Bank development company A case study of community bank president leadership

Bank development company A case study of community bank president leadership

BANK DEVELOPMENT COMPANY:

A CASE STUDY OF COMMUNITY BANK PRESIDENT LEADERSHIP

by Leonard Zazula

TONI BUCHSBAUM GREIF, Ph.D., Faculty Mentor and Chair

JOHN HERR, Ph.D., Committee Member KAREN BAMMEL, Ph.D., Committee Member

Bill Reed, Ph.D., Acting Dean, School of Business & Technology

A Dissertation Presented in Partial Fulfillment

Of the Requirements for the Degree Doctor of Philosophy

Capella University

UMI Number: 3359046

Copyright 2009 by Zazula, Leonard

All rights reserved

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Abstract This study was designed to explore the traits, skills, and characteristics of

community bank presidents essential to achieving superior performance in their

profession Qualitative research was conducted through a phenomenological case study and examined the lived experiences of 20 community bank presidents; data included corporate documents and researcher observations The individual thoughts, perspectives, feelings, and beliefs of the community bank presidents elicited candid insight into

development, training, interaction, and practices that were utilized for career

advancement and attaining superior performance for the community bank Emergent themes were revealed during the data coding and analysis Decisiveness, community involvement, team building, family, values, listening, relationship management, and work ethic surfaced throughout the analysis When the themes were synthesized and weighed against extant theory, the case study confirmed the effectiveness of defined leadership qualities Utilizing relationships established through effective interaction with customers, employees, board members, and regulators, combined with core values, provided the foundation for success The study exposed the need to remain cognizant of changes in market and economical environments that affect community banks, to remain competitive and excel

Dedication This dissertation is dedicated to my family My parents, first and foremost, helped instill the ethics and values that I would carry with me throughout my life The love and support they provided allowed me to face challenges and not be afraid to tackle tasks that seemed out of reach I thank them for setting the foundation that served as a springboard for curiosity, tenacity, and an overactive desire to take the path less traveled, regardless

of the sacrifices necessary to succeed My grandparents, aunts, and uncles worked hard throughout their lives but knew how to enjoy life As a result, I too can find pleasure in those facets often overlooked in the hectic struggles we all face

To my beautiful bride, Sandy, thank you for your understanding and tolerance While this task has been all consuming at times, I recognize this will not be the last time I will place high demands on myself and you I look forward to the future and the time we will share as one

To my children, thank you for allowing me to get a hint of fatherhood Please use this dissertation as a reminder that all things are possible with the proper attitude and dedication

To Aubrey, thank you for creating the time to initiate this project and keeping me young by allowing me to see through your eyes and feed off your insatiable energy I love you all

Acknowledgments Until the process of completing a dissertation is attempted, the course of action cannot possibly be anticipated Much like my hobby of climbing mountains, the vision of the event and the execution are not always in synch, and the needs to prepare, investigate, adapt, trust your equipment, and persevere become paramount Physical and mental abilities are challenged beyond expectations and completing the task as an individual is highly improbable Depending on a team of experts to extract your full potential is

essential to completing a successful expedition To that end, I wish to recognize my dissertation mentor and committee chair, Dr Toni Buchsbaum Greif, to whom I have been roped throughout this journey Her unending support, encouragement, advice, alternative recommendations, and confidence provided a source of strength necessary to continue my advancement over torturous terrain While attempting a difficult alpine ascent in the Northwest Cascades, a seasoned climber commented that he had been watching me, and even on the most complex glacial conditions, I had not taken a wrong step I aspired to perform as admirably in this venture and I recognize Dr Greif for allowing me to perform at this scholarly level in a sure-footed manner

Special thanks to Dr Bammel and Dr Herr for their assistance in my transition to scholar-practitioner and this next phase of my development

I would also like to recognize the Bank Development Company and its CEO and affiliate presidents for providing the resources to assist in completing this project, but more importantly, accepting me into an organization that has allowed me to develop alongside it I am proud of our accomplishments and look forward to overcoming future challenges

My expert team has been comprised of Linda M., and her tireless editing prowess, Donna Green, churning out transcripts as fast as I could provide files, William Douwes, for keeping me focused, and Cheryl Clark and Jennifer Adams for assisting with

technical support and software applications All of these individuals contributed to this endeavor, and I needed all of them as part of my team

Finally, I need to recognize those individuals that paved the way for me through the monthly mentee conference calls Those glimpses into their progress generated inspiration and convinced me that completing this goal was not beyond my realm of possibilities

