Author Archive

What do you want to be when you grow up? Creating a development plan that works

Time after time, personal development plans have all the staying power of a new year’s resolution. What goes wrong? Why is a good plan so hard to build, and even harder to execute?

Too Ambitious ….

Too trivial ….

Too vague ….

Too far away ….

Correct on all counts, but mere symptoms of the real problem – Creating and executing effective executive development plans is hard work, and planning efforts most often fail because someone forgot that people are unique, and that the change we are talking about may be real change. More often than not those attempting development planning processes (participants and practioners), don’t take time to understand how the “person they are working on” learns and grows, and/or don’t have a solid process for “testing” to see if the plans they have made have a high probability for generating change (i.e. provides the motivations needed for effective follow-through).

The Future Community Bank Model – Greater Diversity of Revenues and Reduced Risk

We wonder about the future of community banking.  Times are tough right now in community banking, but we are thinking about the business model for the long-term future of community banks.  Does anybody care?  We think so.

It seems every time there is a major wave of consolidation in banking, there follows a wave of new local bank charter applications.  There is always a strong desire among local business owners, developers and city fathers to have a locally owned bank that understands the local market and its needs for financing.  When the dust settles on the current banking crisis, and the coming wave of consolidation begins to wane, it is predictable that there will be another wave of interest in starting new local banks.  The necessary capital should be available as long as a business model can be found that will produce a reasonable return on what is sure to be a higher capital requirement.  We will take up the question of how much capital is needed in a future blog.

So, if you were starting a new bank, what business model would you want to use?  One lesson we relearn every 15 or so years is that concentration of loans in any one industry or type of lending is always risky.  There is just not enough margin in many types of lending to warrant risking more than a relatively safe level of concentration.  Some community banks have found some success in the insurance business or the investment brokerage business.  One thing seems clear, diversity of assets and revenue sources will be a key part of the future model.

It has also become clear that most, not all but most, of the small banks that got into trouble after the 2008 credit and liquidity crunch had little to no local franchise.  A local franchise is a brand that your local community understands and sees as a valuable part of the community.  While money was cheap and plentiful during the nineties and the beginning of the current decade, many banks started and leveraged their capital with brokered and wholesale deposits instead of local consumer and business deposits.  The demand for loans, especially for funding local real estate projects was strong during those boom days and a small marginal spread could be made with that model.  As we know though, when the easy money dried up, that model of banking did too.

The new community banking model will require more capital and greater control of risk.  We may not know everything about a new model for community banking but we can be sure it will require a strategy of building a local franchise for deposit growth and loan diversity.  I would love to hear your thoughts, so please comment below.  Also, to discuss your bank’s future, call me at 919-644-6962 or complete a contact request at

Give ‘em some space … Professional distance can equate to effective leadership

Parenting, teaching and counseling are leadership activities. Unfortunately, today’s parents, teachers and team leaders are all too likely to be operating as if their primary goal is to establish wonderful relationships with their children and/or students. Leaders, however, must guard against letting the desire for relationships undermine their leadership responsibilities. An attempt on the part of a person in a leadership position to establish “wonderful relationships” reflects insecurity, which can open the door to challenges within or surrounding the relationship. They don’t have to like you for you to be respected and seen as an effective professional, and seeking that fully appreciated “high” can be draining and disillusioning.

Effective leaders command by establishing an energizing vision of the future. They usually guide by establishing the “outer boundaries” and can delegate the known, while managing the unknown themselves. People in leadership positions who are overly demanding do not know how to command. Effective leaders are relaxed, not uptight. They realize that perfection is not necessarily a “best” goal. They are open to changing their minds (albeit they have to take care not to appear to be wishy-washy), and are not defensive when questioned, etc. They communicate clearly and concisely, which is essential to a projection of decisiveness, but are not prone to over control or feeling that they must know answers or be right. They understand the power of “discovery”, and while they may protect their charges from disaster, they also let people make mistakes and learn from them. Above all, the effective leader is focused on helping the people s/he leads become better at what they are doing. As a consequence, working for or with a good leader is intrinsically rewarding.

