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Management News

Affirmative Action Plans
Mike Lehr

Affirmative Action Plans . . . Yes, No, Not Maybe

By: Mike Lehr, Human Resources Consultant

Does your bank need an Affirmative Action Plan (AAP)? The short answer is, talk to your legal counsel. In my HR audits, I require banks of 50 or more employees, including part-time employees, to have one or to demonstrate that they have reviewed the subject with their legal counsel. Still, the answer seems more convoluted than ever.

For instance, at first we had from 41 CFR 60-1.40(a) the following as criteria for financial institutions of 50 or more employees being required to have affirmative action plans:

  • Serves as a depository of government funds in any amount; or
  • Is a financial institution which is an issuing and paying agent for U.S. savings bonds and savings notes in any amount; or
  • Holds a prime or subcontract with the federal government of at least $50,000.

Now, as of January 1, 2012, financial institutions no longer sell U.S. savings bonds; people do it directly through the U.S. Treasury Department's website. This eliminates one of the criteria. Still, the Office of Federal Contract Compliance Programs (OFCCP), the division within the Department of Labor charged with enforcing affirmative action requirements with federal contractors, has long held via their implementation of Executive Order 11246 that coverage under FDIC made banks federal contractors.

As sometimes happens, agencies of the federal government create pseudo laws through their implemental powers. The OFCCP's stand seems to resemble that since there is no specific authorization for their position regarding FDIC as a contract. Nevertheless, its position received a boost from Executive Order 13496, requiring federal contractors to post notice of employees' rights under the National Labor Relations Act (NLRA). Under it the OFCCP is using FDIC as a qualifier for being a federal contractor and thus being required to post this notice. So, the thinking goes that if the OFCCP can make FDIC a qualifier under this notice, it can do so as well for requiring the development and implementation of a written affirmative action plan.

With that you have the long answer for why you should refer the matter to your legal counsel if you're concerned about the legalities. Outside of those, there are some very good reasons, especially for larger banks, to have an affirmative action plan:

  • Quantifying how well your workforce matches the community you serve
  • Exposing "equal pay for equal work" risks that you might have
  • Encouraging you to make sense of your practices regarding compensation, promotions, officer titling, and jobs' nomenclature

Census estimates were showing that many of our communities had fast-growing Hispanic populations. This not only applied to southwestern states but to the Midwest. Even before seeing the 2010 Census data, some banks were positioning their workforces to ensure they were welcoming to the new demographics in their communities.

It is still unclear exactly how "equal pay for equal work" will function. How do you define equal? Affirmative action plans can help identify disparities among similarly grouped jobs and among officer titles, thus reducing risk. Gender aside, the categorization of job functions that they require can help ward off morale problems caused by:

  • Disparity of compensation for jobs on the same level in your bank's hierarchy
  • Promotions that are meant to be equivalent but don't appear so on paper
  • Officer titles awarded inconsistently depending upon the criteria at the moment or simple tenure
  • Names of jobs that make sense only for the department but not the whole bank

Yes or No?

In the end, affirmative action plans are a yes or no decision, not a maybe. If yes, ensure you get a plan that can help you. Pay for the extra, useful information. Most banks, especially smaller ones, have low turnover. While the first year might incur upfront fees, lower subsequent fees should result assuming a stable workforce and no expansion into new communities. You might even be able to do much of the work yourself and only need someone to run the numbers for you.

If no, ensure you have received support from your legal advisor. Pay for a documented opinion not just a verbal one, something that shows you did your due diligence. If your answer is maybe, well more than likely that was your answer last year . . . and the year before . . . and the year before that. If anything, the OFCCP is conducting more audits of financial institutions and threatening to do more. Finally, if the Equal Employment Opportunity Commission or the U.S. Commission on Civil Rights receives a complaint from someone working or visiting your bank, more than likely they are going to request to see your AAP. You probably aren't going to feel good if you have to say, "Well, we don't have one, and we never really looked into it." Of course, that's the price of "maybe."

For more information on Affirmative Action Plans and how Young & Associates, Inc. can assist in this area, contact Mike Lehr at or 1.800.525.9775.

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Is Your Interest Rate Risk Program Up to Date?
Reviewing Community Bank Interest Rate Risk Systems as Regulatory Scrutiny Increases

Martina Dowidchuk, Consultant

The interest rate risk may not be among the areas of your immediate concern; however, the anticipated increases in market rate volatility in the future and the heightened regulatory scrutiny are forcing many community banks to reassess their existing interest rate risk management systems.

Outlined below are some considerations to help you ensure that your interest rate risk (IRR) management is effective and consistent with the most recent regulatory expectations.
  • Both earnings and economic perspectives are considered necessary to capture the IRR effectively. While most community banks are familiar with measuring the earnings at risk, monitoring the economic value of equity (EVE) at risk is less common. Unlike the earnings simulations, measuring EVE allows you to look beyond the one-year or two-year horizon and estimate the impact of rate movements on your longer-term earnings and the equity. Changes in the economic value may affect your capital adequacy, as well as the liquidity, which is typically not reflected in the earnings simulations.
  • Earnings simulations should be run over at least a 24-month time horizon. The longer-term earnings simulations better capture the true impact of certain transactions and strategies taken to increase revenues, which may be hidden when viewing projected results within shorter time horizons.
  • Scenario analysis should include immediate rate shocks of up to 300-400 basis points. Latest regulatory guidance suggests that interest rate shocks of at least +/-300 basis points are more representative of a severe movement in interest rates, given the frequency and magnitude of observed historical interest rate movements. Based on the historical Federal Reserve data, 30% of one-year periods between 1955 and 2008 have experienced changes in interest rates of more than 200 basis points.
  • Dynamic earnings simulations need to be supplemented with static simulations. Static simulations based on a constant, no-growth balance sheet help identify the potential interest rate risk exposures embedded in the current balance sheet. Dynamic simulations are dependent on new business assumptions and, while they are very useful for business planning purposes, they can hide certain interest rate risk exposures when combined with the results of new business strategies and anticipated balance sheet growth.

Assumption sensitivity analysis should be performed at least annually. Based on the latest regulatory guidance, it is recommended that banks perform an assumption sensitivity analysis at least annually. Even subtle changes in some of the model’s key assumptions (such as prepayment speeds, core deposit price sensitivity, and decay rates) can have a material impact on the risk measurements. Stress testing the key model assumptions is particularly useful when the existing assumptions cannot be supported by bank-specific statistics due to the lack of data or limited feasibility of performing detailed internal data studies. A sensitivity test should focus on the model’s key assumptions and you should alter these assumptions to show how such a change can affect the earnings at risk and economic value at risk measurements. It is another form of stress testing or what-if analysis performed to better understand the model’s sensitivity and the potential effects of inaccurate assumptions on model results. If the alternate/worst-case assumptions produce results not significantly different from the base case scenario, and if those results are within the bank’s risk limits, then management can be comfortable that even if the assumptions are off, the effect on the bank’s interest rate risk will not be significant.

  • Model assumptions must be supportable and the rationale supporting the assumptions should be documented. Whether you rely on vendor-provided assumptions or use your own estimates, it is important that you can support their reasonableness and relevance to your bank.

  • Interest rate risk measures should be compared with the policy limits and reported to the board of directors. Any discussions regarding the interest rate risk management, policy exceptions, and policy change approvals should be formally reflected in the board minutes.

Interest rate risk and asset-liability management will require greater attention in the coming years. Community bank managers and directors need to plan for likely increases in interest rate volatility and make sure that their risk management systems are consistent with the new regulatory expectations.

If you are interested in an independent review of your IRR management process and controls, please contact me at 1.800.525.9775 or click here to send Martina an Email. Young & Associates, Inc. performs interest rate risk reviews for a variety of community bank clients and is familiar with many different IRR models.
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Who Is the Client?
Where Is My Attorney?

Robert J. Novak, Member, Jennings, Strouss & Salmon

Community banks are often founded by local talent, usually a banker who, with prior experience and support of family, friends, and the community, sets the wheels in motion. The birth of a bank involves a series of key, sometimes challenging, processes, including creating the structure, requesting and receiving regulatory approval, selling stock, raising capital, electing a board of directors, and hiring officers and staff. If all goes well, the bank opens to serve the community.

At the officer level, a community bank is often managed by individuals with prior banking experience; however, this may not be the case for all of the board of directors. The directors of a community bank often come from a variety of industries and have diverse knowledge and business experience. For those individuals, knowledge and experience specific to the banking business may be gleaned over time.

Starting a bank can be a challenge; however, it is not uncommon for a community bank and its directors to experience a period of growth and manageable loss during the first few years it is open. Loans are often limited to customers who are well vetted or are known personally to someone at the bank and, with a modest start-up, there is little to focus on other than drawing new clients and their deposits to the bank.