Transactional Leadership Theory 35

Research Questions 65

REFERENCES 167

APPENDIX A FDIC STATISTICS ON DEPOSITORY INSTITUTIONS 182

APPENDIX C DEVELOPMENTAL CHARACTERISTICS AND RESULTING

APPLICATIONS 187

List of Figures

CHAPTER 1 INTRODUCTION

Introduction to the Problem The value of financial institutions within the United States is determined by quarterly performance as compared to expectations of analysts During eras of economic uncertainty, the importance of results is magnified and subject to industry scrutiny The current credit crisis, fueled by the practices of sub-prime lending, abandoning traditional underwriting, and credit scoring in favor of stated information has eroded billions of dollars from the capital of financial institutions (Enrich, Smith, & Paletta, 2008) The resulting foreclosures, asset maintenance of real estate acquired as collateral, and the inability to lend new dollars, as funds are unavailable, has created an unhealthy

environment for many banks Treasury Secretary Henry Paulson proposed sweeping changes that would remodel the system of U.S financial regulation, built piecemeal since the Civil War (Paletta, Ip, & Phillips, 2008)

While large regional banks cut thousands of jobs to improve their bottom lines, smaller commercial banks had fewer options available to them Selecting the appropriate bank president to avoid difficult situations provided the strongest line of defense An objective of the current research was to explore the management and leadership of

community bank presidents in an effort to characterize performance and the ability to deal proactively with changing markets and demands More specifically, the study was

designed to examine the success factors of community bank presidents from a particular Bank Development Company (BDC), a pseudonym, utilizing a framework to garner insight and opinion of front line individuals

Bank Development Company has over 60 banks affiliated through common ownership and has plans to double that number in the next several years (Annual Report,

2007) Developing additional start-up banks, referred to as de novo banks because they

are fully organized from the bottom up, requires securing regulatory approval, facilities, capital, and staffing, as well as necessary support functions Bank Development

Company prefers such organizations because their corporate culture and methods of operations can be grown and implemented from inception After providing the resources

to acquire the necessary elements, a newly formed de novo bank becomes a fully

functional institution, left in the hands of the community bank president

Problem Statement Bank Development Company, a community bank holding company, has

experienced significant growth, while expanding the existing geographic footprint by creating banks affiliated through common ownership, management, and policies Bank Development Company finds itself dependent on affiliate performance results to generate the income necessary to accomplish its goals and satisfy its investors Criteria for

selecting the appropriate individual to lead the community banks are based on speculation and perceived experience, with no guidelines or assurances Literature addressing trait theory (Bernard, 1926; Horner, 1997), situational leadership theory (Hersey & Blanchard, 1969), and path/goal theory (House & Dessler, 1974) is plentiful; whether such theories

apply to evaluating community bank presidential leaders' success was the focus of this case study research Valuable insights regarding the selection, training, and development

of community bank presidents were also realized

Purpose of the Study The purpose of the study was to explore the management and leadership traits, characteristics, skills, and personalities of high-performing community bank presidents

by researching their lived experiences (Van Maanen, 1988) Identifying commonalities that translated into high performance was sought, as determined by various peer group analyses Standards were based on as the Financial Accounting Standards Board (FASB Financial Accounting Standards Board [FASB], 2007) ratio known as return on equity (ROE); Federal Deposit Insurance Corporation (FDIC Federal Deposit Insurance

Corporation [FDIC], 2007) regulatory grading, commonly referred to as CAMELS ratings of safety, soundness, and compliance; and various performance measurements identified by the BDC

Research Questions The inherent nature of the social sciences involves identifying information

through data collection In particular, the current study was intended to examine potential leadership traits, characteristics, skills and personalities in community bank presidents The use of a qualitative means to collect the input from lived experiences (Van Maanen, 1988) of those serving in the capacity of community bank president allowed this analysis The following research questions guided the research:

1 Why do some community bank presidents consistently outperform the

competition? What can be learned from these individuals?

2 Can mechanisms be established to improve the selection process for

community bank presidents who possess the desirable traits, characteristics, skills, and personalities for success?

3 Can such findings be generalized to allow for applicability across diverse

disciplines?

The research questions were selected with the intent of encouraging the sharing of community bank presidents’ lived experiences in order to acquire information for a clear understanding of the phenomenon that cannot be identified in the literature The literature and its proposed theories do not adequately provide sources to establish a determination

of assessing or identifying the management and leadership traits, characteristics, skills, and personalities of community bank presidents For example:

1 What are the factors that allow community bank presidents to transition

from manager to community bank leader?

2 Are there specific traits and characteristics that can lead to success as an

affiliate community bank president? Can these be identified?