Anatomy of a Community Bank Failure

Why do community banks fail?  We are being called by a growing number of community banks that have serious credit problems, usually related to commercial real estate loans.  These banks desperately need capital, as losses from loan write-offs have eroded the capital base.  Why have so many community banks found themselves in this situation?

I could argue that the nation’s policies and regulations pushed community banks into their current situation.  If the problem today is too much concentration in real estate loans, I’m sorry, but this was the only lending niche left for community banks after interstate banking allowed large-scale mega-banks to form and compete on price for Commercial and Industrial loans and the consumer loan business was handed to the credit unions with their non-taxable status and the auto companies with their ability to finance their cars at giveaway rates.  Where else could community banks turn but local businesses and their real estate needs.

Matthews, Young SextantNow, having argued that they couldn’t help it, I would also argue that the real problem was a lack of leadership.  Lack of leadership started in Washington, where Congress allowed unfair competition.  Regulators tried to bring attention to the concentration of real estate loans being built-in community banks, but they were obviously not very convincing in so doing.  Boards of Directors allowed concentration risk to build because they assumed that real estate value would always appreciate.  Finally, too many CEOs and other senior officers of community banks took the easy way out and grew their banks down the path of least resistance.  People ALWAYS make the difference; on the way up and on the way down.

Armchair quarterbacking is easy, and I can’t claim that I saw the enormity of the impact of the real estate bubble or the liquidity crisis, but these things worried me and I tried to warn clients that diversity of assets, funded by a strong local deposit franchise was a worthy goal.  Alas, wholesale funds were too cheap and real estate was booming, so that approach seemed pretty boring.  Perhaps next time, we will all risk being stronger leaders.

Are SERPs On Their Way Out?

Increasingly, Compensation Committees are asking if Supplemental Executive Retirement Plans should be eliminated from executive pay packages along with Change in Control Parachute payments and country club dues.  SERPs are misunderstood as unnecessary expenditures of shareholders’ hard earned capital, but in a 2009 survey of executive benefits, conducted by Clark Consulting, Inc., 67% of responding companies reported having supplemental executive retirement plans (SERPs), similar to the prevalence in 2007.  Let’s look at the history of SERPs to see why they are so prevalent.

During the last quartile of the Twentieth Century, the capitalist world moved away from offering defined benefit retirement plans.  Shifting mortality rates and increasing volatility of investment markets rendered Plans that promise certain retirement benefits much riskier and companies found it increasingly difficult to forecast their future costs.  Most of those old defined benefit retirement plans provided for a retirement at roughly 75% of a career employee’s final five-year average base salary.  There were variations, but that was about the average Plan’s promised benefit.  Along came ERISA (Employee Retirement Income Security Act) which established by statute that highly compensated folks could not benefit at the same percentage as the average worker in these IRS qualified plans.  The limits that ERISA imposed on participation in qualified retirement plans, like defined benefit and defined contribution 401(k) Plans, meant that executives can only provide for about 40% of their final five-year average base salaries during their retirement years.  This is still true.

So, Companies realized that the folks who were having the greatest impact on the organization, were being discriminated against on their ability to participate in the retirement plans.  Supplemental Executive Retirement Plans were then created to plug the gap.  Over time, some have forgotten what SERPs were designed to do and some of the benefits got out of hand.  Those high benefit SERPs were criticized, and rightfully so, by stakeholders.  One old argument was that executives make so much on stock-based long-term incentive plans that they should not need to save supplements for retirement savings.  Recent trends in stock markets and other forces have pushed previously granted stock options “under water,” meaning the cost to the executive to exercise the option is now greater than the value of the underlying stock.  Who wants that?  Some would say, “well, to bad for the executives.  It is their fault that the stock price has declined.”  Maybe the executives should be replaced, but if a Board decides that they want to retain their executives, or recruit new executives, the SERP issue will need to be resolved.