Throughout the process of establishing a new community bank, attorneys may assist with developing the bank’s structure, working with regulators, and creating policies. During this time, attorneys may develop close relationships with some or all of the bank’s officers and directors. Once the bank is operational, the attorneys who provided advice during the development stage are engaged to assist with a variety of other legal matters. By providing these legal services, those attorneys, either by written agreement or by practice, have established an attorney-client relationship with the bank itself. What officers and directors often fail to recognize (and attorneys often fail to make clear) is that those attorneys represent the bank as a separate corporate entity and do not represent the directors and officers personally. In other words, the attorney’s primary duty of care and loyalty is to the bank as a separate entity and not to the institution’s individual directors and officers.

The current economic upheaval, resulting in an unprecedented number of bank failures and investigations by the FDIC and other federal and state regulatory agencies, has forced community bank officers and directors to realize that the attorneys they often relied upon for advice, some of whom they considered friends, were never their personal attorneys. One significant ramification of such relationships is that the officers and directors, who believed communications with their banks’ attorneys were privileged, learn that the privilege belongs to the bank, not to them. As a result, if regulators take over the bank, the privilege belongs to the regulators, who can then review all such communications. This concept of who the attorneys represent must be understood by all involved at the formation of the bank, and should not first be discovered when regulatory issues arise. The proper understanding of the relationship between a bank and its attorneys (and the proper role of such attorneys) helps mitigate risk on the front end, and helps reduce disputes over the attorney-client privilege in the event of unforeseen circumstances down the road

In the past several years, if nothing else, those who are involved in the areas touched by financial issues have learned the value of thoughtful, practical, and experienced legal advice. Jennings, Strouss & Salmon, PLC. is a dynamic law firm with the talent and insight to address a wide range of business legal issues and has offices in Phoenix, AZ, Peoria, AZ, and Washington, D.C. Mr. Novak actively assists public and private bank officers, directors, and shareholders with such issues as regulatory compliance, dispute resolution, deal structures, bankruptcy, and related matters. For more information on how he can assist you and your bank, click here to Email John Fahrendorf. For more information on Jennings, Strouss & Salmon, visit
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The Mortgage Origination "Revolution" Has Hit Hard…and Vaguely
Mike Lehr, Human Resource Consultant

Recent regulatory changes hit no job function harder than mortgage loan origination. This includes mortgage loan officers, mortgage originators, and mortgage brokers (herein referred collectively as mortgage originators). Community banks need to make sense of these still rather vague and potentially conflicting changes. At the fore are the following major regulatory changes:
  • Federal Reserve Board’s (along with the OCC, OTS and FDIC) requirements for boards to monitor incentive compensation plans. (This would apply to loan originators who also perform managerial or executive functions.)
  • Wage and Hour Division of the Department of Labor’s Opinion Letter, stating that loan officers in financial services organizations are not exempt employees under the Fair Labor Standards Act./li>
  • Federal Reserve Board’s final rules regarding the Truth in Lending Act and Regulation Z, stating that mortgage originators’ compensation cannot be based upon loan terms or conditions. This essentially prohibits almost any compensation-based-upon yield spread premium, and possibly includes raises to salaried-only mortgage loan officers based upon loan profitability./li>

Challenges for Community Banks
From a community banking perspective, these changes are especially challenging because of the multi-faceted role a mortgage originator can play. In large corporate banks, where job functions are narrowly defined, compliance is easier. The “wearer of many hats” environment of community banks makes compliance challenging. With Dodd-Frank hanging in the wings of rulemaking, this might change our thinking and approaches again. Therefore, while community banks can, with good intentions and with the best available knowledge, they should prepare themselves and their people for mid-stream corrections.

However, in doing so, community banks should be prepared to defend their own unique facts and circumstances. For instance, mortgage originators could remain exempt if they are performing other significant duties. Also, originators who have a senior managerial or executive function could retain their incentive compensation plan if their respective boards perform the right due diligence. Mortgage originators can still be compensated based upon the size of the loan, so some compensation programs might only require small changes. Moreover, what’s considered a term and condition of a loan isn’t as clear as it needs to be.

Preparing Your Defense
In preparing for such a defense, the first step is to consult with the bank’s counsel to see if the bank’s unique facts and circumstances fit some of the exceptions built into the regulations. It is not unusual to find an officer in one bank performing four different functions that are done by four different people in a larger bank. Moreover, from one community bank to another, those same four functions aren’t necessarily grouped in the same way and given to the same officer in another bank.

Regardless of whether such a defense is in order, a “continuing with the norm” or a “do-nothing” approach is not wise. Bank boards (for banks over $175 million in assets) will need to increasingly show that they were aware of and examined their banks’ incentive plans so as not to put the bank at risk, including the incentive plans of mortgage originators. Additionally, banks will need to consider mortgage originators as non-exempt unless they can demonstrate otherwise. They will also need to show how their compensation programs for every single mortgage originator does not violate the new, supercharged Reg Z. Finally, community banks will most likely need to make sense of these changes for mortgage loan originators even if they think they don’t make sense and don’t apply to them.

We have learned about the changes to mortgage origination. We now need to adapt to them . . . more than once.

If you would like to contact Mike, please give him a call at 1.800.525.9775 or click here to send Mike an Email.
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"M" is for Management and Managing


During the last three years, bank management has been called upon to pull the proverbial “rabbit from the hat” to identify and meet various challenges which have been unlike any the industry has witnessed in a generation of banking. Many, if not all of these challenges require a growing degree of risk management. Also, many, if not all of these challenges include the need to pull strength from all management resources, including the board of directors, bank executives, and other specialists...“M.” Some of these ever-present risk challenges involve credit risk, concentration risk, liquidity risk, regulatory and compliance risk, reputation risk, and product/service offerings risk.

Regarding concentration risk, bank management needs to develop an ability to control risks beyond the loan portfolio, including investments, liquidity facilities, and engaging in off-balance sheet activities. It is equally important to understand and manage the relationship between concentration risk and capital. The greater the concentration risk, the higher the capital levels required to support the risk taken. That said, there should be directional consistency between the two…the same basic thought process for the relationship between asset quality and the ALLL.

Financial institutions that have remained sound and well-managed throughout this period of time have one thing in common – continuing efforts to improve risk-identification and management strategies. Some of the common basic elements in successful organizations include appropriate governance (policies) and controls; risk identification and measurement; and a management team that persistently rises to the occasion in the way of increasing their skills, drawing from the bank’s talent pool, and utilizing its tools and third-party resources.

The use of quality third-party resources can be proven to be invaluable and necessary in accomplishing many tasks at hand. Over the years, Young & Associates, Inc. has been providing such services as asset liability modeling, loan review, compliance audit, fairness opinion, ALLL analysis, policy development, board training, strategic planning, and branch and de novo bank feasibility analyses. If you would like to contact young and associates, please call 1.800.525.9775.
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Remember When?
John Fahrendorf, Executive Vice President, Western Region

It wasn't that long ago when your correspondent bank(s) was a long-standing and valued relationship built primarily upon mutual trust. You bought and sold Fed Funds and an occasional participation, and maybe they bought your Trust Preferred Securities (TRuPS). Your correspondent banker would periodically call on you to exchange pleasantries, possibly even buy you lunch, and other banks clamored to be your correspondent.

A New World
A couple of years ago, the world changed and without warning many banks found their Fed Funds lines being reduced or cancelled, or had requests for collateral to be pledged to secure those lines. Compounding those problems were banks that found that their lead or participant was under Formal Regulatory Orders, severely restricting their ability to do "business as usual.”

Not surprisingly this "new world" was reinforced by the April 30, 2010 FIL Correspondent Concentration Risks. I trust that by now all of you understand that Interagency "Guidance" is much more than "Guidance." If you have any doubts, read or re-read the Summary where "expectations" is used twice; one would be wise to assume that the "expectations" might very well represent the minimum acceptable standards.

The Unimaginables
A few years ago, a senior regulator was heard to counsel bankers that they should plan for the “unimaginables," a bit of an oxymoron. Unfortunately, we've all learned that the "unimaginable" can and has happened and that brand new "unimaginables" will happen again some time in the future.

While loan participations (purchased without recourse) are specifically excluded in the FIL, I would strongly encourage you to actively monitor all banks that you either purchase from, or sale to, participations. Particular attention should be paid to all participation agreements. The ''unimaginables'' could include such things as a participant unable or unwilling to fund a draw or even a participant with a "loss share" agreement, potentially creating a different agenda than yours. Remember, the very nature of the banking business is risk, but our job is to identify, plan for, and manage risk in a proactive, dynamic, and profitable manner.

Young and Associates, Inc. has developed a very effective Correspondent Banking Policy to assist you in complying with the April 30, 2010 FIL. This policy is designed to be customized for the unique circumstances of your bank and is available for $295. Please contact us at 1.800.525.9775 for more information.
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Location, Location, Location
John Fahrendorf, Executive Vice President, Western Region, and Martina Dowidchuk, Consultant

With all of the stress in the industry, it is interesting to look at the different regions of the country geographically and try to identify both different levels of stress, along with some of the possible causes for that stress. The chart on the following page summarizes key data points for the six FDIC Regions. Of note are the West and Southeast Regions, clearly evidencing the greatest levels of balance sheet stress and, as a result, both the poorest earnings performance and the highest levels of failures. Both the West and Southeast regions also have the highest levels of Commercial Real Estate (CRE) concentrations, but it is interesting to note that the Western Region has the lowest levels of Residential Real Estate concentrations. As a result, one might conclude that the root cause lies in both the high levels of CRE and the low levels of “safe” 1-to-4 family mortgage loans.