3 Based on the experiences of successful community bank presidents, can

these traits and characteristics be utilized by other organizations?

4 Are there personality traits that translate to high-performing community

bank presidents?

5 Are there traits, characteristics, and skills that translate to high-performing

community bank presidents?

6 How can community bank presidents differentiate themselves from their

competition?

Nature of the Study The current case study utilized a phenomenological approach to develop a method

of identifying community bank president candidates with the necessary managerial and leadership traits, characteristics, skills, and personality, who can purposely (Scharmer, 2002) impact their communities while increasing the bottom line of the corporation The use of phenomenology and the attempt to capture information directly from individuals serving as community bank presidents offers the opportunity to address those areas that could provide the greatest influence in determining commonalities among them Isolating traits, characteristics, skills, and personalities found in current community bank

presidents was important to the study

Traits distinguish qualities of a person, and character is the sum total of the traits possessed Skills are the abilities, information, and knowledge gained throughout life and utilized to hone personality, which displays the outcome of mixing the elements

Combining such factors with the ability to translate them into bottom line results while positively impacting the community further define the nature of the study

Bernard (1926) opined that great leaders must possess attributes that differentiate them from followers and that it was possible to isolate the internal qualities they held at birth By identifying the traits, individuals may be assessed and subsequently placed into the appropriate position More recently, the idea of trait theory has reemerged and traits have been thought to play a significant role in determining leadership efficacy

Kirkpatrick and Locke (1991) identified six specific traits that distinguished leaders from non-leaders Krulak (1998) identified 14 traits of effective leadership, applicable not only from a military standpoint, but across the successful business spectrum Vardallas (2006)

observed trait similarities among effective CEOs, and Warren (2006) narrowed the traits down to four: (a) muster courage to create change; (b) share the vision to know where you are going, why you are going there, and how you are going to get there; (c) possess a sense of reality to limit possibilities and weigh alternatives; and (d) lead through

personal, corporate, and employee values The current research obtained additional knowledge regarding trait theory by addressing proven leaders in a very specific and measurable environment

The perspective of focusing on traits suggests that leadership might be explained

by those internal qualities that a person is born with (Bernard, 1926), prompting

investigators to attempt to isolate those qualities: Are traits in the genes or drawn from the environment? In most fields of endeavor, the innate abilities of an individual cannot totally explain leadership aptitude; motivation, training, and coaching also may have an impact on the outcome (Horner, 1997) By working with a homogeneous group of high-performing bank presidents, the ability to draw commonalities through conversation offers an opportunity to clarify and enhance the importance of trait theory

Significance of the Study Bank Development Company depends upon the performance of affiliate banks to support expansion, capital growth, and ongoing investor interest The ability to apply leadership theories to evaluate current and select future community bank presidents provided the challenge of the current study The survival of the BDC rested in the hands

of these individuals The ability to perform, particularly in times of significant

economical challenges, becomes a critical element of sustaining the path to further

development The outcome of the current study provided insight to the selection or replacement of community bank presidents regarding recognition of their abilities of managerial and leadership traits, characteristics, skills, and personalities while attaining high performance for their organization The accompanying challenges to existing

leadership may foster new practices for performing at a higher level

Definition of Terms

Community bank The FDIC identifies such banks as typically having less than $1

billion in assets

De novo bank The regulatory agencies identify this chartered institution as one

that has been approved by the appropriate regulators and has been operating for less than

5 years De novo banks include only new banks built from the ground up, rather than banks created from existing branches or institutions

Federal Deposit Insurance Corporation The Federal Deposit Insurance

Corporation (FDIC) preserves and promotes public confidence in the U.S financial system by insuring deposits in banks and thrift institutions to at least $100,000; by

identifying, monitoring, and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift

institution fails An independent agency of the federal government, the FDIC was created

in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure The FDIC receives no Congressional appropriations; it is funded by premiums that banks and thrift institutions pay for deposit

insurance coverage and from earnings on investments in U.S Treasury securities With

an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion

of deposits in U.S banks and thrifts–deposits in virtually every bank and thrift in the country (FDIC, 2007)

Financial Accounting Standards Board Since 1973, the Financial Accounting

Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting Those standards govern the preparation of bank financial reports and they are officially recognized as authoritative by the Securities and Exchange Commission (Financial Reporting Release No 1, Section

101 and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May

1973 and May 1979) Such standards are essential to the efficient functioning of the bank's economy because investors, creditors, auditors, and others rely on credible,

transparent, and comparable financial information (FASB, 2007)

