Pandemic Complicates CEO Evaluations

One of a board’s most important responsibilities is ensuring that the bank has effective leadership at the helm. This oversight role should include a regular evaluation of the chief executive’s performance.

Yet, 21% of the directors and CEOs responding to Bank Director’s 2021 Governance Best Practices Survey say their board doesn’t regularly evaluate the CEO. Further, conducting a regular CEO evaluation is a less frequent exercise at smaller banks — just 56% of respondents representing banks below $500 million in assets say their CEO’s performance is reviewed annually.

But even for boards that regularly assess the performance of their top executive, conducting this evaluation proved tricky following an unprecedented 2020. And evaluating performance for 2021 won’t be much easier, as challenges related to the Covid-19 pandemic have remained through the first half of the year. Boards may want to reassess their process — and measurements — as a result.

The biggest challenge [for] 2021 is trying to be reasonable about changes from 2020,” says Rick Hays, chair at $1.3 billion Eagle Bancorp Montana in Helena, Montana. He cites the outsized demand for Paycheck Protection Program loans as an example. And 2021 has had its own idiosyncrasies so far, so it may not be appropriate to gauge performance through comparison to pre-pandemic outcomes.

Eagle Bancorp Montana’s board conducts an annual evaluation of its CEO, Pete Johnson. “It’s a fairly straightforward, deliberative process,” says Hays. The board’s independent members regularly convene in March to review Johnson’s performance based on the strategic goals set the previous year. At that time, they compile a consensus evaluation, which factors into compensation decisions for the year. Hays, as chair, reviews and discusses the evaluation in a one-on-one conversation with Johnson.

The assessment incorporates qualitative and quantitative data points; efficiency and return on average assets are among the metrics reviewed. “The board decided a few years ago that those were going to be our overarching goals,” says Hays, “and the executive team agreed wholeheartedly, so we’ve proceeded down that road.”

More than three-quarters of the executives and board members responding to Bank Director’s 2021 Compensation Survey indicated that CEO compensation is tied to performance metrics, with income growth (56%), return on assets (53%) and asset quality (46%) the most commonly used.

Hays and the board were pleasantly surprised with the bank’s financial performance for the year, given its challenges, which they believed were important to factor into Johnson’s evaluation. “[Covid-19] impacted everything we did, everything he did,” he says. Targets were achieved — all while taking extra precautions and steps to care for employees and customers in a crisis. “It wasn’t just meeting needs; it was meeting them in a different way for a lot of 2020. So, it had to be factored into the evaluation, to be able to achieve the results achieved, particularly given the environment in which they were achieved.”

A quarter of the respondents to the 2021 Compensation Survey said that their board exercised more discretion and/or relied more heavily on qualitative factors in examining CEO performance for 2020.

While Eagle Bancorp Montana’s CEO evaluation process is now an annual one, the board conducted a mid-year review when Hays was new to his role as chair. This created transparency in the process and ensured everyone was on the same page. “I wanted to make sure that [Johnson] was comfortable with how I was viewing things,” he explains. “The main objective in my mind about any performance evaluation is to eliminate any surprises when you finish up the year [and] create the written performance evaluation.”

At Southside Bancshares in Tyler, Texas, the annual CEO evaluation process begins in the compensation committee, which is chaired by Patti Callan. Several qualitative factors are considered in the board’s examination of the CEO’s performance. These factors are “soft skills that are important [to] being the leader of the company,” says Callan, and include developing the company’s culture, innovation, regulatory management, ethics and integrity, community outreach, customer service, shareholder relationships, board communications and leadership.

More than half of respondents in the 2021 Compensation Survey said that they measure CEO performance based on strategic goals; 38% don’t tie CEO performance to any qualitative factors.

According to Southside’s most recent proxy statement, the board also examined performance measures such as growth in earnings per share, loan growth, return on average equity, the efficiency ratio and nonperforming assets as a percentage of total assets.

Strategic planning occurs in the fall, with the CEO evaluation generally following in January. The strategic plan guides the goals that the board will lay out for the year; these are outlined at the end of the evaluation.

Strategic goals typically have a one- to five-year time horizon, says Callan, “so it’s very difficult to put a definite value on goals so far into the future, particularly in these uncertain times. Building a plan with a performance range that includes a threshold, target and maximum payout gives us the opportunity to determine whether we are on the high or low side of performance.” This year, the board ensured that not only were these goals outlined, but they also clarified how they’d measure progress toward achieving them by tying metrics to specific measurements. “It’s well worth the time and the effort to complete this process, as it makes the determination of the degree that each goal was achieved at year end very quantitative,” she says.

“Your strategic plan should provide a roadmap,” said Bryan Cave Leighton Paisner Partner James McAlpin Jr. earlier this year in an interview with Bank Director Editor at Large Jack Milligan. “What are your goals with respect to loan growth, with respect to efficiency, with respect to net interest margin [and] overall profitability? So that there’s some measure, and then [they’ll] perhaps take stock halfway through the year and then again at the end of the year, so there’s some objective criteria on which to base an evaluation.”

Southside CEO Lee Gibson III completes a self-assessment based on metrics outlined at the beginning of the year. Concurrently, the compensation committee, board chair and vice chair complete their own assessment, blending the reviews into one document. The comprehensive feedback identifies areas where Gibson can improve his performance and by extension, that of the $7 billion bank. “[I]f there is an area that we excel in, we’re quickly able to identify and build on those areas. Conversely, if there is an area that requires improvement, it is clearly obvious. The process not only measures and improves current programs within the bank but can also result in the development of new programs, which gives us an opportunity to establish new metrics for the next year,” says Callan.