Home Prices
According to S&P/Case-Shiller, the eight Metropolitan Statistical Areas (MSAs) with the greatest gain in home prices from 2000 to the peak are all located in either the West or Southeast Regions, with gains ranging from approximately 120% to 175%. Of particular note, those same MSAs reflected the greatest declines from the peak. The “Sun Belt” states experienced the greatest run up and subsequently the greatest declines.

To illustrate the impact that had on western financial institutions, in 2004 the average loss for 1-to-4 family mortgage loans in Arizona, California, and Nevada ranged from 0% to -.01%. For 2010 (thru 6/30/2010), that same statistic ranges from a high of 3.55% (Arizona) to a low of .49% (California). By loan type, in Arizona, that loss ratio exceeds all other loan types, including CRE!

It is also interesting to note that Arizona, California, and Florida are three of the only 12 states that have “Anti-Deficiency” Statutes. Simply put, the lender may not sue the borrower for any deficiency, subsequent to the trustee sale or foreclosure; the lender must take the loss. The reader can draw their own conclusion, but one could logically conclude that a home buyer who had bought at the “peak” of the market (in any of those states) could more readily rationalize “walking” from an “underwater” loan, if there were no further recourse under the law. Put another way, a prudently underwritten loan that was originated in 2006 with a 75% LTV could today result in a significant loss in many markets.

Unemployment and Bankruptcy Levels
Finally, we’ll look at unemployment rates and bankruptcy filings, both personal and business. As noted in the chart, three regions’ unemployment rates exceed the national average, led by the Midwest Region, closely followed by the West and Southeast Regions. Nevada is widely believed to have the highest unemployment rate in the nation, well in excess of 14%, followed closely by California at 13.8%.

Nationally, personal bankruptcies are averaging 4.5 per 1000 people. Once again, the Midwest Region leads at 6 filings per 1000 people, closely followed by both the West and Southeast, with levels well above national averages. When you look at business bankruptcies, the only two regions exceeding the national average are the West and Southeast.

Conclusion The challenges that have caused our industry stress are very complex, have no simple solutions, and are perhaps even still unfolding. However, a small piece of the puzzle might be “location, location, location.” For more information on this article, please contact John Fahrendorf at 602.321.9463 or click here to send him an email.
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2010: Dealing With Executive Compensation
Mike Lehr, HR and Sales Consultant

We will remember 2009 as the year in which executive compensation was scrutinized more than in any other. However, 2010 will be remembered as the year when governmental entities had to deal with it. Except for the most public financial institutions, most of that “dealing” will be outside the public scrutiny that encouraged it.

Even in 2009, a few of our clients received examinations citing questionable compensation practices for their executives. The problem is that bankers are not asking the right question with regard to this issue. They’re too focused on whether the law and regulations allow them to pay people in certain ways and amounts. The real evolving question for regulators is this: How risky are the compensation practices?

For instance, consider the theme in the guidance announced by the Federal Reserve Board (FRB) on October 22, 2009. In that guidance, the FRB proposed to make a requirement that all banks with over $175,000,000 of assets include a compensation risk assessment as part of their annual filing with the Fed.

Additionally, on January 12, 2010, the board of directors of the Federal Deposit Insurance Corporation (FDIC) approved an Advance Notice of Proposed Rulemaking seeking input on whether certain employee compensation structures pose risks that should be captured in the deposit insurance assessment program.

In both cases, the FRB and FDIC aren’t saying that banks can’t do certain things with compensation; they are asking what the inherent risk in the compensation approach is. That means the bank needs to clearly state three things:

  1. Business objectives
  2. Compensation practices and processes
  3. The linkage between compensation and objectives
In the Fed’s case, it is primarily looking for financial institutions to demonstrate that:
  • Incentive programs do not encourage excessive risk taking beyond the institution’s ability to effectively identify and manage risk
  • The programs are compatible with effective controls and risk management.
  • The board of directors and executive management provide active and effective oversight of these programs

For example, compensation programs based upon revenue growth will likely be considered more risky than those based upon profit. Programs with a one-year time horizon will likely be considered more risky than those with three to five-year horizons. Banks lacking a definable, documented compensation review process will likely be considered more risky than those who do.

It is important to remember that it is not completely clear how this risk assessment will work. However, in addition to the financial and business risk created by compensation plans, there will also be closer examination of reputation risk, tax risk, and control risk. One thing is certain.Traditional practices of responding to outsiders’ inquiries about compensation with “we’ve always done it this way” and “it’s none of your business” are no longer acceptable. While it won’t be necessary to disclose actual compensation numbers, banks will need to have transparency about process and how fairness was determined. We saw 2009 bring the issue to the fore; we’ll see 2010 dealing with its practicalities.

For more information on this article or on how Young & Associates, Inc. can assist you in conducting a practical compensation risk assessment, contact Mike Lehr, HR and Sales Consultant, at 1.800.525.9775 orclick here to send an Email
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Benchmarking Bank Performance
Martina Dowidchuck, Consultant

Both examiners and bankers agree that there is value in measuring an institution’s performance by comparing it with other, similar banks. Whether you need to analyze your past performance, set annual goals, or provide support documentation, peer comparisons can be very helpful.
Finding true peers and obtaining meaningful comparisons, however, could be a challenge. The pools of potential peer candidates with similar characteristics are limited, regional economic climates vary significantly, and financial institutions are pursuing increasingly diversified strategies. Young & Associates, Inc. has been helping bankers in the process of obtaining meaningful performance comparisons through its customized peer analysis reports and consultations.

Customize Your Peer Group
The peer customization options are virtually endless. The most commonly used criteria include asset size, geographical region, lending specialization, age, and number of branches. Some banks find it helpful to compare their performance to several peer groups simultaneously. As an example, these may include a group of peers with characteristics similar to the bank’s current profile and a peer of banks pursuing business strategies that the bank is planning to target in the future. Some institutions choose to use peer groups comprised of highest-performing banks in their regions or within their business specialization, rather than targeting averages.

Quantify Potential Earnings Enhancements
Both ratios and dollar impact need to be considered when benchmarking performance. A small ratio change affecting a large asset or liability balance may be far more significant than a relatively large ratio change affecting a smaller balance. Our impact analysis included with the peer report illustrates in dollar terms how your earnings and balance sheet would be affected if your performance ratios matched peer averages. This provides a snapshot of the areas where you need to focus your energy.

As an example, let’s consider a bank with an average asset size of $100 million that generated $3 million in net interest income – a margin of 3.0%. The average peer group margin is 4%. To reach the comparable net interest margin with the existing asset size, the bank would need to generate a net interest income of $4 million. Therefore, the below-average net interest margin has a negative impact on the bank’s earnings of $-1.0 million. By improving a margin by 100 basis points, this bank could potentially improve its earnings by $1.0 million. Similar dollar impact calculations are performed for all other major profitability ratios, asset quality ratios, capital adequacy, and liquidity ratios.

Identify Profitability Drivers and Impediments
The ratios in our peer reports are organized using the “decision tree” approach. We begin with the overall performance measures which are then analyzed further on subsequent pages. For example, the net interest margin is explained by interest income/average assets and interest expense/average assets. Interest income/average assets is further studied through the ratio of earning assets/assets, composition of earning assets (with detailed loan mix information), and yields on earning assets (with detailed loan yield information). The interest expense is explained through the individual components of funding mix and cost of interest-bearing funds. The purpose of the decision tree analysis is to explore how ratios are interrelated and how one ratio can affect other ratios, thus allowing you to track the source of a particular performance to its root cause. We believe the value of the peer analysis rests in its aid to a banker in asking the right questions about bank performance and asking those questions in a systematic manner.

Apply Information in Strategic Planning and Action Planning Process
Each bank has its own unique operating characteristics that affect both its balance sheet composition and its income stream. No single ratio or trend is indicative of a financial institution’s condition. A given bank may be above or below the peer group average for a given ratio; however, that information must be considered in combination with other related facts before its importance can be determined. Young & Associates, Inc. regularly assists clients in interpreting the unique results of their performance and peer analysis, helps address the conditions that require further attention, and applies the information in the strategic planning and action planning process. For more information, please contact Martina Dowidchuk at 1.800.525.9775 or click here to send an Email. Sample peer reports and pricing information are available at
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Technology: The Swiss Cheese of “Invasion of Privacy” Risks
Mike Lehr, HR Consultant

Technology policies are very similar to drug testing policies in two major ways. First, you need to disclose to employees that you have a policy instructing them on the appropriate use of bank technology, and second, you need to disclose to them the extent to which you are allowed to “test” whether they are using it appropriately. However, they differ in one major way: technology policies are far more complex.
This compare-and-contrast exercise highlights three key areas to find loopholes in most technology policies. These policies usually fail to:
  • State the extent to which a bank may audit employees’ use of technology
  • Deal with technology comprehensively and only cover e-mail and internet use
  • Specify the coverage, intent, and enforcement of the policy
All of this assumes, of course, that actual practice syncs with policy. Many times it doesn’t and thus creates a fourth loophole:
  • Practices imply privacy is preserved when policies do not

Technology Audit
To start, it is one thing to tell employees that they can’t use technology in certain ways and quite another to tell them what rights you have in auditing their use. For instance, it’s important to state that employees should have no expectation of privacy with respect to a specific technology. It’s also important to state that anything created with bank technology is owned by the bank. This covers gray areas in which employees might come in early or stay late to type letters, create spreadsheets, or produce presentations for charitable purposes. This should also include policies regarding the search of personally-owned technol¬ogy such as laptops, cell phones, and portable drives brought onto bank premises. Policies should govern the type of bank and client information that can be stored on personal technology, if at all. Employees in sales capacities are frequent gray areas regarding the examination of such things as covenant not to compete and the non-solicitation of customers.

