y., is more like small-town America than a New York City suburb. Plenty of people make the 90-minute commute into the city on the Long Island Rail Road, but the town, on Long Island’s north shore, has its own identity. It was established in the 1600s by Richard Smith, who, legend has it, was told by the Indians he could have all the land he could encircle in a day, while riding astride a bull.

Brad and his wife, Tracy, grew up in the village of Hauppauge (pronounced HAH-pog), which is part of the town of Smithtown. They dated in high school, where Brad was not only a star quarterback, but was good enough in both baseball (pitcher and shortstop) and basketball (point guard) to get scholarship offers in all three sports. He chose a full football scholarship at Boston College, switching after a couple of years to the University of Connecticut, where he continued to play quarterback until he graduated.

Ironically, given his success in sports, Rock from his early teens was interested in becoming either a lawyer or a banker. As it turned out, he became both. So, despite offers to play in the Canadian Football League, Rock chose to go to Cornell Law School, and has not been active in team sports since.

A significant event in Rock’s life occurred in May of 1974, while he was still an undergraduate. He was looking for a business-related summer job, and his father arranged an interview with Buck Schechter, who with his brother, Herman, ran a law firm in town. Buck also was president of the Bank of Smithtown—the two offices being about a block apart on Main Street.

Young Rock and Schechter had never met before, although each knew of the other by reputation—Rock as the high school athlete, Schechter as the decorated World War II Marine Corps hero who had fought on Tinian and Iwo Jima.

“Buck was a very direct guy,” says Rock. “He told me in the interview, ‘We’ve never hired anyone so young [Rock was 20] or who had not entered law school, but I like your attitude and your energy. We could hire you as a ‘gofer’ for $125 a week’.”

This was less than Rock had been making at previous summer jobs. Schechter said to him, “Why don’t you think it over?”

But Rock replied, “I don’t need to think it over. I’d like to work here.”

“Good,” said Schechter. “Meet me at the front door tomorrow at 7:30.”

“That first time I met Buck,” says Rock, “I knew I wanted to be around him. Boy, was that the right move. For the next 16 years, when not in law school, I was his shadow. Everywhere he went, I went.” Schechter was a top real-estate lawyer, and Rock would sit in on some big-deal negotiations for malls and other projects.

He and Schechter would have lunch together every day, sitting across the desk from each other. Rock would ask him, “Why did you do such and such?” and Schechter would explain.

All this, says Rock, “gave me experience beyond my years.” After getting his law degree, Rock joined the Schechter law firm full time, made partner and became Bank of Smithtown’s attorney. He also handled cases for Citibank and other banks, and for schools.

Reflecting back on his younger years, Rock recognizes a common theme: His father, an elementary school teacher, “always gave me lots of decision-making authority, and rarely told me what to do, just telling me the options”; Marv Weitz, his high school football coach and English teacher, taught him everything he knew about play calling and then let him call the plays; and Buck taught him by “letting me see and hear everything.”

So when Rock became president of the bank at age 38, he was, as he says, “about as prepared as anyone could be to take over the bank.”

Brad and Tracy Rock married when Brad entered law school. Tracy was a kindergarten teacher and then stayed at home to raise the couple’s two children—Bradley, Jr., now 25, and Casandra “Casey,” now 23. Brad Jr. is a commercial lender for Bank of Smithtown, while Casey is currently in an executive training program for retailer Lord & Taylor in New York City.

The family is very close and gathers often at the Rock’s home in Smithtown. They’re all sports fans, and if the Yankees are playing as they prepare a meal, the game will be on the kitchen TV. The women in this family can definitely hold their own talking baseball or football.

The same job, but bigger
The ABA can thank Tom Goldrick for bringing Brad Rock into the fold. The recently retired CEO of State Bank of Long Island, Jericho, N.Y., was a mentor to Rock, and had served as both chairman of the New York Bankers Association and on ABA’s Community Bankers Council. Rock had been president of the Independent Bankers Association of New York, and was also active with NYBA, serving on its board. Though the bank was an ABA member, he had not been involved with the national group up to that point.

When a position on the ABA Community Bankers Council opened for a New York banker, Goldrick and NYBA President Mike Smith thought Rock would be a good choice. Rock wasn’t so sure at first.

“I had bought a little bit into the rumors that ABA was really for the big banks, and I voiced that to Tom. He told me I really didn’t know what I was talking about and that I should go do it and I would find out firsthand that nothing could be further from the truth.”

