Steven D. Hovde, President & CEO, Hovde Financial Inc., speaks at Bank Director’s 2012 Bank Executive and Board Compensation event in Chicago on the state of the banking industry over the next 12 months.
Steven D. Hovde, President & CEO, Hovde Financial Inc., speaks at Bank Director’s 2012 Bank Executive and Board Compensation event in Chicago on the state of the banking industry over the next 12 months.
When the board of Citizens Republic Bancorp named Cathy Nash president and chief executive officer in early 2009, shortly after the bank recorded a nearly $400 million annual loss, she knew it would be an uphill battle. The then-$13-billion asset bank holding company based in Flint, Michigan, was grappling with bad loans and the results of a disappointing acquisition of Republic Bancorp in 2006.
Within months, she had to face angry shareholders whose stock had tanked and were demanding to know why she didn’t recover the departing CEO’s millions in pay and pension benefits.
“It was a contract and I was going to lose,’’ she explained during an interview recently. Instead of focusing on the past, she decided to forge ahead with her plan: rebuild pre-tax pre-provision profits so that after Citizens had dealt with its bad loans, it would have a strong core banking business at the other end of the economic cycle. The strategy worked. Citizens returned to profitability six quarters ago.
On the other hand, economic and political forces had other ideas.
By the summer of 2011, Nash had begun to see the writing on the wall. The Federal Reserve had stated publicly that it intended to keep interest rates low until 2013 (the Fed later said it would keep rates low through 2015) and organic loan growth was slim. Plus, the bank was near the $10 billion asset threshold where it would start getting regulated by the new Consumer Financial Protection Bureau and also see interchange fees from debit cards cut in half under provisions of the Durbin Amendment.
Nash and her management team modeled different financial scenarios. The cost of capital was 12 percent, and the bank would need to get a better than 10 percent return for shareholders, Nash says. In the second quarter of 2011, the bank’s return on average equity was 10.5 percent (it has since fallen) and its return on average assets was 1 percent. The net interest margin was 3.56 percent.
The bank had slimmed down during the crisis to $9 billion in assets, but it would need to quickly get to at least $12 billion if it wanted to return a reasonable profit to shareholders. Strategic planning sessions in 2011 with the board analyzed the prospects: could the bank acquire another bank? It could take a year to get regulatory approval as a new acquirer with a new management team, Nash says. Could the bank increase fee income? Could it shrink its branch system and use the savings to reinvest in the bank? The board decided to look around and see if there were any possible combinations with other banks.
By the spring of this year, not much had changed. The bank was trying to figure out how to buy back its $345 million of TARP preferred stock from the government. Raising common equity would dilute shareholders.
Nash says she went to Citizens Chairman James Wolohan and told him she didn’t see a way clear in the current economy.
“We cut this in every way we could to not come to this conclusion that we needed a partner,’’ she says. “But my job is to offer my shareholders the best long-term returns I can give them. You have to fish or cut bait here.”
The bank was in a strong position to sell. It was profitable and well capitalized. It had exited a consent order with regulators. It had dealt with its problem loans and the bank was on strong financial footing.
The deal with Akron, Ohio-based FirstMerit Corp. was announced in September as a stock-for-stock exchange worth $912 million at the time of the announcement, with Citizens’ shareholders receiving 1.37 shares of FirstMerit stock for each share of Citizens. The price to Citizens’ tangible book value at the time of the announcement was 130 percent, according to SNL Financial.
The combined entity would have $24 billion in assets across five Midwestern states, 415 branches and more than 5,000 employees. There was little geographic overlap and FirstMerit had been looking to expand in Michigan and Wisconsin, Wolohan said in an interview.Nash believes that the combination, which is expected to close in the second quarter, will deliver significant value for shareholders, while allowing them to participate in “tremendous” upside potential of a stronger bank with increased scale.
The stock market wasn’t as enthusiastic, and both banks have seen share prices fall since the announcement. Citizens’ stock price has fallen to less than $18 per share from about $20 shortly before the announcement.
Nash says she can’t control the stock market.
“We feel very good about the opportunity with FirstMerit,’’ he says. “It’s just a terrific organization. Paul Greig is just a terrific CEO. It’s a strong franchise. It’s a top quartile bank in terms of financial performance the last five years. It pushed through the financial crisis with continued profitability and continued to pay a very nice dividend.”
For Nash, she’s likely negotiated her way out of a job. Greig won’t need a second CEO on staff. And instead of feeling sorry for herself, she noted that many members of her team had made significant sacrifices to strengthen the organization during the last few years.