Comprehensive Policy
In terms of a comprehensive view of technology, banks often fall short because what’s considered a “technology policy” is really nothing more than an e-mail or internet policy. Often, banks rely upon the generic phrase “bank property” to cover such things as computers, phones, laptops, and cell phones. However, technology’s uniqueness delves into privacy issues far more deeply than office supplies do.

Coverage, Intent, and Enforcement
Specifics with regard to coverage, intent, and en¬forcement are important because most federal and state privacy laws are often under some kind of review with regard to technology – not to mention the relentless changing face of technology itself. For example, it’s not only important to say that employees can have no expectation of privacy with regard to technology, but also to specifically state the technologies to which that refers. This means specifically stating such things as computers, copiers, faxes, printers, phones, laptops, and cell phones. This becomes more significant as many of these electronics become integrated into a single entire computer network.

Actions Speak Louder Than Words
Finally, as always, it is one thing to have a policy and quite another to live by it. A typical problem is allowing employees to protect their privacy by allowing them to have private passwords and access codes that the bank doesn’t know. If you can’t access the underlying tech¬nology in another way, you could be implicitly stating that employees have a right to privacy that you did not intend. This easily happens on such things as laptops and cell phones but is often overlooked on passwords established to prevent the access of specific documents. That’s why it’s important to state that employees are re¬quired to report any passwords or access codes they use in the protection of documents they create.

In Conclusion
While this article does not intend to describe every way to fill a loophole in a technology policy, it does give some fundamental strategies for self-auditing to avoid “swiss cheese” coverage when it comes to invasion of privacy concerns. Start off by asking whether you have given the bank the right to audit employees’ usage of technology. Then, ensure that every technology is specifically mentioned, not just e-mail and internet; don’t rely upon “bank equipment” wording. Review for specificity; don’t worry about sounding repetitive. Finally, ensure that your practices are truly in line with your policies with passwords and access codes. For bonus points, look in your employee handbook. Do you see your technology policy comprehensively stated there? That’s the preferred practice over a separate document. If you take a half-hour to audit your technology policy in this manner, you will be well on your way to a sounder one. To learn more about the information in this article, contact Mike Lehr at 1.800.525.9775 or click here to send an Email.
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Justify Your Liquidity
Martina Dowidchuk, Consultant

As the competition for retail deposits and their costs continues to increase, more banks have sought to improve their liquidity by reducing the size and liquidity of their investment portfolios and by expanding their wholesale funding sources. While the availability of diverse funding sources can reduce liquidity risk and regulators acknowledge the benefits of wholesale funding, bank managers are expected to be prepared for a more rapid funding erosion during times of stress. Regulatory guidelines call for realistic, written contingency funding plans that are supported by quantified stress testing and new liquidity metrics customized to match the banks’ balance sheets. According to the proposed Interagency Guidance on Funding and Liquidity Risk Management, all financial institutions, regardless of size and complexity, should have a formal contingency funding plan (CFP) that clearly sets out the procedures for addressing liquidity shortfalls in emergency situations.

The CFP should:
  • Identify stress events. These are unexpected situations or business conditions that may create liquidity pressures. Stress events may occur for a variety of internal or external reasons, such as unexpected changes in credit risk, operational disruptions, rapid deposit erosion, or inability to access contingent funding facilities.
  • Identify early warning indicators and their monitoring system. These indicators should signal any negative trends in the bank’s internal and external environment and, in case of a potential vulnerability, should trigger a response by the management mitigating the bank’s exposure to the emerging risk. Early warning indicators may include negative publicity, increased potential for deterioration in the bank’s financial condition, above-average deposit withdrawal rates, or an increasing trend in exercise of off-balance sheet commitments.
  • Define stress levels. The various levels of stress severity should trigger different actions and contingency funding strategies.
  • Identify alternative funding sources. Liquidity pressures may spread from one funding source to another during a stress event, and not all of the existing funding options may be available in all circumstances. Bank management should maintain ongoing communications with alternative funds providers and regularly test its fundraising options to evaluate their effectiveness at providing liquidity in both the short and long term. Concentration tolerances should be set on the usage of alternative funding sources.
  • Define funding strategies. Funding strategies should outline the available backup facilities under different stress scenarios, the circumstances under which the bank might use them, and the anticipated sequence of use.
  • Establish a crisis management team. The CFP should identify the individuals who will be responsible for implementing the contingency funding plan. Individual responsibilities and authority should be clearly defined so that all personnel understand their roles during a problem situation.
  • Establish an action plan. The CFP should outline the specific actions of the crisis management team that would be triggered if the assessment of the warning signals suggests an increased vulnerability in the bank’s liquidity position. The plan should ensure a timely, consistent, and coordinated implementation of the contingency funding plan and an effective communication flow between bank management, bank employees, board of directors, the public, and key constituents.
  • Outline the cash flow planning and stress testing process. The CFP should outline the quantitative tools that will be used to measure, monitor, and control the bank’s liquidity position. Typically, these include the liquidity cash flow forecast projecting the bank’s funding needs and funding sources, various time horizons, and the liquidity stress tests considering additional funding erosion and other liquidity constraints.
In Summary
A liquidity program, justified by realistic cash flow plans, relevant liquidity metrics, stress testing, and a formal contingency plan, is more likely to withstand regulatory scrutiny and increased liquidity pressures in stressed times. For more information on this article or how Young & Associates, Inc. can help you with your liquidity planning, give me a call at 1.800.525.9775, or click here to send an Email.
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Five Guidelines for Incentives
Mike Lehr, Human Resources and Sales Consultant

I often get asked about incentive programs, a favorite topic of mine since many plans assume complex forms in an attempt to achieve multiple objectives.

In analyzing incentive plans, I use five guidelines:

1) Motivation. Make sure an incentive is really an incentive; a PhD shouldn’t be a prerequisite to figuring it out. Employees should be able to figure their incentives on their drive back to the office.

2) Evolution. Don’t try to build Rome in a day – allow the plan to evolve over time, especially if your employees don’t have much experience with incentives.

3) Imperfection. All incentive plans have inherent flaws, so realize they are no substitute for good management. In fact, good management can survive without a good incentive plan, but a good incentive plan cannot survive without good management. I know it seems obvious, but many tend to forget it.

4) Integration. Keep incentives narrow and focused on the behaviors they need to reward, and integrate other compensation and benefits to reward non-sales efforts (i.e., retention is important even though it may not show up on a sales report).

5) Practicality. Make sure incentives are operationally feasible in terms of running the metrics and paying your people. You have to be able to engineer what the architect sketches.

Typically, when incentive programs are rolled out, we look at them as additive rather than subtractive; employees will do the extra things we want to earn the incentive. This is a fantasy. If employees only have so many hours in a day, the extra effort they will devote to earning incentives will come from other activities. For instance, a sales incentive program will likely take time from activities involving retention and credit quality.

This is why a multi-faceted, integrated compensation program is important. Employees need to see that their compensation doesn’t revolve solely around the activities supported by incentives. For instance, the use of other forms of compensation can help buttress activities that aren’t easily quantifiable. Discretionary bonuses are one such type although some labor attorneys frown on them because they carry greater discriminatory risk.

However, these types of bonuses can help managers retain the authority that incentives sometimes strip away. This stripping occurs because employees are more likely to spend time doing what you reward financially than what you simply command to be done. Consequently, incentives can create built-in resistors to other initiatives that might come up during the year.

For those who have experienced various incentive programs, some of these pitfalls are not new. Still, it’s a challenge to make sure they don’t get out of hand. The five guidelines above can help.

For more information on incentive plans and how Young & Associates, Inc. can assist your bank in this area, please contact me at 1.800.525.9775 or click here to send an Email.
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Director Orientation
Fran Samson, Consultant

New board members have taken on a big responsibility, one that requires learning the ins and outs of bank operations in a relatively short period of time. To create an effective board, bank management must equip new directors with the knowledge they need to serve their positions successfully.

In order to use the full board of directors’ time more efficiently, new member training should be done, for the most part, outside of the board meeting. Young & Associates, Inc. would recommend new director orientation include time with the management group that would be responsible for board reports and presentations made during the board meetings.