Retirement funds are like “bread, butter and mortgage money.”  People do not want to risk it too much, especially now that traditional sources of savings, like Social Security, are shaky.  Congress, long ago, in all its wisdom, decided that highly compensated folks did not need help saving for retirement.  So, what happened?  SERPs were born…..and my guess is that they will be around for the foreseeable future.

What’s Your Digital Marketing Strategy?

We recently surveyed a group of financial institution clients about the status of their digital marketing programs.  Twenty one community financial institutions were emailed invitations to participate in this survey during May and early June.  Nineteen participated and fifteen of those who completed the survey identified themselves as the person responsible for overall retail marketing in their organization.  50% of the respondents are financial institutions with assets of $500 Million to $999 Million.  Most are community commercial banks.

This Chart summarizes their use of various digital marketing tools:

The scores shown above are combined weighted average scores for “plan to use” and “currently use.”  If every respondent was currently using a tool, the score would be “2.”

While almost everybody has a website, significantly smaller numbers of these financial institutions are using digital media and social websites to direct traffic to the primary sites, and delivery of services through mobile devises is still rare for community institutions.  While the survey sample is not large enough to be statistically representative of the industry, the findings beg some questions.  Will smaller banks and credit unions be able to compete for the customers of the future; the folks who never come into your office and do everything on-line or via mobile technology?  How do you cross sell services in this new environment, when you never see your prospect?

We believe that there is still time to “get in the game,” but the new generation of customers/members is forming banking habits now that will be “sticky” for a long time.  It is imperative that community institutions figure out how to communicate with young customers, what they want and how to deliver those services in a safe and convenient fashion.

Incentive Compensation Needed More Than Ever

To be clear, I am not talking about discretionary bonus pay.  That is money wasted by managers who do not know what to expect of their business or their employees.  I am talking about a promise to pay a specific amount for a specific outcome, and the promise is made in advance of the performance period.  You know, the kind of incentive you used with your kids, or your parents used with you.  “Son, please give up the girl, sell the motorcycle, go back to school…..”  Sometimes an incentive can be a stick, but often a carrot is more effective.

When the economy and the effects of the bursting of the latest bubble are threatening your company, management teams need focus, and properly designed incentives create focus.  It’s not that good people need to be bribed.  Rather, when an incentive is properly designed it communicates a powerful message of what is expected from employees.  It focuses the team on exactly what you need.  Let’s face it, there is little less effective than a talented group of people all pulling in opposing directions.  When times get tough, the tough get going….but you better make sure they are going in the right direction.

One bank CEO told me recently, “I need the Incentive Plan now more than ever,” as he strategized how to reduce loan losses, raise capital and improve liquidity.  This team has a new set of metrics based on that strategy and a significant upside opportunity if they achieve the turnaround.  The shareholders and management team will win or lose together and there is no question what it will be worth.

It is true that incentive pay, if large enough to create the focus that is needed, can be dangerous.  You will get what you pay for, so you better make sure you want it.  I have seen companies driven over cliffs with poorly designed incentives.  In financial services, care must be taken to incent asset quality, risk management, controlled liquidity and interest sensitivity risk…..not just growth.

As the economy stumbles along through a slow recovery, unusual opportunities will become available.  Will your team be ready and focused?

American Bankers Association Lists “Impact on Community Banks of the Regulatory Restructuring Bill”

Here is a list of 27 areas where the ABA says there would be new regulations stemming from the current form of Senate bill, S.3217, better known as “Fin Reg.”