“Many of them know they are not likely to have a job,’’ she says. “We’ve all been through this before. These are the people who made sure we had value to give to FirstMerit and they’re going to end up without a seat at the table.”
Still, she’s adamant she’s done the right thing.
“I still believe we’ve made the best long-term recommendation for our shareholders,’’ she says.
To hear more from Cathy Nash, check out this video from her keynote presentation from Bank Director’s 2012 Bank Executive & Board Compensation Conference.
What does this have to do with credit culture, often associated with the practice of making sound loans? A great deal, at least as banking evolves beyond the financial crisis. To accomplish this requires a changed mindset, and credit culture is largely a mindset. Despite its traditionally esoteric nature, credit culture must not only be felt but enumerated. No longer should the former Supreme Court Justice Potter Stewart’s famous line about knowing obscenity when you see it be operative in defining your bank’s credit culture. To define credit culture, this leads us to the spectrum of qualitative versus quantitative, concepts known to every lender and credit officer. We believe it’s time to take this dichotomy beyond classic credit analysis, which most of us think of when hearing those terms, and project it onto the broader spectrum of optimal, future bank-wide portfolio risk management.
Qualitative analysis implies subjective judgment—and in the greater scheme of things can also encompass the transactional, tedious loan-by-loan assessment of risk. We know transactional risk sensitivity is particularly important in relationship to the size of the bank. If one big loan goes down, that can have a huge impact on a small bank, for example. On the other end of the spectrum, which we can label quantitative, we have aggregated portfolio risk assessment, often combined with financial models used to predict outcomes. Many believe excessive dependence on modeling lead to the financial crisis in the first place.
Therefore, one could argue that on one end of the spectrum of optimal credit risk management, we have transactional risk (individual loan analyses and servicing) and on the other end, aggregated risk (modeling and forecasting). Worshiping exclusively on either end of the spectrum is problematic. Understanding only individual loan risks is like losing sight of the forest for the trees. And at the other end, we all know models are only as good as the integrity of what informs them (i.e., the transaction-based discreet data points, tediously mined from underwriting). There’s a sweet spot somewhere between the two polar opposites. But in the end, there must be a bottom line, a sum of all the parts to accurately project a bank’s risk profile, both present and future. Each stakeholder needs that profile depicted in summary fashion.
How does one accomplish this blending of the theoretical qualitative and quantitative disciplines? Ideally, a bank should begin with an underwriting process that ensures adherence to its policies and guidelines—while cataloguing exceptions. Concurrently, it needs to have a complementary process that aggregates the individual loan data, and performs multiple portfolio-wide tasks, including stress testing, and calculating the allowance for loan and lease losses (ALLL), risk grade migration and potential credit losses (beyond the reserves), etc. Products have been developed to perform these tasks, on both ends of the spectrum, and frankly at costs far less than what some of the national providers of analytic tools are quoting.
Lastly, much of credit culture jargon is historically, or backward- focused. That leads to statements such as “We grew this much in loans,” or “We had this percentage of past dues,” or “Our yield improved to this.” Regulators and investors read the call report. They are focused more on the future, as bank boards and management should be. Boards need to ask questions such as, “Where are we trending in the various quality, growth, and profitability measures?” or “Where’s the next bubble in the portfolio?” or “Where will our non-performing loans likely be in one year?”
Success in banking going forward will be defined largely by institutions’ shifting from this traditionally historic to a forward-looking focus—and not just within a strategic planning or budgeting context—but embedded in the credit culture itself. Simply put bank management and boards will have to be as conversant in PD (probabilities of default) and EL (expected losses) as traditional acronyms such as DSC (debt service coverage) and LTV (loan-to-value) ratios. With the widely anticipated high level of bank mergers and acquisition activity in the next few years, an additional premium will be placed on being informed and credible with these more macro and predictive concepts. They don’t replace the old reliable transactional measures; they just partner with them to quantify the risk going forward. The investors, the regulators—and common sense bank management—will mandate this.
As Europe continues to experience a financial breakdown, there is no doubt that U.S. banks are and should be worried. All banks will be affected, although some more than others, depending on their relationship abroad. Business will be impacted in a number of ways, but according to the attorneys we polled, it’s not all bad.
The boards of U.S. banks that may be affected the most (such as banks that hold a significant amount of European debt, deal in Euros or otherwise engage in business in Europe or with European banks) should be particularly mindful of the situation. On the flipside, in some cases, the problems in Europe may actually open up new opportunities for U.S. banks, which are opportunities that boards of U.S. banks may want to consider. For instance, European banks may begin to lend less in the U.S. and focus on preserving capital and lending in their home countries, which would present increased lending opportunities to U.S. banks (including through loan syndications).