Typically, this group would include:
  • Senior Loan Officer. The senior loan officer should review the bank’s loan/credit policy, new loan request format, past due reports, Allowance for Loan and Lease Loss, loan review and risk grading, and overdrafts.
  • Auditor. The auditor should review the audit report process and the audit schedule.
  • Compliance Officer. The compliance officer should discuss exception reports and Regulation O: Insider Lending.
  • Chief Financial Officer (CFO). The CFO should discuss the bank’s financial reports that are typically given to the board of directors monthly. This would include the bank’s investment transactions for the month.
  • Risk Management Officer. If the bank has a risk management officer, he/she should go over the different reports completed by the group, i.e., asset liability management, interest rate risk, liquidity risk, etc.
  • President/CEO. The president/CEO should walk through an agenda to acclimate new directors with the board meeting process. Also, an overview of bank committees that include board members and the bank’s overall strategic plan would be helpful.

This may sound like a lot of information to cover; however, no one would expect this to be covered in one day. Ideally, new board member orientation should take place before the first board meeting that a new director attends. This may not be realistic for some banks. It would be reasonable, however, to expect that the information be covered in the first two to three months of the director being hired.

As ongoing training, when a bank policy is presented to the board for annual review, be sure to encourage the new directors to ask questions about any areas of the policy that are unclear.

The role of a bank board member comes with a great amount of liability to serve the shareholders responsibly. Being equipped with knowledge of the bank’s processes will help the new member be effective much sooner. Additional information about the role of a bank director can be found in The Role of a National Bank Director – The Director’s Book, issued by the Office of the Comptroller of the Currency (OCC) and located at: To discuss this article in more detail, please contact me at 1.800.525.9775 or click here to send an Email.
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Regulatory Enforcement Actions in Today’s Banking Environment
Jim Kleinfelter, President and Senior Consultant

While most community banks may not have had the difficulty that the large money center banks have had since the mortgage market began to unravel, this is, none-the-less, a time that is testing bank managers and bank directors in banks of all sizes throughout the country – and the world for that matter. My banking career dates back to 1977, and the tough economic times and record-high interest rates of the late 1970s and early 1980s at times still seem fresh in my mind. That is the only period during my career that rivals today’s banking environment.

Then and Now – Major Differences and Similarities

The main difference between the economic environment back then and the current environment is that high unemployment caused a real estate crisis back then, but in today’s crisis, a real estate crisis caused high unemployment. Also, at that time, we had record-high interest rates and very high inflation versus the record low interest rates and the possibility of deflation now. The double-edge sword of high credit losses and deposit costs exceeding large segments of the average financial institution’s loan yields may have made our fundamental issues even greater to overcome then than now. As an industry, we were not as well capitalized back then as we are today. The greatest fear now is that we don’t know where the bottom is. The major similarity of then to now is that we see many banks that, by most measures, are considered to be well-managed, having less than desirable regulatory examinations and, in many cases, entering into a regulatory agreement.

Be Proactive in Your Response

While we are always sorry to learn that a bank is having difficulties, we understand that a regulatory enforcement action or just-less-than-ideal examination is a very tough experience. It is, however, very important for the board and management to remain positive and to aggressively lead the organization through this difficult but necessary regulatory process. It has been our experience that institutions that have been proactive and have embraced this trying time have fared relatively well, and often have stated that the organization was significantly improved by those changes. Institutions that fought the process or that proceeded from the prospective of only meeting regulatory demands ultimately did not fare as well. We urge you to not just do the minimum that is required, but to do more than is required. Don’t just meet a deadline, but beat the deadline.

Types of Regulatory Enforcement Actions

The current regulatory environment poses significant challenges for financial institutions, large and small. The regulatory agencies are closely scrutinizing how your bank does business and making demands for improvement. These challenges can come in two forms. If you are lucky, you may receive an informal enforcement action. Or, if issues are more serious, the bank may receive a formal enforcement action. The primary types of enforcement actions against banks and savings institutions are briefly summarized as follows:

Informal Actions

Commitment Letter: A Commitment Letter is a document signed by the bank’s board of directors on behalf of the bank and is acknowledged by an authorized regulatory official, reflecting specific written commitments to take corrective actions in response to problems or concerns identified by the regulator in its supervision of the bank. The document may be drafted by either the regulatory agency or the bank. A Commitment Letter is not a binding legal document. However, failure to honor the commitments provides strong evidence of the need for formal action.

Memorandum of Understanding: A Memorandum of Understanding (MOU) is a bilateral document signed by the bank’s board of directors on behalf of the bank and an authorized regulatory representative. An MOU is drafted by the regulator and in form and content looks very much like a formal regulatory enforcement action. It legally has the same force and effect as a Commitment Letter.

Safety and Soundness Plans: Safety and Soundness Plans are a less common form of informal action. A regulator issues to the bank a determination and notification of failure to meet safety and soundness standards and requires the submission of a safety and soundness compliance plan (collectively called a Notice of Deficiency). If the Safety and Soundness Plan is approved, it functions as an informal enforcement action. However, if the bank fails to submit an acceptable Safety and Soundness Plan or fails to in any material respect to implement an approved plan, the regulator will require the bank to correct the deficiencies.

Formal Actions

Consent Orders: A Consent Order is the title given by the regulator to an Order to Cease and Desist, which is entered into and becomes final through the board of directors’ execution on behalf of the bank of a Stipulation and Consent document. Consent Orders are signed by an authorized regulatory official. Its provisions are set out in article-by-article form and prescribe those restrictions and corrective and remedial measures necessary to correct deficiencies or violations in the bank and return it to a safe and sound condition. Violations of a Consent Order can provide the legal basis for assessing civil money penalties (CMPs) against directors, officers, and other institution-affiliated parties.

Cease and Desist Orders: Aside from its title, a Cease and Desist Order is identical in form and legal effect to a Consent Order. However, a Cease and Desist Order is imposed on an involuntary basis after issuance of a Notice of Charges, hearing before an administrative law judge, and final decision and order issued by the Comptroller. Any Cease and Desist Order is reviewable by a U.S. court of appeals. Cease and Desist Orders can be used to order affirmative corrective action. Moreover, a willful violation of a final Cease and Desist Order is itself grounds for receivership.

Temporary Cease and Desist Orders: A Temporary Cease and Desist Order is an interim order issued by the regulator and is used to impose measures that are needed immediately pending resolution of a final Cease and Desist Order. Such orders are typically used only when immediately necessary to protect the bank against ongoing or expected harm. A Temporary Cease and Desist Order may be challenged in U.S. district court within ten days of issuance, but is effective upon issuance and remains effective unless overturned by the court or until a final order is in place.

Formal Written Agreements: A formal written agreement (“Formal Agreement”) is a bilateral document signed by the board of directors on behalf of the bank and an authorized regulatory official. Like a Consent Order, its provisions are set out in article-by-article form and prescribe those restrictions and corrective and remedial measures necessary to correct deficiencies or violations in the bank and return it to a safe and sound condition. Violations of a Formal Agreement can provide the legal basis for assessing civil money penalties (CMPs) against directors, officers and other institution-affiliated parties. However, unlike a Consent Order, Formal Agreements are not enforceable through the federal court system. Another important difference between a Formal Agreement and a Consent Order is that willful violation of a Consent Order may be used as grounds for appointment of a receiver while with a Formal Agreement it may not. The decision to utilize a Formal Agreement instead of a Consent Order is largely driven by negotiation strategy and the discretion of the delegated decision-making official.

PCA Directives: Under 12 USC 18310 and 12 CFR 6 (Prompt Corrective Action or PCA), insured banks are subject to various mandatory and discretionary restrictions and actions depending upon the bank’s PCA capital category. Mandatory restrictions and actions are effective upon the bank being noticed that it is in a particular PCA capital category. Discretionary restrictions and actions are imposed on the bank through the issuance of a PCA Directive. If circumstances warrant, the regulator may issue a PCA Directive that is immediately effective. Otherwise, the normal process for issuing such a PCA Directive begins with the issuance of a Notice of Intent to Issue a Directive. The bank is given an opportunity to respond to the Notice of Intent, explaining why the proposed directive is not necessary or offering suggested modifications to the proposed directive. A PCA Directive is preferred when the supervisory office anticipates the bank may be a candidate for early resolution. A PCA Directive can enhance the regulator’s use of resolution options later because, e.g., failure to submit or implement a capital restoration plan required in a PCA Directive is grounds for receivership.

Safety and Soundness Orders: The regulator issues to the bank a determination and notification of failure to meet safety and soundness standards and requires the submission of a safety and soundness compliance plan (collectively called a Notice of Deficiency). If the bank fails to submit an acceptable plan or fails in any material respect to implement an approved plan, the regulator must, by order, require the bank to correct the deficiencies, and the regulator may, by order, require the bank to take any other action that the regulator determines will better carry out the purposes of 12 USC 1831p-1. The regulator must also take certain additional action against a bank that has not corrected a deficiency if the bank has experienced either extraordinary growth over the past 18 months, or within the past 24 months commenced operations or underwent a change in control. If circumstances warrant, the regulator may issue an order that is immediately effective.