  1. New risk committee requirement: The Federal Reserve Board is authorized to require all publicly traded bank holding companies with less than $10 billion in assets to have a new “risk committee.” The committee will have to have as many independent directors as the Fed dictates and must have at least one risk management expert that has experience in “identifying, assessing, and managing risk exposures of large, complex firms.” (Sec. 165(g)(2)(B) of the Senate bill)
  2. Expanded affiliate transactions rules: The definition of “covered transaction” in the affiliate transaction laws would be expanded to include repurchase transactions, derivative transactions, and securities borrowing or lending. It also will require that all covered transactions be secured at all times, instead of just at origination. (Sec. 608(a))
  3. Expanded lending limit rules: The lending limit rules would include credit exposures arising from derivatives, repo transactions, and securities lending. (Sec. 610)
  4. Lower lending limits for state banks: The lending limits applicable to national banks would apply to state banks as well. Thus, state banks located in states with higher limits would have lower limits under the bill. (Sec. 611)
  5. New insider transaction rules: Banks would be subject to new Federal Reserve Board rules governing purchases of assets from, or sales to, insiders. (Sec. 615)
  6. Capital rules for holding companies: Bank holding companies would be subject to new capital requirements. (Sec. 616(a))
  7. “Source of strength” rules for holding companies: Bank holding companies also would be subject to new rules regarding the company’s role as a source of strength to its bank subsidiaries. (Sec. 616(c))
  8. Limits on securitizations: Securitizers and originators would, as a general rule, have to retain at least 5% of the credit risk of any asset that is transferred through an asset-backed security. (Sec. 941)
  9. More information collections about consumer loans: Banks will be subject to extensive new information collections imposed by the Consumer Financial Protection Bureau (CFPB). Moreover, the CFPB may disclose nonconfidential information that it gets from banks as it deems to be in the best interest of the public. (Sec. 1022(c)(4) and 1026(b))
  10. Prohibition of mandatory arbitration clauses: The CFPB may issue rules prohibiting mandatory arbitration clauses. (Sec. 1028(b))
  11. Rules on “unfair, deceptive, or abusive” practices: The CFPB is authorized to issue rules regarding “unfair, deceptive, or abusive” acts or practices. (Sec. 1031(b))
  12. Disclosures to consumers about risks of a transaction: The CFPB is authorized to issue rules requiring banks to make disclosures regarding the costs, benefits, and risks, in light of the facts and circumstances of a given transaction, for every covered financial product or service. (Sec. 1032(a))
  13. New TILA and RESPA disclosure: The CFPB is to publish new mandatory disclosures that combine requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act. (Sec. 1032(f)) (Banks currently are working at great expense to comply with yet another rewrite of RESPA rules.)
  14. Disclosures about existing customer transactions: The CFPB is to issue rules requiring banks to provide information, including cost, charges, and usage data, to any customer who asks for it regarding any transaction with the bank. The data are to be made available electronically and through standardized formats, including machine-readable files, that CFPB will design. (Sec. 1033(a))
  15. Disproportionate penalty for violations of CFPB rules: It will be unlawful for a bank to enforce, or attempt to enforce, any agreement that does not conform the CFPB’s rules. Thus, any violation of a rule makes the entire transaction unenforceable. (Sec. 1036)
  16. More state laws applicable: National banks and federal thrifts will find themselves subject to potentially hundreds of state and local consumer protection rules. The OCC will not be permitted to preempt a state law under the Dodd bill unless there is substantial evidence of a conflict and the OCC finds that there is a “substantive standard” in place that regulates the activity in question. Preemption will be unavailable to subsidiaries of national banks. (Sec. 1044(a))
  17. Disclosures regarding deposit accounts: Every bank is to maintain records of the number and dollar amount of the deposit accounts of its customers, for all branches, ATMs, and other deposit-gathering facilities. Customer addresses are to be geo-coded and identified as a residential or commercial customer. Every bank also is to make annual disclosures, for each branch, ATM, or other facility, regarding the type of deposit account (including whether it is a checking or savings account) and data on the number and dollar amount of all accounts, by census tract of the customer. (Sec. 1071(b))
  18. Burdens on small business loans: Every bank, when it receives a loan application from a small business, must ask the applicant whether it is women- or minority-owned. The bank is to maintain this information separately from the application file and the bank’s loan underwriter. If the bank determines that the underwriter should have access to the information, the bank is to tell the customer that the underwriter has access to it. Banks are to itemize each loan according to 12 enumerated criteria plus anything else the CFPB thinks is appropriate. All of this info is to be publicly available. (Sec. 1072)
  19. Prepayment penalties prohibited: The CFPB is to adopt rules implementing new prohibitions on prepayment penalties. (Sec. 1074)
  20. Burdens on remittance transfers: Banks that offer remittances will have to make disclosures, updated daily, for sample transfers of $100 and $200 that show what the recipient would receive in the 3 currencies into which the dollars are most frequented converted by the bank. Additional disclosures would be required for each remittance. The disclosures would have to be in all of the foreign languages that are principally used by the bank’s customers. (Sec. 1076)
  21. Expanded HMDA disclosures: Banks would have to report at least 13 new items under the Home Mortgage Disclosure Act based on the dollar amount and number of mortgage loans. (Sec. 1092)
  22. Rules regarding “Say on Pay”: All public companies would have to give shareholders a non-binding vote on executive compensation. (Sec. 951)
  23. Requirement for compensation committees: All companies listed on an exchange would have to have a committee of directors, all of whom are independent, to review compensation practices. (Sec. 952)
  24. New compensation disclosures: Public companies would be required to disclose the relationship between the company’s performance and compensation as well as whether employees are permitted to hedge their equity holdings in the company. (Sec. 953 and 955)
  25. Claw-back provisions: All public companies would have to institute claw-back policies for certain accounting restatements. (Sec. 954)
  26. Rules regarding director elections: All public companies would have to comply with new SEC rules regarding the election of directors and disclosure requirements that apply if the Chairman and CEO offices have not been separated. (Sec. 971 – 973)
  27. Rules on excessive compensation. The Fed, in consultation with the other banking agencies, is to adopt rules regarding unsafe and unsound compensation plans that will apply to bank holding companies. (Sec. 956)