Peer group analysis An industry accepted comparison of the performance of

banks based on a commonality such as asset size, age, or full-time equivalents (FTE) The Uniform Bank Performance Report (UBPR) is an analytical tool created for bank supervisory, examination, and management purposes The UBPR is designed to display the impact of management decisions and economic conditions on a bank's performance and balance sheet composition in a concise report format The performance and

composition data contained in the report can be used as an aid in evaluating the adequacy

of earnings, liquidity, capital, asset and liability management, and growth management Individuals can use the report to further their understanding of a bank's financial

condition A UBPR is produced for each commercial bank in the United States that is supervised by the Board of Governors of the Federal Reserve System, the FDIC, or the Office of the Comptroller of the Currency The UBPRs are produced for FDIC insured savings banks, as well The report is computer-generated from a database derived from public sources and contains several years of data, which are updated quarterly Those data are presented in the form of ratios, percentages, and dollar amounts computed mainly from Reports of Condition and Income submitted by the bank Each UBPR also contains corresponding average data for the bank's peer group and percentile rankings for most ratios The UBPR therefore permits evaluation of a bank's current condition, trends

in its financial performance, and comparisons with the performance of its peer group (FDIC, 2007)

Assumptions and Limitations The primary limitation of the research was the use of a single case (Yin, 2003) because all the presidents were affiliates with the same BDC The unique nature of the BDC and restricted size of the interview pool may have limited the applicability of the observations, since identical circumstances may not be found within the banking industry

or within other industries, which may have limited the study's generalizability (Miles & Huberman, 1994) The narrow range of de novo banks established, coupled with even fewer bank holding companies, may limit the applicability of the current case study The insider perspective of the researcher, as a BDC executive officer, may also be perceived

as a limitation Finally, it was assumed that data collected and analyzed through affiliate

bank presidents lacked personal agendas and contained honest responses, and that the questions utilized provided significant value to analogous organizations and researchers

CHAPTER 2 REVIEW OF LITERATURE

Introduction Leadership literature covers a wide expanse of diverse theories, processes, and sources From earliest recorded literature, man has questioned what traits separate

individuals from each other Since the writings of the ancient Greeks, theorists and

philosophers have questioned why great leaders are great Such are the themes of Homer and Aeschylus Consensus in modern theory began with a criticism of Carlyle’s

postulates of the “great man” theory As both an academic study and as a professional career endeavor, the search and classification of the components that comprise superior leadership have filled libraries and fueled a consultant industry Since the end of World War II, the corporate world’s strong demand for superior leadership has spawned

numerous disciplines and expansive research endeavors in the search to understand the phenomena, its components, its personality, and its values

Effectiveness of leadership cannot be represented or applied by a single broad swath painted by one brush alone Effectiveness of leadership requires specificity in its application Effectiveness can manifest in several ways, dealing with employee moral and commitment to financial performance Today's leaders are expected to convert such effectiveness into performance by establishing purpose within the organization and defining the purpose in terms of creating value for stakeholders while implementing

emerging strategies (Dhar & Mishra, 2001) Leaders are expected to develop people by creating contexts in which each individual within the company strives to be the best (Ghoshal, Piramal, & Bartlett, 2000) Leadership effectiveness should also be cognizant

of the dynamics embedded within the social system (Dachler, 1988) and the maturity to develop and maintain cooperative relationships with subordinates (Yukl, 1998)

Leadership is an applied attribute Its application is customized by specific

industry criteria with industry specific outcomes The qualities desired and cultivated by distinct institutions that train military combat officers, United States Military Academy, Reserve Officers Training Corps, and Officers Candidate School, do not necessarily instill the same leadership qualities that multinational bank training programs stress Some leadership characteristics are universal; others remain applicable only to specific areas of endeavor

History of Community Banks The review of literature attempted to understand the expansive literature of

leadership from historical, academic, and corporate efforts as applied to a specific narrow industry: that of the community bank and its leadership profiles The community bank is

an institution in the United States of America that has flourished Community bank is no

misnomer, as the institutions supply and support most of the financial products and needs

of the American communities served by the banks, whether that community is a

neighborhood in an inner city, a small town in suburbia, or a community on the Great Plains In 2007, The FDIC emphasized the community banks’ criticality to American

community economic and financial life by stating that the vast majority of U.S banks are still community banks, addressing the particular needs of small business and agriculture

In practice, industry analysts, regulators, and economists tend to establish an arbitrary asset threshold for community banks of $1 billion However, the unidimensional approach fails to identify the complexities of community banking DeYoung, Hunter, and Udell, (2004) offered a more robust definition:

A community bank is a financial institution that accepts deposits from and

provides transactions services to local households and businesses, extends credit

to local households and businesses, and uses the information it gleans in the course of providing these services as a competitive advantage over larger

institutions A community bank holds a commercial bank or thrift charter; and operates physical offices only within a limited geographic area; offers a variety of loans and checkable insured deposits accounts (p 86)

Crossover with regional and multi-national banks exists in some products and services offered by community banks touting sophisticated technological offerings Yet, the true strength of the community bank is its portrayal of hometown, personalized service The evolution of the community bank is obviously a factor of the general

economic history of the United States The history of banking, and thus community banking, in the United States derives from the political economy, that is, economic vicissitudes and the clash of resulting political philosophies to stabilize the nation Since the ending of the Civil War, the American economy has been marked with a series of serious downturns Most noted were those instances of 1873, 1893, a warning downturn

in 1927, and then the Great Depression, which reached its lowest point during the winter

of 1932-1933

The importance of the 19th century bank panics relates to the concept of federal banking regulation As the country matured through 19th century transportation and

communication revolutions, banking regulation became a political concern, with

community, intrastate banking becoming an area of responsibility of the federal

government as a factor of economic linkage The downturn of 1927 saw a Republican congress promulgate the McFadden Act of 1927, the first in a series of laws protecting local banking from interstate interference In 1933, during the darkest days of the Great Depression, The First Hundred Days of Roosevelt’s New Deal saw the assumption of Regulation Q of The Glass-Steagall Act, which effectively shielded the banking industry from geographic, product, and pricing competition (DeYoung et al., 2004) After bank run-ons in the early 1930s, it was the aim of the New Deal to make banking appear to be

a safe haven, initially through the creation of a Bank Holiday and then the banking legislation of the First Hundred Days In following years, FDR increased banking

security and stability with banking bills in The Second Hundred Days in 1935 and further banking reforms in 1938 The Glass–Steagall Act of 1933 insulated banks from potential competition from brokerage firms, insurance companies, and investment houses

Regulation Q of that act imposed interest rate ceilings and prohibited savings and loans and credit unions from generating commercial loans

Relative stability in expanding domestic markets and the continued functioning of the New Deal safety net characterized the economic activity of 1950s and 60s, affording the community banking sector prolonged stability and resultant strong growth However, market changes resulting from volatile interest rate variations in the late 1970s, coupled with the onset of significant technological change, led to the dismantling of the

protections during the 1980s and 1990s For community banking, changes came quickly, although not surprisingly, as national and international banking systems technologically

and culturally up-linked Ironically, community banking, drawn into the maelstrom, also became information technology (IT)-intensive in ever-increasing efforts to maintain personal services in a period of prolonged growth In efforts to meet processing

requirements, community banks introduced faster equipment with uneven results (Triplett

& Bosworth, 2003)

In 1994, with far-reaching results, the Reigle-Neal Interstate Banking and

Branching Efficiency Act eliminated the patchwork, state-by-state regulation, which, by

2000, led to an unprecedented number of bank mergers (Berger & Udell, 2002) The Graham-Leach Bliley Act of 1999 finally dismantled Glass-Steagall, with nationwide geographic deregulation of banking powers Banks were then empowered to launch diverse financial products throughout diverse geographies Such banking laws, direct outgrowths of the political economy of the roaring 1990s, affected the entire United States banking industry By the end of 2001, such sweeping changes had reduced by half the number of banks with assets under $1 billion, from 14,078 at the end of 1980 to just 7,631, mostly through mergers and acquisitions (DeYoung et al., 2004)

Such results might have been catastrophic were it not for the rebirth of the

community bank that sprang up from scratch De novo banks were financed by local investors and main street practitioners anxious to fund their local growth De novo

startups accounted for 89 new banks throughout the United States during the first 6 months of 2007 (White, 2007)

During the 1980s and 1990s, more than 4,000 de novo commercial banks were

charted The phenomenon suggested that a new breed of entrepreneurs believed the community bank market remained viable and profitable (DeYoung et al., 2004) A recent

study indicated the new banks were more likely to be placed in markets that had

experienced the loss of a community bank through either purchase or merger (Keeton, 2000) Entrepreneurs perceived such areas as fertile markets for development of

community banks Such community banks represented the beginning of the history of community banking for the 21st century With roots in local areas, they were perceived as banks of destination, which meant gaining the:

Support of local investors/customers, its own brand, and its top management team Utilizing local decision makers and local investors drove local economies, prior to the most recent enactments of regulations, and the local economies

flourished (Cocheo, 2007, p 33)