– Doug McClintock & Sara Lenet, Alston & Bird
Yes. On an immediate basis, the problems with the calculation of LIBOR will result in a different rate, although how that may be calculated is unclear. Since the rates on many commercial and consumer loans are based on LIBOR, any replacement will at a minimum complicate the lives of both borrowers and lenders. For lending going forward, a bank probably should not use a LIBOR-based rate and may want to consider whether to base lending on any standard rate. More broadly, on a macro basis, problems in Europe inevitably spill over into the United States.
Even though the spill-over seems unlikely to cause a second recession here, any resulting slow down necessarily will have an adverse effect on the U.S. banking industry—a phenomenon we are already experiencing. The macro consequences of the European problems are beyond the control of any bank, but on an individual basis, a U.S. bank should have a deep understanding of its European exposure. This would include not only any direct exposures, for example in the form of bonds, but also exposures to commercial borrowers that may depend to a material extent on their European businesses. A bank should re-visit the use of any foreign instruments that it may use for hedging purposes. The use of foreign exchange also may require more careful monitoring.
– Dwight Smith, Morrison Foerster
Ongoing problems in Europe affect U.S. monetary and fiscal policies, especially in a presidential election year. Concerns over Europe have led to an influx in foreign investment in U.S. Treasury securities as a safe haven investment. This has reduced yields upon Treasury instruments, and TIPs (Treasury Inflation Protected Securities) have even sold at negative rates. Lower Treasury rates adversely affect the yields on bank investment portfolios and compress margins on loans and other credit assets. This makes it more difficult for banks to generate returns on equity and funds available for dividends and repurchases of common stock. Current low interest policies may have created new systemic risks by encouraging investors to “reach” for higher yields in longer maturity securities with riskier credit quality.
All directors should be concerned about current levels of interest rates, potential future inflation, and interest rate risks resulting from these policies driven by European and domestic U.S. concerns. The regulators are especially concerned about interest rate risks and their future effects on bank balance sheets and earnings.
– Chip MacDonald, Jones Day
Yes. Boards of banks, regardless of asset size, must understand generally the business of their bank and the environment in which their bank operates. For example, it was not long ago that many bank directors had never heard of or made a subprime real estate loan. They quickly came to appreciate the many challenges to their banks that that loan product presented. The European Union is the largest trading partner of the U.S. Threats and the challenges presented by the second largest economy in the world (the combined economies of the euro zone) cannot and should not be ignored. Problems in Europe could have very real consequences for financial stability in the U.S. in areas such as employment and credit availability.
– John Bowman, Venable
Fortunately or unfortunately, the world in which we live is interconnected. What once appeared to be vast oceans now seem like small ponds (unless one is flying internationally in coach). With the current global economy, it is hard to avoid thinking of the Woody Allen quote, “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness; the other, to total extinction. Let us pray we have the wisdom to choose correctly.” Unfortunately, there are not many ways to inoculate our economy, and thus, the life blood of community banks from the contagion taking hold in Europe. Only if we as a country can get our own financial house in order will we be in a position not only to withstand, but to help the European economy to grow out of its problems.
– Peter Weinstock, Hunton & Williams
Obviously, boards at U.S. banks with European operations should pay close attention to country developments. However, boards at U.S. banks without European operations also should monitor Europe’s problems, because they have the potential for a major ripple effect if country initiatives are unsuccessful. A board should consider whether its bank has particular exposure to Europe and determine whether special contingency planning is necessary.
—Jean Veta and Michael Nonaka, Covington & Burling
Bank stocks rallied earlier this year but then faltered mid-year in the throng of worries about the European debt crisis.
“It’s really been a lost decade,’’ said Steve Hovde, the president and chief executive officer of The Hovde Group, an investment bank that focuses on the financial services sector. He was speaking at Bank Director’s Bank Audit Committee Conference this month in Chicago.
Looking at bank stocks going back to 2007, when valuations reached their peak, the U.S. SNL Bank and Thrift index was down about 60 percent through May.
The current global outlook has put a good deal of pressure on bank stocks lately, as well. Even banks that don’t have exposure to European debt are feeling the heat, as the crisis will put a drag on the U.S. economy, Hovde said. And a weak U.S. economy will do nothing for U.S. banks.