What can bank boards do to make sure they hold on to their best executives, including the CEO?

Average payouts from incentive plans for 2009 and 2010 in the community banking industry were extremely low, including bonuses and stock incentives. Because a lot of stock options that were granted two or three years ago are now underwater, we’re looking at a significant potential drop in executive compensation for 2010 after a similar drop in 2009. It was down some last year and I’ve projected it’s going to be down even further this year on average. There are some notable exceptions, but on average you might say the at-risk forms of pay are very much at risk this year.

It’s a good time to pay attention to the base salary component and make sure that it is competitive enough to provide for bread, butter and mortgage money. In recent years most banks have been trying to keep base salaries low in favor of heavy use of incentives. As an overall strategy that makes a lot of sense, but when incentive comp is down due to things beyond the control of your CEO there’s also some risk that you could lose them if the base salary component is not competitive. So it’s a good time to look at that and make sure it is competitive.

What I would not do is throw out the incentive plan and replace it with a new plan that will pay out under the current conditions because shareholders will react negatively to that, as anyone would. What’s the purpose of having the incentive if we’re going to throw it out the first time it doesn’t pay? We are seeing a trend toward increased use of restricted stock awards where the full value of the shares are awarded. In other words, it’s not a right to purchase like an option but is actually a gift to the executive, with the restriction that if the executive leaves before a certain period of time has passed the stock is forfeited back to the bank. It’s a velvet handcuff if you will.

It’s also possible to tie the lapsing or forfeiture component to some modest level of performance so that not only does the executive have to stay but the bank must perform at some modest level, whether in a comparison with a group of peer banks or just in absolute terms. That’s a good way to provide some incentive in a down market because the shares have value regardless of where the stock price goes and if it goes up then there’s an incentive there to see that happen.


What is a Blog and why is Matthews, Young – Management Consulting sponsoring one for Bank Directors?

A Blog like an interactive forum for people with similar interests to post news, ideas and questions. An “Author” can start a dialog about a subject and readers can respond by adding “comments.”

This is a Blog where friends and clients can participate in our “group think.”

We will post topics and questions we hear from various sources and invite your comments. However, this will be a much better forum if you will be good enough to “author” new topics and questions for your peers. If you will be an author, please email us at and we will set you up as an author.

Thank you. We hope you find this forum useful.

Matthews, Young – Management Consulting

Contact Us

Main Office
Hillsborough, NC
(919) 644-6962

Greensboro, NC Office
(336) 644-1980

Atlanta, GA Office
(404) 435-6993

Email Us