Community Bank Retirement Plans Start to Feel Sting of Regulatory Orders

A tug-of-war between executive compensation and regulation has spread to retirement packages at community banks.

Fentura Financial Inc. said in late September that it would withhold 45% of a retirement payout to a departing executive. Daniel Wollschlager, who is retiring Oct. 21, will receive the funds after the Fenton, Mich., company emerges from its existing enforcement actions.

The plan could serve as a blueprint for how struggling banks compensate retiring executives while remaining under tight regulatory scrutiny. What is unclear is whether Fentura's regulators were behind the split payout.

Many industry observers said they had never heard of a split retirement payout tied to a regulatory order. To some it is evidence that regulators may be looking beyond "golden parachutes," perhaps influencing normal payouts for retirement plans.

"Excessive compensation at the community bank level is historically not an issue," said Jon Winick, the president of Clark Street Capital, a Chicago advisory firm. "This is Wall Street shrapnel making its way down to the smaller banks."

Some observers say the detailed split of Wollschlager's payout — with $137,750 paid now and $107,250 when the agreement is lifted — indicates a regulatory influence. If true, it would show that regulators can micromanage even the smallest plan if it poses a risk to the bank's costs and capital.

"In the past, they almost never got into" retirement plans in this much detail, said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "It's never a good sign when the regulators are focusing on this component."

Calls to Fentura, the Federal Reserve and the Federal Deposit Insurance Corp. were not returned. (The company was hit with a consent order in 2009 and entered into a written agreement with the Fed last year.)

In most cases involving a regulatory order, Weissman said executives usually get all or none of their compensation, depending on whether they were blamed for the company's financial woes. "To negotiate it like this is unusual, but it makes sense" since "it shows some creativity on the part of the bank and employee," he said.

Payments to Wollschlager, a chief lending officer at the bank level, are tied to a supplemental executive retirement plan, which is entirely funded by the $303 million-asset company. So Fentura can stretch costs by deferring some of the payment, making it less likely that a single payment would hurt expenses and capital.

Such plans ensure attractive payouts that are "more affordable" to banks, said Rod Taylor, the president of Taylor & Co., an executive recruiter in Atlanta. "It gives them something they can rely on for tomorrow."

Compensation has been a prickly topic for banks since the financial crisis, as regulators keenly watch payments to executives of distressed banks.

"No one wants to make a decision where the proven action potentially weakens the bank" further, Winick said. "The mentality now is that all incentive compensation is bad."

Many banks have restructured executive compensation, deemphasizing bonuses, stock options, and other incentives.

Winick said plans are becoming increasingly based on metrics such as asset quality and capital levels, relying less on revenue and loan production. An issue with past compensation is that objectives were "easily gained," he said. Amounts and measures are getting "vaguer" and "based on a way that can't easily be gained."

With bank stocks depressed, compensation is becoming less based on equity, replaced with more cash, compensation consultants said. Historically, most plans allowed executives to retire and still accumulate equity, said Alan Johnson, a managing director of Johnson Associates, a compensation consultant.

Now, "you get what you accumulated and that's it. It sounds cold and harsh, but the general view is that's just too bad," Johnson said. He said directors are telling executives "if our shareholders bought stock at $25 and now it's at $10, if we were to do something special for you, they would shoot us."

Taylor said the changes are good for the industry because they will help retain more skilled, veteran bankers who would rather stay in bank purgatory than retire at a possible loss. "A lot of the industry suffers from lack of knowledge and expertise," he said. "I don't think the industry needs to push them out to pasture too quickly."

Observers said it will be harder for struggling banks to lure new executives to replace retirees without paying more. Another challenge involves getting regulators to sign off on higher compensation packages. (Industry observers said such an impediment may have stymied efforts by Bank of America Corp. in 2009 to find a CEO to replace Ken Lewis.)

In the case of regulators restricting salaries, banks could consider other "novel agreements" where a cash is guaranteed over longer periods of time, Taylor said.

Johnson said that if the bank is "honest" with its regulator, "our experience is you usually get a reasonable outcome." He said that compensation in the banking industry should remain flat next year compared to roughly 3% growth in 2009 and 2010.

Still, it would be prohibitive for regulators to get mired in the minutia of compensation for every bank. Regulators "can't micromanage thousands of banks," Johnson said. "They don't want to be micromanaging. The government shouldn't be in the pay business."

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Community banking Law and regulation
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