After serving five years on the Community Bankers Council, Rock was invited to be vice-chairman of the ABA Government Relations Council, followed by a year as chairman. It was at the ABA that Rock first met Earl McVicker, CEO of Central Bank & Trust of Hutchinson, Kan., and current ABA chairman, and Albert “Kell” Kelly, CEO of SpiritBank, Bristow, Okla., and a member of the ABA Board of Directors. The three men and their spouses became good friends as they served together on ABA councils. This is one of the great benefits of association service, says Rock.

Within a few years of becoming a bank CEO, Rock realized that participating in the legislative and regulatory process was crucial. “It’s very important on behalf of your bank to be outspoken about these issues,” he says, “because they matter to the future of the industry and where your company will be three or five years.”

In 2004, Rock was nominated to be first vice-chairman of ABA, beginning a three-year process that will culminate in his election as chairman at the ABA Banking Leaders Conference and Annual Convention this month in San Diego.

Rock views the ABA post as an extension of what he does at Bank of Smithtown: trying to get everyone on the same page and then turning that consensus into action. It’s a little bigger task at ABA, he admits, especially now that the association will be merging with America’s Community Bankers next month.

Rock will be involved in the integration of the two groups, but Earl McVicker and current ACB chairman Mark Macomber will co-chair a committee to oversee the transition, so Rock will be able to focus on other association issues. The combined organization will be a big plus with lobbying, says Rock, as it will represent 95% of the banking assets of the United States, and will have deeper and stronger staff.
Taking on the “cherry pickers”

The new chairman has two areas of particular interest as he enters his term. He refers to them as “fair competition” and “upstream feedback.”

About the first, he says, “It’s become popular lately to have folks outside the banking industry cherry-pick the best parts of our business, but not take on any of the burdens of our franchise. They know banking is a profitable business, but they don’t want to pay the same taxes that we pay, and they don’t want to be regulated the way we’re regulated.”

Two primary examples of this are credit unions—the ones that have abandoned what Rock calls the “quid pro quo” underlying the 1937 law that governs that industry—and the Farm Credit System, subsidized by an implicit federal guarantee of its debt.

If these two groups “continue to be allowed to expand their business lending opportunities and be completely exempt from income taxes and from CRA and so on,” says Rock, “the community banking system that has worked so well in the United States will be replaced by a less-effective, less-experienced, less-regulated, non-taxpaying group of institutions. People say we’re just protecting our turf when we say this,” he says.

“There is some of that. But you have to ask, is this change a good thing systemically? Will consumers and small businesses be better off? I don’t think so.”

By way of example, he cites the current mess in the mortgage market where the business moved out of savings institutions and banks—regulated businesses—into a collection of unregulated players, for which we’re now paying the price.

Tell us what’s happening
The second theme, upstream feedback, has to do particularly with regulatory and accounting matters.
Big issues like credit unions and industrial loan companies tend to surface in Washington as a bill in Congress or a regulatory proposal, says Rock. “We know how to deal with that.”

More difficult to deal with, he says, are things that bankers experience in the field during examinations or audits; things that often don’t surface in Washington. Rock hopes to get bankers to speak up more often about what they’re seeing—to tell their association representatives what’s going on so the association can act as a clearing house and begin to bring these things to the attention of policymakers.

A good example of how this can work in practice occurred last year in the debate over the commercial real estate guidelines. Dozens of bankers reported that examiners were treating the proposed guidelines as a hard lending cap. Armed with that information, the ABA and the state associations met with senior regulators, which helped lead to improved guidelines and better instructions to examiners.

“This is the way we as an industry need to band together to fight regulatory and accounting issues, and not just have each of us saying, ‘I don’t understand why the association isn’t doing something about this.’ We can’t fight the right battles if we’re not pooling our information.”

The thing about Brad Rock that an article can’t really convey is the depth of his knowledge on the subjects touched on here, and many others. He does say on occasion, “I don’t know about that,” but on the subject of subprime lending, the Farm Credit System, credit unions, and many others he is well versed.

And, as you probably won’t be surprised to hear by now, he’s equally knowledgeable about sports. (If football is your game, ask Rock about the code phrases Peyton Manning and other NFL quarterbacks use to shift plays before the snap. He and Brad Jr. listen for them as they watch games.)

In all, you’d be hard pressed to find a better-qualified, or better-prepared person to be the chief representative of the industry for the next 12 months. BJ

 

 

What drives those earnings?