Otherwise, the normal process for issuing such an order begins with the issuance of a Notice of Intent to issue an order. The notice identifies the safety and soundness deficiencies, and describes the proposed actions which would be included in the order and the time-frame for complying with the proposed actions. The bank is given an opportunity to respond to the Notice of Intent, explaining why the proposed order is not necessary or offering suggested modifications to the proposed order. A Safety and Soundness Order has essentially the same force and effect as a Cease and Desist Order. However, unlike a Cease and Desist Order, a willful violation of a Safety and Soundness Order is not itself grounds for receivership.
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Accountability: Creating Confidence in Your Bank
Mike Lehr, HR Consultant

If anyone had any doubts as to the role psychology plays in our finan¬cial markets, they are gone now. The virtual actions you take are now as important as the concrete ones. One little surprise can shake the confi¬dence of your community and cor¬respondent banks. As regulators make their rounds, the trouble areas are becoming apparent. It’s not that banks lack knowledge about regula¬tions or fail to initiate appropriate compliance efforts. It’s really about getting your employees to do the things to safeguard your bank and its reputation. In a single word, it’s about accountability.

Features of Effective Accountability
Accountability problems are directly attributable to management; only management can address them. The features of a good accountable infrastructure include many known tools, but you also need to use them well.
In order to create such an account¬able infrastructure, bank manage¬ment needs to answer four questions for employees:

1. What are their jobs?
2. What are their goals and objectives?
3. How well are they doing?
4. What are the benefits of doing well, and the consequences if they don’t?

Tools to Increase Accountability
Here are the four tools associated with each question that help us address them:

1. Job descriptions
2. Planning documents
3. Performance appraisals
4. Compensation plans and employee handbooks

As you already notice, none of these questions/tools are earth-shat¬tering; yet, most likely one or more of them are not employed and, probably, most of them are not employed well. Generally, if there is a problem with accountability, you will find it in the use of these documents. For instance, saying you have job descriptions for your people is very much like saying, “I have a hammer in the garage.” If all it does is sit there, it’s very much like not having one at all. Someone who doesn’t have a hammer will achieve the same amount as one who does but doesn’t use it.

Accountability Audit
That’s why, in my work, I often audit job descriptions using three steps. First, I sit down with those who wrote them to ensure they are comprehensive enough without being onerous. Second, I ask the employee what he/she thinks his duties are. Last, I ask the manager what he/she thinks the employee’s duties are. To pass the audit, all three need to be in sync. I also assess how often and how well they are reviewed. Thus, the audit process allows me to assess not only compliance, i.e., “Is there a job description?” but also quality, i.e., “How well is it being used?”

I use a similar methodology for each of the other tools above. There is a direct correlation between the audit score and the degree of accountabil¬ity in the bank. More importantly, the degree of accountability is inversely related to the operational risk the bank is carrying. In other words, the less accountable the bank environment is, the more operationally at risk it is and vice versa.

Accountability Benefits
What are the benefits of a strong, accountable work-place? First, there are the obvious ones such as reducing the inherent risk in running the bank. This will translate into fewer surprises and less severe ones that could disrupt the confidence of the community and correspondent banks. On a personal level, the benefit will be fewer sleep¬less nights. However, there are also covert ben¬efits. Employees will have a greater sense that the bank is being run well. They will know that everyone is doing their part, not just them. Their confi¬dence in management will increase. Morale will remain high even in tough times. All of these translate into positive feelings that will spread to your customers and community as your employees interact with them. When times are tough, organiza¬tion and discipline often provide the sense of security and stability that people need.

Creating a strong, accountable infrastructure not only benefits the bank from a regulatory and opera¬tional perspective, but also in a service and public relations one too. In uncertain times, people don’t like facing them in a sloppy manner. Belt-tightening and returning to basics are often the best medicine.
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Reassuring Customers in Unreassuring Times
Mike Lehr, Human Resources Consultant

How can we help customers in these times? The biggest mistake we can make is to emphasize facts and information about our banks. Panic is about the heart, not the head, so you need to alter your tactics accordingly. Here’s how:

Immunize yourself against your customers’ panic; Move and talk a bit more calmly and slowly; Delay when practically and legally possible; Allow them to talk (vent); Reassure with talks of the future about local and family events

Immunize Against the Panic
When others panic, it’s very easy to get sucked up into it too. The panic you catch from one customer will make you a carrier for the rest of your customers. Tough times are for heroes, not for administrators. Seize the opportunity; opportunities exist in crises. You have to have a heightened awareness for what your words and behaviors can convey to customers.

Stay Calm
When communicating with customers, be very careful to stay away from extreme words. The military trains soldiers to use only certain words in situations of panic so that accuracy is ensured. This technique also helps morale within the bank. Sometimes purposely slowing oneself down in front of a customer can help. Imagine a ballet troupe rushing behind the scenes to change clothes and get into place only to perform slowly and gracefully once on stage. Whether you believe it or not, your branch, your office, and your bank is a stage.

Delay When Practically and Legally Possible
Encourage customers to “think” about their actions. Remember how many times they told you they wanted to “think about it?” It’s now your time to use this in reverse. Show them that there may not be a need to decide anything today (i.e., the markets are closed, a transaction won’t go through today). Take them to a quiet part of the bank. Always be cognizant of any legal and procedural ramifications which might prevent delay. Our jobs involve helping customers make good decisions as well as avoiding bad ones.

Allow Customers to Vent
The most important thing you can do is allow customers to vent or share their concerns with you. This takes a lot of courage because often it seems to encourage panic. Too often we recommend solutions or advice before customers are finished venting; this increases the likelihood that they will refuse our help. I graphically call this “sucking out the venom.” You can encourage the venting by asking questions or saying, “Tell me more.” When they slow down, speak calmly and add in some questions so you can begin to present your advice.

Be Reassuring
Calm small talk can go a long way. Focus on the future. People tend to believe the future will be better than the present. Ask about family and community events or those things you have in common. Catch up on the local high school football team or their grandchildren’s soccer games. Hype up a local festival or community event. Let them see that no matter how bad the news is, life goes on. The sun will rise, and you will see them again.

The key to reassuring customers in unreassuring times is not to panic no matter how much they do. In tough times, people want to be with those who can reassure them. Even if they decide to close their accounts, tell them, “I want you to know that you are always welcome to visit us and talk to me, and I look forward to seeing you again soon.”

Young & Associates, Inc. offers a variety of human resources services. For more information on these services and/or the information in this article, give me a call at 1.800.525.9775 or click here to send an Email.
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Liquidity Planning in Tomorrow’s Environment


Asset quality is liquidity. Four words to explain liquidity is an oversimplification to be sure. But you hear them repeatedly for a reason. They quickly get to the heart of the matter for most community banks. Liquidity, particularly access to contingent sources (that’s liquidity when you need it the most), is highly predicated on the quality and availability of a bank’s loans and investments.

The correlation between loan problems and the need for heightened liquidity risk management is strong and well-established. So, if a bank is experiencing deterioration in asset quality it is no coincidence, and highly likely, that its regulator will increase scrutiny of its liquidity risk management program. In fact, even in the absence of credit problems, given the recent turmoil in the markets and uncertain collateral requirements (haircuts), I suspect all banks will be required to provide a more robust liquidity risk management system. What will be needed is a dynamic system of measuring, monitoring, reporting, and controlling liquidity risk that will reassure regulators and directors that the sophistication of the bank’s liquidity risk management program is tailored to their institution’s unique situation and is in line with the times.

Liquidity Risk Fundamentals
That being said, many of the fundamentals of sound liquidity risk management are essentially unchanged from those derived in less turbulent times. To begin, the directors should approve a set of liquidity risk limits. The directors’ appetite for liquidity risk should then be communicated, through a series of formally-approved liquidity risk management policies and procedures, to those in management responsible for ensuring compliance with their directives. Then, in turn, management should be capable of supplying information back to the board which validates that they are managing liquidity risk in a manner consistent with the board’s wishes.

But setting board-approved risk tolerance guidelines is just the start. Similar to where interest rate risk management was before the advent of more sophisticated IRR models, liquidity risk management is entering into a new era for community banks. Clearly, the level and sophistication of the liquidity risk management tools deployed by an institution will depend on the complexity of their operation, the condition of their assets, and the seriousness of their liquidity posture. However, at minimum, all banks should have a dynamic cash flow model, well-defined collateral management practices, and a contingency funding plan derived from honest behavioral assumptions.

Dynamic Cash Flow Model. A dynamic cash flow model will allow management to customize their liquidity planning based on projections unique to their condition, competitive environment, reputation, and other variables. Sounds like work. But, an approach that relies only on standard static metrics and industry benchmarks and averages derived from an era when liquidity risk management may have been an afterthought is like waking up one morning feeling like you should lose weight and then going out and hiring someone else to exercise for you.

A dynamic model doesn’t change any of the traditional fundamentals and objectives of sound liquidity planning. But it does enhance management’s ability to measure, monitor, report, and control risk. Properly deployed, it will help management identify cash flow shortfalls and test other potential scenarios. Early detection is, of course, key to arriving at the least costly solution in a calm and deliberate manner.