Southside Chair Bob Garrett points out that banks didn’t only face a pandemic in 2020. There was also the adoption by many financial institutions — including Southside — of the current expected credit loss (CECL) accounting standard, and a changing administration in Washington. And the uncertainty didn’t abate on Dec. 31, 2020 — Covid-19 continued to impact communities in the first half of 2021.

On top of all that, Southside and other Texas banks weathered plummeting energy prices. “Although our bank doesn’t have a heavy portfolio in oil and gas, it has a profound impact on the economics of our entire state,” Garrett says. And a mid-February snowstorm further devastated the state. “We [are] not set up for subfreezing temperatures over a seven-day period here in our part of the world. In many respects that event challenged us even more than the pandemic,” he says. The accumulation of snow and ice resulted in the failure of the Texas power grid and the loss of other utilities. “It was an absolute mess, but we were able to make good decisions,” Garrett says.

Forecasting for 2021 — and evaluating the CEO’s execution of those goals in early 2022— could prove just as challenging for bank boards as they did earlier this year.

Last summer, Callan and the rest of the compensation committee gathered via Zoom to discuss how to adjust the CEO evaluation process, which they believed wouldn’t accurately reflect performance in this more dynamic environment. First off, the previous plan reported measurements as a percentage of the maximum opportunity, and the committee believed those results didn’t accurately reflect the hard work put in by executives, she says. “That made us uncomfortable. We were also uncomfortable with our ability to predict what was going to happen by the end of the [2020],” Callan further explains. “When you have metrics that are geared specifically for certain results — but may not have taken into consideration the enormous amount of time and skills it takes to maintain your current customer base during such turbulent times — even though [executives are] working harder than they’ve ever worked before, they may or may not be getting compensated appropriately under our previous structure. This was during a time when keeping our key employees was critical. We needed to make sure they were recognized and rewarded for their hard work, but we also needed to assure the individualized quantitative goals were being accomplished.”

Southside worked with a consultant to restructure its program, shifting how the board reviews qualitative and quantitative factors. “It allows for a targeted range with a base, midrange and maximum opportunity so that executives’ production or performance fit within the appropriate range to achieve some bonus categories,” Callan says. The evaluation process includes an individual scorecard as well as documentation that provides more detail. These are tailored per role, beginning with the CEO.

Updating the compensation plan on the heels of a global pandemic proved to be a “wise move” by the compensation committee, Callan believes. “We didn’t know at the time that our bank was going to have the best year in our 60-year history. We really felt the need to be focused on and prepared for ‘the worst thing that could happen,’ which thankfully didn’t occur,” she says.

Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.

Bank Director’s 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, surveyed 217 independent directors, chairs and chief executives of U.S. banks below $50 billion in assets. The survey was conducted in February and March 2021, and explores the fundamentals of board performance, including strategic planning, working with the management team and enhancing the board’s composition.

Bank Director also conducts an Executive Performance Survey that is available as part of its membership program.

A New Look at Problem Loan Management

Regardless of how you describe 2020, change was the common theme.

Not only did the coronavirus pandemic and economic contaction in 2020 change the way the banking industy identifies problem loans, it changed the way it approaches them. As 2020 unfolded, CLA continued to encourage institutions to evaluate policies and procedures, given that most were written for normal operating environments. A problem loan is a credit that cannot be repaid according to the terms of the initial agreement, or in an otherwise acceptable manner. In a time when payment deferrals and modifications are numerous and widespread, and government-assisted credit is necessary, how does problem loans identification change?

Risk Identification
The first step in problem loan management (PLM) is an effective risk identification program, which includes proper monitoring and continually applying appropriate risk ratings. Management teams can use internal reviews performed periodically or annually to assist with early risk detection.

Frequent monitoring of the portfolio remains one of the critical pillars of PLM. This requires collecting updated financials and information to monitor the wherewithal of the borrower, guarantor and related entities on a standalone and combined basis. Increased monitoring is warranted, especially for vulnerable industries.

Who leads your bank’s PLM program? Many lenders have not been exposed to a PLM process, or have not been in the industry long enough to experience an economic downturn. The art of PLM involves objective parties, including a group independent of the loan officer, to manage the loans effectively.

Evaluation of performance
Financials for 2020 will include unusual items, and completing year-over-year comparisons will require eliminating “extraordinary” items. For example, removing funds received through the Small Business Administration’s Paycheck Protection Program will be essential to ascertain and review the performance of core operations. Banks will need to consider how a borrower’s core performance would have met the requirements of the original loan terms without modifications. It is pertinent to remove these items and evaluate how the borrower is functioning at its core.

Action plans
The routine nature of completing a quarterly problem loan action report deserves a new look. Banks of all sizes must address problem loans and develop plans to mitigate exposure. Action plans are a way for management to track and document each borrower’s circumstances and next steps to reduce credit risk exposure.

Problem Loan Action Plan Considerations

  • Borrower identification and history — Identify the obligor(s) (direct and indirect), ownership composition, type of business, underlying debt(s), and operational changes over the past few years or as a result of COVID-19.
  • Communication — If the borrower remains communicative, address commitments made, if any, and all legal correspondence.
  • Financial analysis — Update financial information with a look at historical trend on standalone and global basis and impact of COVID-19.
  • Repayment history — Review payment status, including any late payments or 30/60/90-day history. Discuss modifications.
  • Collateral valuation and analysis — Evaluate need for updated values given changes in market, property type, or other pertinent factors.
  • Risk rating — Consider current and recommended risk rating changes, if any.
  • Impairment analysis — Clearly document the analysis or testing for impairment to support quarterly Allowance for Loan and Lease Losses analysis.
  • Progress update — Address actionable items from the last review. Is workout plan effective?
  • Next steps — Detail steps the borrower and institution will take to improve the status of the loan. Establish clear and quantifiable objectives and timeframes for both parties and document results as the plan progresses.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit

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