Most importantly, the growth accentuated the role of community bank president The 21st century community bank leader is a qualified banker from the local area, as the president is the foundation for each de novo bank The president is the resultant figure of community banking history

Community Bank President: Persona Uniform requirements characterize community bank leaders/presidents and the criteria of desired leadership The criteria are near immutable: first, community bank presidents are directly involved and deeply dedicated to their communities Second, with such commitment comes identification of talent based on excellence to create a network

of directors, clients, and referrals essential to building a base of operations Third,

candidates for community bank leadership are frequently pulled from existing banks Changes usually resulting from acquisition or consolidation and the subsequent loss of decision-making and related powers leave the candidates uncomfortable in their current

roles Fourth, candidates are recruited from the ranks of senior loan and operations officers possessing similar credentials and contacts and qualified to accept the additional responsibilities of the position of president (Cocheo, 2007) Other criteria include the ability to share corporate vision through the process of self-exploration, intuition, and acumen in the areas of internal and external communications and marketing (Kouzes & Posner, 2003) Cocheo (2007) noted criteria may include the participation in a family of established banks with presidents comfortable in their ability to function as an

Direct, personalized leadership and the success of a community bank are

integrally linked Deregulation, coupled with technological advancements, intensified the competitive nature of community banks, creating an environment that allowed well-managed community banks to exploit local lending activities and area banking services

Consolidation generated obvious local lending opportunities for community banks as large consolidated banks typically abandoned small business requests (Avery & Samolyk, 2004) Of particular note was the ability of the community bank to obtain, write, and service local, small commercial loan business; this represented a particular niche and service critical to both the local business community and the leadership role of the bank president

Nakamura (1993a, 1993b), suggested that small banks had an advantage over large banks The flatter organizational structures allows the bank to be better information processors because loan officers can secure more in-depth credit details while being closer to decision makers Relationship banking, in conjunction with subjective analysis, (Cole, Goldberg, & White, 1999) creates more timely decisions This type of banking is

in opposition to the extended hard data preferred by larger banks (Berger & Udell, 2002) Such requirements depersonalize and elongate the interaction and decision process

Ironically, the successful community bank president confidently cultivates the use

of soft information for decisions, while simultaneous opportunities abound for his

organization to dig for extensive information, unlike large banks that base decisions strictly on hard numbers and do not possess the contacts to dig for further information (Cocheo, 2007) Boot (2000), characterized relationship banking, a cornerstone in the community environment, as investing in customer-specific information and profiting from such investment Scott (2004) suggested that expending sufficient personnel

resources to gain knowledge about the customer base increases the competitive advantage within the market Scott went on to report that his surveys indicated this social contact

and the ability to produce soft information are critical to yielding high bank performance through fee-generating products added to each bank’s arsenal

However competitive on the lending side of the income statement the smaller banks are, one area in which community banks traditionally lag behind larger banks is non-interest income (Stiroh, 2004) Larger banks historically generate significant revenue from volume-driven non-interest sources of fees and service charges not associated with loan processing A fixation on loans and deposits generates approximately half the

average non-interest income among community banks when compared to larger banks (Cocheo, 2007), leaving earning resources untapped and unavailable to generate revenue when loan activity may be limited or undesirable In practice, Cocheo indicated the community bank president would rather not deal with such a complex issue, nor generate plans to take advantage of this essential income element

Inherent in successful community bank leadership is profitable and sustained functioning In community banking, profits, and losses may be magnified due to the smaller scope of a bank’s assets and credit lines The bank performance reports in

Appendix A represent hard criteria in the determination of successful leadership at the community bank president level The FASB focuses on three categories, each containing further sub-categories Table 1 shows the individual elements The BDC identifies

measurements utilized by the FDIC and FASB to isolate factors that could contribute to high performance or negatively affect outcomes (see Table 2)

Table 1 Bank Performance Report Elements

Category

Cost of interest-bearing

Net interest margin

Net interest margin

(including fees)

As presented in Bank Development Company procedure

Table 2 Bank Development Company Performance Elements

Element Measures

Productivity and

Table 2 (continued) Bank Development Company Performance Elements

Element Measures

Defining the Elements The FDIC, State Department of Financial Institutions (DFI), and other bank

regulators routinely use ratios and comparisons to grade and evaluate (Yeager, 2004) A

report is found in Appendix A The FASB is recognized as the authority for financial

reporting Some of the more common terms in Appendix A are:

Community bank The FDIC defines these banks as typically less than $1 billion

in assets

Peer group analysis The FDIC defines a comparison of the performance of banks

based on a commonality such as asset size, age, or full-time equivalent employees (FTE)

Regulatory grading The Regulatory agencies cumulative grade awarded to a

bank is based on industry-accepted CAMELS rating

Bank examination ratings guide and assess large changes in bank performance

ratios CAMELS is an acronym that stands for Capital adequacy, Asset quality,

Management, Earnings, Liquidity, and Sensitivity (to market risk) Each time a

bank is examined, regulators assign a composite rating and an individual rating to

each of the CAMELS components CAMELS ratings range from 1 (the safest

banks) to 5 (the riskiest banks) Banks with composite ratings of 1 and 2 are considered to exhibit "strong" and "satisfactory" performances, respectively Banks that fall below a 2 rating may prompt supervisory action, which could include a board resolution, a memorandum of understanding, a written agreement,

or a cease and desist order (Yeager, 2004, p 2146)

Return on equity (ROE) An accounting defined statistic showing company's

profitability that is calculated by dividing a company's annual income by its book value

Return on assets (ROA) An accounting defined statistic calculated by dividing a

company's annual earnings by its total assets

Leadership Theory The advancement of the labor force has taken employees from independent

workers to team players Technological improvements and competitive forces have also resulted in an ongoing evolution of leadership styles to manage the varying circumstances effectively It is no longer possible to use the practices of the past to generate the results required in today’s markets (Heifetz, 1999)

Companies must realize the need to mobilize resources Rapid changes in society, technology, markets, competition, and a host of developments require organizations to clarify their cultures and their values (Vaill, 1989) For the workforce to evolve and compete, so must leadership styles, including appropriate stimuli for improved

production The oversight once necessary to ensure performance has been replaced by an increasing responsibility on all employees, encouraging creative behavior within

leadership, management, labor groups, and organizations (Amabile, 1998) As Redmond, Mumford, and Teach (1993) advanced, in times of social and technological change, the

creative efforts of individuals had a substantial and dynamic affect on organizational performance

To facilitate changes in labor, leadership must evolve During the past three decades, a constant offering of leadership theory has been advanced to provide solutions for such managerial challenges Establishing, embodying, and instilling the mechanisms

to institute a corporate culture, and then adapting and evolving that culture, defines the challenge of contemporary leadership (Schein, 2004) Still, the definition of leadership remains ephemeral Bennis (1989) observed that leadership, like beauty, is known when observed Leadership involves an identifiable package of practices and skills that are obtainable by all, not just a select group of charismatic men and women (Kouzes & Posner, 2003) Although leadership is a quality that can be recognized when observed, its description is difficult The controversial nature of leadership traits and characteristics makes its definition an issue of great debate (Kirkpatrick & Locke, 1991) Understanding how the leader takes advantage of circumstances or how leaders emerge based on the state of affairs is an important distinction Identifying whether individuals have traits that allow them to recognize opportunities and then influence the outcomes has value

To comprehend contemporary leadership, one must begin with an understanding

of the classical theories of leadership and greatness First of the modern era is Carlyle’s great man and trait theory (Carlyle, 1907), suggesting leaders are born and not made, versus behavioral theories proposing events make leaders Carlyle believed that a few powerful and famous individuals shape our destiny and that a leader enters the world with extraordinary endowment and talents Carlyle argued that heroes shape history through the vision of their intellect, the beauty of their art, the prowess of their leadership, and

most of all, their divine inspiration Suggesting the timely emergence of situational forces and the influence of environmental forces propels born leaders to their providence

(Cawthon, 1996) Fashionable with professional historians in the 19th century, the theory strayed into the mythic domain, with notions that in times of need, a Great Man would arise, almost by magic

Fieldler (1967) later posited, with the presentation of contingency theory, that the effectiveness of a leader depended on style and context Hersey and Blanchard (1977) introduced situational leadership theory and focused on the premise that differing

situations required corresponding approaches to leadership House and Dessler (1974), introducing the employee motivational factor, produced path-goal theory, which used motivation to improve employee performance through employee satisfaction

Transactional theory (Bass, 1990; Burns, 1978) allowed for rewards based on performing agreed-upon objectives Transformational leadership launched a process to empower followers and nurture them through the change required to attain the vision of the leader (Bass, 1990; Tichy & Devanna, 1986)