“Until we see a healthy economy, we’re not going to have a healthy banking sector,’’ he said. “Until we get employment back, the banking sector is going to have pressure.”
Housing still is a drag on the economy. Moody’s Analytics has predicted that home values, while improving in some markets, won’t return to pre-crisis levels until 2017. Home prices have lost about one-third of their value since hitting a peak in 2006, according to the Fiserv Case-Shiller composite index.
On the other hand, banks have been getting rid of bad loans and improving their balance sheets. On the credit side, net-charge offs of bad loans are declining, and tangible capital ratios are slowly being rebuilt, Hovde said.
Profitability has improved, as well, as banks reduced their loan loss provisions year-over-year in each of the past four quarters.
Return on average assets has risen to an average of 1 percent in the first quarter of 2012, up from .76 percent in the fourth quarter of last year, according to the Federal Deposit Insurance Corp.
A strengthening bank sector has led to slightly better deal pricing in mergers and acquisitions, but deal volume is still very low.
Uncertainty about commercial real estate and housing values still is hindering deals, as well as the fact that the stock of many buyers and sellers’ is trading below book value, Hovde said.
The glut of failed banks could also be putting a crimp on deals in some markets, and Hovde predicted that the Chicago area alone will probably have another 10 to 15 bank failures. Nationwide, there were 403 banks with a Texas ratio greater than 100 percent as of March 31, according to SNL Financial LC. A Texas ratio greater than 100 is an indicator of potential failure. There were 59 banks with a Texas ratio greater than 300 percent, and 36 of them are in the Southeast.
Still, the pace of bank failures has slowed and many buyers are beginning to turn their focus to non-FDIC assisted deals, he said.
“With M&A I think we’ve probably hit the bottom and will probably see it pick up absent another global financial crisis,’’ Hovde said.
After the passage of the Sarbanes-Oxley Act, audit committee members experienced an increase in the intensity of the spotlight the public and regulators placed on them—and the focus didn’t just affect public companies. The current financial crisis again has put a spotlight on the responsibilities that all boards and audit committee members face. Although audit committees are actively engaged with their management teams and internal and external auditors, it can be difficult to know what should be the focus of those ongoing discussions.
So what are the things that audit committees should be thinking about today? Highlighted here are three of the critical risk areas that audit committees should have on their minds.
1. Earnings and Growth Plans: Early Assessments of the Risks
The credit challenges and related complications of the financial crisis are improving for many banks. Management teams are focused on returning to sustainable profits. Lending groups are actively looking to build their portfolios, and management teams are considering new products and services and expanding existing programs.
Audit committees need to be aware of the strategies their organizations are considering and of the associated risks. Internal audit should be auditing those risks. Whether a bank is considering resurrecting an old lending strategy or launching a new product or service, early action by the audit committee and internal audit will safeguard the organization. Audit committees and internal audit should work to understand their organization’s initiatives, limits and controls, and understand the risk monitoring that exists at their institutions.
2. Compliance: Effective, Efficient, and Critical for Survival
Compliance doesn’t always seem like the most strategic topic, but a lack of compliance can have consequences that quickly become strategic. Consumer regulations have changed significantly over the past few years, and more changes are on the horizon as the regulatory focus on consumer compliance has increased noticeably.
Audit committees should understand not just the details of compliance for individual regulations, but the compliance program itself. Having a robust system in place to identify changes, assess the enterprise-wide effects, and respond effectively is the only way that ongoing compliance can be achieved. Internal audit cannot just rely on management monitoring systems; it must perform independent testing of the compliance program and of compliance risks. Audit committees should understand the risk assessment process and internal audit’s coverage approach with respect to consumer compliance, and they should be comfortable that the compliance program will produce consistent and efficient results across all regulations and lines of business.
3. Enterprise Risk Management: Present, Comprehensive, and Insightful
Enterprise risk management (ERM) has been a topic of conversation for many years, but the level of discussion within banks and regulatory examinations is greater today in light of the financial crisis. Companies need an ERM process that is designed to address all risks across an organization and that provides meaningful information to executive management and the board. In addition, in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires a board-level risk committee for firms with more than $10 billion in consolidated assets, examiners sometimes are asking much smaller organizations to put programs in place that include board-level oversight.
Audit committees should understand their bank’s ERM program, and internal audit should evaluate its effectiveness. Questions to consider include: Does a program already exist, and, if so, who owns the program? Are the right people involved? Do the results prompt the right discussions (are the company’s biggest risks part of the conversation)? Do the board and executive management support the process and the outcomes?