Bank of Smithtown’s success has been singular under CEO Brad Rock’s leadership. Three things account for a great deal of that performance. One is the bank’s unusual incentive compensation plan, described in the main article under the heading “The perfect meritocracy.” The plan allows everyone in the company to earn bonuses using the same basic formula, based on company, team, and individual performance.

The other two factors are described here.

The Meeting
If one thing more than anything else defines Bank of Smithtown’s performance, it’s the bank’s commercial lending operation—the “engine,” as Rock calls it.

“Commercial” in this case means predominantly commercial real estate. The bank’s sweet spot is loans of $1 million to $10 million. Loan growth has averaged 24.35% over the last ten years. Quality is beyond blue chip.

At the end of the first quarter nonperformers were .002% of total loans; net chargeoffs were .004%; there was one ORE property.

How do they do that? Basically they hold a weekly loan meeting to review all loan applications of $250,000 and up. Rock, his two chief lending officers, and the other three commercial lenders attend every meeting—and stay for the entire meeting.

“I insist that everybody read every loan prior to the meeting,” says Rock. “No exceptions. Going over the background of a loan when it’s all there in writing is a waste of time. Instead, when we sit down, right out of the chute we’re coming with the hard questions.”

Here is a typical loan-meeting exchange, with Rock speaking:

“Let’s start with the Braunstein loan. What I see as the problem here is that Braunstein has always done high-end residential and he’s done it in Brooklyn. But this is Queens, and by the way, the neighborhood isn’t like the ones he’s been in before… Fred [one of lenders, not his real name], have you seen this property? Do you have photos? Have you talked to Mr. Braunstein about the differences?

Fred says, no, he hasn’t seen the property.

“Then you need to do that. Right, Fred? Okay let’s move on to the next one…”

“Here’s what happens,” says Rock. “The other lenders, especially the less experienced ones, hear all this and are thinking, ‘Whoa, boy, these are the kinds of questions that get asked. I guess when I’m presenting I better have visited; I better have analyzed the market’.”

“They can challenge my opinion,” says Rock, “I love that. And by the way, I don’t rail on people. I take great care not to embarrass somebody because they disagree about a loan. That would be a disaster. Then they wouldn’t disagree. But if someone hasn’t done their homework, that’s different. Then they’re going to look foolish.

“You do this year after year for ten years with everybody sitting in the room,” says Rock, “and you’ve got a pretty good lending team.”

As the bank has grown, Rock has relinquished some duties, but he hasn’t, and won’t, give up these loan meetings.

Bank Pros
Brad Rock hates it when, as a customer, someone’s looking at a computer screen about him and he can’t see it.

So he had architects design special tables for his new-look branches. They are semicircular, with a short “el” section, and look something like the letter “P.” They are designed to allow customer and banker to sit side by side. Rock calls them “P tables.”

Bank of Smithtown’s new branches are so different from the usual bank office that people have walked in and wondered if they were in a bank. There is no teller counter and no tellers or platform officers, for that matter. Instead, there are five or more Bank Pros, one of whom will approach a customer as she walks in. That Bank Pro becomes dedicated to that customer, unless some special expertise is needed.

If the customer is making a deposit, the banker will take it and walk the customer over to a counter in front of a flat screen plasma display showing news from CNN or CNBC, where the customer can sit and have some coffee while the banker takes care of her transaction.

All Banker Pros do all jobs, including the person designated as branch manager for the day. The P tables are used for opening accounts and other more complex transactions.

Small amounts of cash are dispensed by an employee-operated cash dispenser behind the coffee counter. Larger withdrawals and deposits are handled in the “bullpen,” a locked room off to the side.

The other thing you’ll notice about Bank of Smithtown’s branch interiors is how uncluttered they are. There are no “take one” stands, no promotional rate messages. “Nobody sees that stuff,” says Rock, who admits that this view drives his marketing people crazy. But there are several video monitors in the branch in addition to the big plasma screen, and these display bank promotions about insurance and other products.

(More photos of Bank of Smithtown’s new branches can be seen in the digital edition at www.ababj.com.)

Of the bank’s 15 locations, eight are new-style. Deposit growth for the bank overall has averaged 19.21% for the past ten years (28% in the first quarter of this year), and part of the reason, Rock believes, is the new design.

In a suburban branch, he says, if you collect $1 to $1.5 million in deposits, you’ll break even in 17-18 months. One of his new branches attracted $14 million in its first 13 weeks, of which $12.3 million were core deposits.

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