The question is whether such theoretical cornerstones serve to understand

leadership in the confined environment of community banks While scholars have

focused on leadership theories that have dominated literature for the past 50 years, the mystery of leadership seems no closer to being revealed (Cawthon, 1996) Concentrating

on community bank presidents and their critical role, as well as understanding leadership traits, characteristics, skills and personalities of the presidents to determine how, and if, they relate to textbook leadership theory provided valuable insights Targeting a small

and select group of individuals with common environments added some evidence on the applicability of the theories and gave rise to alternatives

Understanding leadership has changed as various theories evolved in the

progression from trait-specific review (Bernard, 1926) to behavioral (Herzberg, 1966), contingency (Fieldler, 1967), situational (Hersey & Blanchard, 1977), harmonizing abilities, and requirements to transformational (Bass, 1990; Horner, 1997) and possibly back to trait theory (Carlyle, 1907) In a wide-ranging review of the history of leadership, Stogdill (1974) suggested that the number of leadership definitions were as numerous as those who tried to define it Northouse (2004) analogized love and leadership: every individual can grasp a personal meaning of each word, but every meaning may be

different for every person In an effort to simplify, scholars developed broad leadership criteria, including (a) focus on the group process, (b) focus on traits, (c) focus on

behavior, (d) focus on power, (e) focus on goal achievement, and (f) focus on skills (Bernard, 1926; Burns, 1978; Goldsmith, 2004; Horner, 1997; Lines, 2004) Regardless

of varying dimensions, the particular components have been identified as essential to the phenomenon known as leadership: (a) It is a process, (b) It involves influence, (c) It occurs in groups, and (d) It deals with goal attainment (Burns, 1978)

To understand leadership, one must understand the differences between leadership and management Leading and managing are two separate, distinctive processes, at times requiring different and distinct skill sets and personalities (Zaleznik, 1977) While there is general agreement that the functions of leaders and managers are different conceptually,

no overwhelming statement of what those differences are has yet been developed

(Kotterman, 2006) Fundamental differences exist in the philosophical approach to

leadership versus management While not as apparent as night and day, the contrast and complement of each is unique (Zimmerman, 2001)

Unlike leaders, managers are primarily problem solvers Through the application

of intelligence, tolerance, goodwill, analytical skills, and persistence, managers fulfill problem-solving tasks (Zaleznik, 2004) In contrast, planning for all that the future may

or may not require demands deductive responses that are designed to produce orderly and expected results (Kotter, 2001) Mintzberg (1994) referred to this as calculating a strategy that has no value in and of itself Managers accept existing strategies, micromanage activities, constantly control and monitor subordinates, all while focusing on the bottom line (Yukl, 1999) Inherent in the personality of the manager is a tone of wanting to get the job done

Leaders try to maintain control, try to measure results that are driven by budgets and quotas, try to selectively delegate, and are usually motivated by personal

accomplishments (Katzenbach, 1996) Leaders energize an organization through strategic and operational relationships, and strategic leadership envisions the future and invests resources to meet the future, while the operational leader implements the vision

(Maccoby, 2000) Some attributes associated with strategic leadership (Gardner, 1990) include vitality and stamina, intelligence in judgment, capacity to motivate and set

priorities, as well as adaptability and flexibility of approach Bennis and Nanus (1985) suggested that managers did the right things, while leaders knew the right things to do According to Pinchot and Pinchot (1997), vision utilized to lead organizations is a

method for inspiring and motivating employees

Given the accelerated speed of technology and global markets, a personality that thrives on change (Kotter, 2001) is a personality that reflects today's leadership Results that generate the same performance as in previous years, deemed successful before, are

no longer tolerable Complexities of the new environment demand change Kotter posited the inability to accept such change would leave a company non-competitive The ability

to initiate and cope with change is a desirable attribute, but forecasting change is

ultimately the critical leadership trait

Leadership requires motivating people to embrace change It requires the creation

of coalitions that recognize a commitment to a vision and development of a new path to achieve that vision Mintzberg (1994) referred to the style as committing: engaging everyone in a journey that builds enthusiasm along the way and utilizes input to help shape the process By encouraging the ability to tap into emotions and values, motivation and inspiration become the mantras for corporate endeavors (Kotter, 2001)

Kouzes and Posner (2003) conducted case analyses and services to define five practices that get extraordinary things accomplished in organizations: (a) Model the way, (b) Inspire a shared vision, (c) Challenge the process, (d) Enable others to act, and (e) Encourage the heart Specific significant theories that characterize leadership, its

guidance, its tools, its skills, and its personalities follow

Trait Theory Trait theory viewpoint was created to suggest that leadership could be explained

by internal qualities with which a person was born (Bernard, 1926) The perspective prompted investigators to attempt to isolate those qualities and determine their origin,