The goal of ERM is not to simply to comply with a regulatory mandate, but to establish a disciplined process whereby the most significant risks are summarized for insightful discussion and response. As it does with all critical areas of its bank, an audit committee must make sure that the ERM function exists and that it is operating as intended.
Having confidence in the quality and scope of the internal audit function should be a priority for any bank’s audit committee. Though the three critical areas discussed above are not exhaustive, they represent some of the larger issues facing banks today. Ongoing changes are inevitable. Adding specific consideration of changing risks—and potential changes to audit plans—could be a useful topic for audit committees to add to their agendas.
Most of the commentary on the financial crisis in Europe has focused on the acute challenges policymakers must address today, an approach that makes sense given the consequences for the global economy if those issues are not addressed adequately. Less attention has been focused on the opportunity the crisis has created for our own community banks.
The combination of the financial crisis that struck our own country three years ago and the fallout from the European debt crisis may be creating an opportunity for community and regional banks to retake market share lost over the past 20 years. During that period, community and regional banks lost significant market share in almost every loan class, with the glaring exception of real estate lending. The resulting real estate dependent business model has now been called into question by both investors and regulators, and it is hard to see growth opportunities or even long-term survival for community banks that do not adapt to the new environment, in which balance sheets saturated with real estate loans are regarded with growing skepticism.
In a silver lining to the European debt crisis, the retreat by many of the world’s largest banks is providing new lending opportunities for those community banks that have steadily grown their capital and liquidity over the past few years, and are contemplating new ways of generating prudent loan growth.
Until recently, European banks have provided credit to American borrowers across a wide range of sectors, including small and medium business enterprises. Historically, these markets were fertile ground for community banks, but in recent years those banks have seen themselves become less relevant in many of those sectors. While the ultimate outcome of the European situation is unclear, we can be confident that European banks are going to continue to be severely constrained, with substantially less capital reaching our own lending markets.
To give some context for the magnitude of this withdrawal, the European Banking Authority last year announced that European banks must reach a 9 percent Tier 1 capital ratio by June 2012. In aggregate, European banks would have to raise over 100 billion euros of new capital to reach this target with their existing balance sheets. Rather than raise this much equity, however, many European banks have indicated that they intend to reduce their balance sheets to meet the capital target. Estimates suggest that balance sheet reductions could exceed 1 trillion euros. While we do not yet know how much of that reduction will take place in the U.S., some European banks are already pulling back from our market.
There is no reason for this void to be filled exclusively by the country’s largest banks. Many, if not most, of these U.S.-based assets and loans are appropriate for banks both large and small. The challenge for community banks in accessing these loans is two-fold: a question of access and a question of understanding the credits. As these banks engage in markets they may have exited years ago, they need to ensure that they understand the loans they put on their books, and remember lessons learned from the recent real estate crisis. In some cases, the move back to traditional commercial (non-real estate) lending may require investing in the education of loan underwriters and credit officers who find their skills outside of real estate lending may have become rusty.
In order to have access to the best credits surfacing because of this disruption, and to defray the associated sourcing, underwriting and servicing costs, we believe that community banks that choose to work together will be best positioned to compete with their larger brethren. They will be able to fill lending gaps left by the European banks and take advantage of the tail winds finally blowing in their direction.
Timing is everything. In his short video, Joe Evans, Chairman and CEO of State Bank Financial Corp, shares how he predicted the recession and how his board was ready with a plan.
Over his 30 year career, Joe Evans has run some of Georgia’s beset community banks. In December 2006, Joe Evans sold Atlanta-based Flag Financial Corp. to the U.S. arm of Royal Bank of Canada for $456 million. Since starting State Bank, Evans and his team have acquired several failed banks in the Metro Atlanta area.
In 2011, State Bank was named the top performing bank in the United States by Bank Director magazine in our 2011 Bank Performance Scorecard, a ranking of the 120 largest U.S. publicly traded banks and thrifts.
Watch the below video filmed during Bank Director and NASDAQOMX’s inaugural Boardroom Forum on Lending held last December in New York City.
What banks have paid the piper from securities fraud lawsuits following the financial crisis?
So far, the biggest losers have been Bank of America Corp. and Wells Fargo & Co. They represent more than half of the $4.4 billion paid in subprime and credit crisis-related settlements, according to Kevin LaCroix, an attorney who writes an extremely well sourced and exhaustive blog on directors and officers (D&O) liability insurance.