Collateral Management. Collateral management is an essential part of liquidity risk management. At minimum, management should routinely track the volume and types of assets available for pledging. And they should be in regular contact with secondary source providers to determine if their estimates of availability are reasonably accurate given the current condition of intended collateral.

Contingency Funding Plan (CFP). No discussion of liquidity risk management would be complete without at least touching upon contingency funding plans (CFP). CFP will be an integral part of any board-approved liquidity risk management program. Among other things, a CFP is intended to detail the measures management will undertake if/when the bank is confronted with a series of serious or unexpected liquidity issues. Typically, a CFP will “stress” primary and secondary sources of liquidity across scenarios ranging from mild to severe.

At its core, a well-constructed CFP is really a behavioral model. But projecting the behavior of fund providers and fund users across a sliding scale from liquidity stability to liquidity crisis is a difficult task. However, all acceptable, functional CFPs have something in common. They always contain assumptions that are directionally consistent with the probable behavior expected from fund providers and users as a bank’s condition worsens, and liquidity becomes less accessible and more expensive.

In Conclusion
Although most community banks may have come through the recent market upheaval relatively unscathed, signs in the funding environment are pretty clear. This is a new era for liquidity risk management. The need for a suitably robust and dynamic liquidity risk management program, which can model various cash flows, embodies a realistic contingency funding plan, and comprehensively addresses collateral management has never been more apparent.

If you are interested in learning more about liquidity risk management and the services that Young and Associates, Inc. can provide, please contact either SVP/Senior Consultant, Lance Ciroli, or Consultant Martina Stofko Dowidchuk at 1.800.525.9775, or click here to email Lance Ciroli or click here to email Martina Dowidchuk. We look forward to hearing from you.
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Four Ways to Increase Morale Without Spending a Cent
Mike Lehr, Human Resource Consultant

A bank president once asked, “Mike, what are some ways to increase morale?” I replied, “I can give you four that won’t cost you a cent.” His interest piqued. Here they are:

1. Know every one of your employees’ names and use them when addressing them.
2. Make sure no employee goes more than six months without you shaking his or her hand.
3. Make sure no employee goes more than six months without your thanking them for the job he or she is doing.
4. Attend every seminar you approve for your people, talk about the direction of the bank for a few minutes, and then open up for questions.

Unfortunately, most leaders do not realize the degree to which their presence impacts their people. Consequently, much of their personal capital is uninvested. Since the number one reason why people leave is because of their bosses, you can reduce your labor cost by moving morale to a higher level.

What underlies the power in these techniques? Let’s talk about that and about making them work for you.

Know and Use Employees’ Names

In any journalism class, instructors will tell you that using names in articles is critical to securing readers’ interest. At a party, someone was telling me that his favorite class was statistics because the professor remembered everyone’s name. Another college professor told me that a student focus group told his colleagues that they could improve their standing if professors would start remembering and using students’ names.

Yes, remembering all your employees’ names may be difficult, but you can “cheat” by reviewing rosters before visiting a branch or going to a department. You can ask managers for the names of folks you don’t know. Your HR manager can be a great resource, too.

The Value of the Handshake

Shaking hands is important because it’s a personal touch. A bookstore manager told me during a book signing that they are taught not only to show people where a book is, but also to hand it to them. Their studies show that the likelihood of the book being bought jumps dramatically. A television host from a medical show told me that when a doctor touches a patient, the patient’s perception of time spent with the doctor doubles.

In one company I helped, the employees would introduce me as “the guy who goes around shaking your hand.” In another, after I shook one employee’s hand, he said I was the first executive in his 14 years of employment to do that. I also once shook the hand of a bartender for a super drink he made. He said, “That’s the first time in a very long time that anyone shook my hand for making a drink.” This simple act – when expanded to include many types of greetings rather than just a first one – creates a lot of impact between a leader and an employee.

Saying Thank You

Thanking people for their efforts is another easy way to build morale. Yes, you may be paying people to do their job, but the corollary is that if they don’t like it, they can leave. This means their work for you is purely voluntary. It also means they are saving you time, money, and headaches because you don’t have to find additional talent in a scarce marketplace. Employers who appreciate their employees and demonstrate it will tend to attract the best talent over time. Furthermore, a thank you is the least costly form of appreciation you can give and, in many cases, is far more powerful.

Attend Your Seminars

When I ran seminars for a large bank, I would guarantee fantastic ratings if I could get an executive to show up, talk for a few minutes, and field questions. One of the best all-day seminars we had was when the executives did all the presenting and facilitating. What was even more significant was that they didn’t have to be particularly good at it. The rank and file love to interact with their leaders. Preparation doesn’t require much because it involves open exchanges. The little preparation that there is can be handled by good administrative assistants.


When we look at all four of these techniques, the key is having the right expectation. People are not light switches or software programs; you don’t flick a switch or hit “enter” and get an immediate change. A disciplined application of these basic techniques over time will eventually transform any group, laying the groundwork for easier and more effective implementation of strategy. In this sense, it’s very similar to the magic of compounding interest. This expectation is no different from the relational ones we currently use when we work with clients and prospects. When you look at these techniques from a return-on-investment perspective, you won’t find anything that will give you a greater return.

For more information, please contact me at 1.800.525.9775 or click here to send an Email.
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Insurance Monitoring in Wake of Hurricane Katrina


Young & Associates, Inc. has established a strategic partnership with Lawrence Victoria, Inc., a leading independent provider of insurance and insurance-related tracking services to the lending industry. Lawrence Victoria is focused on providing custom insurance tracking services designed to increase protection and reduce lender administration..

As current marketplace conditions continue to increase the risk of a lender’s mortgaged real estate portfolio, more and more lenders are selecting to partner with a professional insurance tracking firm to manage their flood and hazard insurance monitoring functions. Even lenders with ample in-house staff dedicated to insurance monitoring are recognizing that insurance monitoring and warning letter cycles can be handled more efficiently by a professional insurance tracking firm. Consider that, on average, each piece of collateral generates six pieces of paper insurance correspondence every year the loan is active. Lender systems were not designed to monitor insurance and, as a result, may not be able to match insurance documents to loans by anything other than name. For the community-based lender with a robust commercial portfolio containing multiple collateral and cross-collateralized loans, this usually means that the servicing area is spending a great deal of time matching flood and hazard insurance documents with the correct loans.

Force Placed Insurance

As most lenders know, force placed insurance is coverage obtained by a lender to protect its security interest in a property where the borrower has failed to maintain insurance. Force placed insurance is usually written to protect the interest of the lender by protecting the outstanding loan balance only. Force placed insurance is secured and paid for on a per loan basis when the borrower does not maintain insurance. The costs for the force placed insurance policy are paid to a force placed insurance provider by the lender who, in turn, collects the money from the borrower who let the insurance lapse. Historically, several factors have driven lenders attention to their force placed insurance practices. Reducing Charge-Off’s. When a borrower lets the insurance on the real estate securing their loan cancel or expire, the lender experiences substantial exposure in the form of uninsured mortgaged real estate. In most cases, if the real estate securing the loan experiences a physical damage loss and is not insured, the borrower will stop making payments and foreclosure will result. The lender then engages the expensive, difficult, and undesirable process of foreclosure on a property that, due to uninsured physical damage, is worth much less than the loan balance. The result is a large charge-off for the lender which will decrease shareholder value.
Safety & Soundness / Compliance. Bank examiners have been instructed to closely scrutinize all procedures lenders have in place to guarantee that adequate proof of flood and hazard insurance exists for all mortgaged real estate. Their concern is not directed so much at proof of insurance requirements at loan closing, but rather at making sure the lender has a system in place to identify if the borrower has cancelled the required insurance at any point after the loan closing.
Borrower Good Will. Force placed insurance is important not only for protecting the lender, but also the borrower. Although the responsibility to maintain insurance ultimately belongs to the borrower, most lenders understand the importance of securing insurance on behalf of their borrowers who neglect to do so themselves. This is especially the case with community and regional lenders who strive to provide exceptional service to their borrowers. When a borrower forgets to pay their insurance bill, has their insurance cancelled, and experiences physical damage to their dwelling, they will be appreciative that the lender secured insurance for them.

Lapse of Insurance

Current marketplace conditions have prompted lenders to re-evaluate their force placed insurance practices. Increasingly, lenders are not made aware when a borrower’s insurance lapses. More and more homeowners’ insurance companies are utilizing third-party mail clearing houses to process and mail policy information, including cancellation notices. This recent trend, in conjunction with potential U.S. Postal Service issues or lender processing problems, leads to increased situations where lenders do not receive notices that a borrower’s insurance has cancelled. Even though the lender is unaware of the exposure, it is not protected from loss. The number of situations where lenders have incurred a significant financial loss because a borrower’s flood or hazard coverage was cancelled or had lapsed and the lender was never notified of the lapse continues to rise.