But what may be interesting about that fact is not so much that two banking giants have paid the biggest settlements, but that the settlements suggest surviving banks are paying more than the entities that collapsed, notes LaCroix.
Bank of America and Wells Fargo both had bigger settlements than say, Lehman Brothers, whose former executives and underwriters have settled for $507 million. Washington Mutual Inc. became the biggest bank failure in U.S. history when it collapsed into never-never land. The WaMu settlement with investors was $208.5 million, half owed by the directors and officers of the bank but paid by D&O insurance. The other half was owed by the company’s underwriter and auditor, amounting to three separate settlements, according to LaCroix.
Bank of America survived, but paid far more for it. It gobbled up a couple of losers in acquisitions: subprime mortgage aficionado Countrywide Financial and investment bank Merrill Lynch & Co., which was heading toward absolute demise. Settlements stemming from the actions of those two failed entities have amounted to $1.56 billion. Countrywide Financial amounted to the biggest chunk, $624 million in 2010, making it one of the biggest securities fraud settlements ever, according to Stanford University’s Securities Class Action Clearinghouse. The case pitted New York state pension funds and others against the bank for making misleading statements about the quality of its loan portfolio. Bank of America paid $600 million of the Countrywide settlement and Countrywide’s audit firm, KPMG, paid $24 million.
Wells Fargo, another survivor, gets the credit for an even bigger settlement: $627 million in August of last year for the Wachovia Preferred Securities action—$37 million of it paid by, again, KPMG. Wells Fargo bought Wachovia in December 2008 after Wachovia had previously acquired Golden West Financial Corp. and its notorious “pick-a-payment” loans, where the borrowers got to pick how much to pay each month. The loans still drag on Wells Fargo’s portfolio to this day. Wells Fargo’s settlements related to the crisis have totaled $827 million so far.
Of course, there are a lot of complicated factors that go into settlement amounts that have nothing to do with simple guilt. A failed bank like WaMu has insurance proceeds and the personal assets of executives and directors on the table, but that’s about it. A surviving megabank such as Wells Fargo has a lot more assets for plaintiffs to fight over.
Only about 40 cases have settled and 76 dismissed out of about 230 that have been filed relating to the credit and subprime fallout, according to LaCroix.
The years ahead will provide an opportunity to see how much survivors will have to pay for the financial crisis.
The financial crisis has had a huge impact on the way banks pay their executives and even their loan officers, but CEO pay is definitely creeping back upward. The smallest community banks to the international mega-banks have all made changes in the last few years to reduce the likelihood that employees will take big risks that threaten the long-term health of their financial institutions.
Many banks are moving away from short-term incentives, paying smaller amounts in cash bonuses for meeting short-term performance goals, and paying equity gradually over a longer period of time in the form of restricted stock based on performance goals.
One of those banks is First Commonwealth Financial Corp. in Indiana, Pennsylvania, a $6 billion-asset institution with 112 offices.
Bob Ventura, chairman of the board’s compensation and human resources committee, said at Bank Director’s Bank Executive & Board Compensation conference in Chicago recently that the bank has moved from paying a roughly 75 percent/25 percent ratio of compensation in short/long term pay to now using a 65/35 ratio.
Even more changes have been made from a risk standpoint among loan officers.
“We have gotten away from volume goals and put some profitability goals in there,’’ he said, adding that there’s an 18-month time period to get paid the full incentive package.
Even though the bank is not a recipient of Troubled Asset Relief Program money from the federal government, it still follows TARP compensation guidelines. The bank conducts third-party annual reviews of its compensation plans, and has created a position for a chief risk officer who reviews compensation plans and makes recommendations to the risk committee of the board.
“We have evolved from plans that were primarily paid in cash,’’ he said.
Todd Leone, a principal at McLagan compensation consultants in Minneapolis and a speaker at the conference, laid out some general trends, including:
Bank CEO pay increased last year as the economy strengthened and bank balance sheets improved, although most of the increases were tied to cash and equity incentives, Leone said. The biggest pay increases were for CEOs at the largest banks, who saw their paychecks drop substantially in 2008 and 2009 following the financial crisis. The median cash compensation for big bank CEOs is now roughly what it was in 2006, $2.3 million, according to McLagan’s analysis of 717 publicly traded bank proxy statements, 41 of them banks with more than $15 billion in assets.
The following table shows the breakdown in CEO pay last year:
Median 2010 CEO Compensation
*Cash compensation is salary plus all other cash incentives, like bonuses. Direct comp is cash compensation plus equity. Total compensation adds direct compensation, retiree benefits and all other compensation.