Staffing Concerns As the cost of a Full-Time Employee (FTE) continues to rise, employee training and staffing continues to be a concern. Staffing employees to manually monitor insurance correspondence is expensive and a task most employees do not volunteer for. Turnover, vacations, and “special projects” reduce the amount of time that is available for monitoring, corresponding, and following up on the insurance requirements for each borrower. A community banker once told me that, even with a full staff monitoring insurance manually, there will always be exposure simply due to the fact that lenders are not always notified when a borrower’s insurance lapses.

Rates On the Rise

Over the past several years, more and more borrowers are seeing dramatic rate increases in their homeowner’s insurance. These increases can be traced to the September 11, 2001 terrorist attacks; huge payouts for toxic mold claims; lower investment returns; hurricanes Katrina and Rita; and most recently, the subprime mortgage crisis. Insurance premiums are always the first a borrower stops paying – food, shelter, and utilities always rank higher than insurance premiums.


Recently, the Mortgage Bankers Association reported that foreclosure levels continue to rise. Doug Duncan, the MBA's chief economist, said the worsening performance was driven by two factors – heavy job losses in the Midwest states of Ohio, Michigan, and Indiana and the collapse of previously booming housing markets. Of particular concern was Duncan’s statement that "The percent of mortgages in Ohio…that are 90 days or more past due or in foreclosure is still more than twice the national average… (10.57%)." Ohio’s delinquency/ foreclosure problem relates directly to a growing exposure in a lender’s mortgage loan portfolio created by cancelled or non-renewed homeowners insurance, as insurance premiums are always the first a borrower stops paying.

Increased Scrutiny

Examiners and regulators from all agencies have been "targeting" the flood insurance area during compliance exams. Flood zone determinations, ongoing monitoring of flood zone properties, and force placed flood insurance procedures have come under increased scrutiny. In many cases, penalties have been imposed, and over the last two years, the number of penalties for flood compliance violations reached a record high. The concern is not directed so much at proof of insurance at loan closing, but rather at making sure the lender has a system in place to identify exposure at any point after the loan closing. Avoiding civil money penalties is of the utmost concern.

Choosing A Partner When considering an insurance outsourcing partner, lenders should expect the plan to:
  • Monitor: Individual hazard, flood, auto, and equipment insurance policies; Minimum coverage requirements; Residential, Commercial and HELOCS; Escrow, Foreclosure and Bankruptcy.
  • Provide: Automatic Coverage (E&O); Reduced administrative costs; Increase lender control and flexibility; Automatic Coverage to protect all loans; Compliance peace of mind; Seamless Integration of flood zone determinations into our tracking system.
  • Produce: Warning letters to borrowers; Insurance documents when necessary; Management reports both weekly and monthly; Specialty reports on demand.
  • Provide These Benefits: Little direct cost to the lender (per loan tracking fee); No portfolio size or system restrictions; Compliance advantages; Integrated flood zone determinations;
  • Multiple and cross-collateralized loans; Reduced administrative expenses; Retain administrative control; Pro Rata refunds – best for borrower; Little/no programming


    Despite the challenging environment lenders currently face, some may still be reluctant to outsource their insurance monitoring functions. However, when lenders discover the distinct advantages outsourcing provides (including the transfer of risk away from the lender), the insurance outsourcing will be swiftly embraced.

    For more information on insurance outsourcing, please contact Jamey Lawrence at 440.349.0775, Ext. 205, or
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Marketing Strategies: Are customers getting the right message from your bank?


Every year, Young & Associates, Inc. assists a number of community banks with selecting locations for new bank branches. There are several factors that are typically good predictors of a branch’s potential for success. For example, we analyze information such as market demographics, the number and strength of competing banks in a market, residents’ tendency to use financial services, and centralized draws (such as shopping malls and large employers) that will likely bring customers to the new location. However, even a bank with a strategically sound location needs a strong marketing strategy to appeal to the different people in its market. In this article, we will explore how the right balance of promotions and customer interaction tactics can help your bank attract and hold on to the types of customers you want to serve.


If consumers are to believe every advertisement they read about banks, they will find the best service, a staff that cares about the community, and products to meet their every need at unbeatable rates at any bank they choose to patronize. In the ultra-competitive world of financial services, the best way to convince potential customers to choose your institution over all the others is to make sure you’re advertising the right products to the right customers.

Consumers have predictable financial needs based on where they are in life. Demographic factors such as age, marital status, the presence and age of children in a household, household income, and net worth can help you determine what types of products your market’s residents would benefit from the most. These are the products that your bank should promote in its advertisements.
For example, if you find that a significant portion of your market’s residents are between the ages of 25 and 49 and married, they will most likely represent families with children. Consumers in this stage of the life cycle are likely interested in buying and maintaining a home, and are also interested in credit of many types, such as mortgages, auto loans, and construction loans. On the other hand, if you find that the majority of your market’s residents are 50 years old or older and have a high net worth, then your advertising should focus on promoting a variety of deposit CDs, IRAs, and large deposit money market products, as these older folks tend to be empty nesters who are providers of funds rather than users of funds.

Stuffing monthly statement mailers with advertisements for free checking may get you a few new accounts, but when you know who your target market is and what their needs are, you are even more likely to attract the deposit and loan customers you desire. Every year, Young & Associates, Inc. assists a number of community banks with selecting locations for new bank branches. There are several factors that are typically good predictors of a branch’s potential for success. For example, we analyze information such as market demographics, the number and strength of competing banks in a market, residents’ tendency to use financial services, and centralized draws (such as shopping malls and large employers) that will likely bring customers to the new location. However, even a bank with a strategically sound location needs a strong marketing strategy to appeal to the different people in its market. In this article, we will explore how the right balance of promotions and customer interaction tactics can help your bank attract and hold on to the types of customers you want to serve.


If consumers are to believe every advertisement they read about banks, they will find the best service, a staff that cares about the community, and products to meet their every need at unbeatable rates at any bank they choose to patronize. In the ultra-competitive world of financial services, the best way to convince potential customers to choose your institution over all the others is to make sure you’re advertising the right products to the right customers.

Consumers have predictable financial needs based on where they are in life. Demographic factors such as age, marital status, the presence and age of children in a household, household income, and net worth can help you determine what types of products your market’s residents would benefit from the most. These are the products that your bank should promote in its advertisements. For example, if you find that a significant portion of your market’s residents are between the ages of 25 and 49 and married, they will most likely represent families with children. Consumers in this stage of the life cycle are likely interested in buying and maintaining a home, and are also interested in credit of many types, such as mortgages, auto loans, and construction loans. On the other hand, if you find that the majority of your market’s residents are 50 years old or older and have a high net worth, then your advertising should focus on promoting a variety of deposit CDs, IRAs, and large deposit money market products, as these older folks tend to be empty nesters who are providers of funds rather than users of funds.

Stuffing monthly statement mailers with advertisements for free checking may get you a few new accounts, but when you know who your target market is and what their needs are, you are even more likely to attract the deposit and loan customers you desire.

Customer Interaction

We generally see three levels of customer interaction, and they are most easily explained through the following example: A potential new customer comes into the bank and says she would like information about establishing a checking account. How does the bank respond?
  • A teller at a bank in the first level of customer interaction will simply hand the potential customer a brochure explaining the bank’s checking account options.
  • A teller at a bank in the second level will ask a few more questions: “Are you new to the area? Would you like information about any of our other services?”
  • A teller at a bank in the third level will enter into a type of service we refer to as “consultative selling.” This type of service requires employees that listen to the customer, ask questions that will help determine what the customer’s needs are, and then provide recommendations for products and services based on that information. For example, in the course of the conversation, the teller may learn that the potential customer will soon be moving to the area with her husband and two teenage sons. The teller could then: 1) offer to set up a meeting between the customer, her husband, and a mortgage lender; 2) explain the bank’s switch kit that will help the customer transfer her family’s accounts from her old bank to the new bank; and 3) provide information about the local school district for her sons. This level of service identifies the totality of the customer’s needs, to solve these problems.
Management must develop a model that outlines the way it expects employees to interact with customers who visit the bank. It may seem obvious, but your frontline personnel deal with your customers every day and likely know the most about their needs. All too often, however, we see a teller being instructed by management to recommend a credit card to each person who walks in the door, regardless of the purpose of the branch visit. Instead, managers should be taking advantage of the relationship between the teller and the customer to help them reach the third level of customer service.

One of the best financial problem solvers that Young & Associates, Inc. has ever encountered was a part time teller at a bank in Indiana. She enjoyed talking to her customers and would recommend a deposit or loan product when she felt it might solve a problem facing a customer. In one year, she brought over $1.8 million into the bank in deposit and loan cross sells.

Consultative selling solves problems based on the best interest of the customer, while earning more valuable accounts for the bank. It is a good model for any bank branch, but it is especially important for branches in mature markets, which may have a more difficult time attracting new customers and therefore rely on continued relationships with existing customers. Perhaps one of the greatest benefits of customer interaction as part of your marketing strategy is that it does not require any additional expense, just some additional training of your staff.

We know how difficult it can be to compete in today’s financial services market, but the right mix of targeted promotions and customer interaction tactics can be your secret weapon against the competition.
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Young & Associates, Inc.
PO Box 711 • 121 East Main Street • Kent, OH 44240