Document:

2004 President and CEO Incentive Compensation Program

 EXHIBIT (10)(h) 
  

					
	The Sage Group	  	 	  	 
	CONSULTANTS TO MANAGEMENT	  	 	  	10409 LESLIE DRIVE
	 	  	 	  	RALEIGH, NORTH CAROLINA 27601
	 	  	 	  	(919) 844-9783
	 	  	 	  	E-mail: steve@sagegroupconsulting.com

  
 MEMORANDUM

  

			
	DATE:	  	May 1, 2004
		
	TO:	  	Ben Ruffin, Board Compensation Committee Chairman
		
	FROM:	  	Steven A. Savia, CMC
		
	RE:	  	Final 2004 President and CEO Incentive Compensation Program
		
	CC:	  	Compensation Committee Members
	 	  	Lee Johnson, President M&F Bank

  
 This year’s incentive
compensation program will have multiple components. 
  

	 	1.	Executive Plan 

  

	 	2.	City Executive Plan 

  

	 	3.	Loan Production Plan 

  

	 	4.	Branch Customer Service Plan 

  

	 	5.	Corporate Support/Teller Plan 

  
 The Board Compensation Committee determined that the President and CEO be separated out from all other plans. That position’s measurement factors are in some cases
less quantifiable. 
  
 Therefore, we offer the following incentive plan for
President and CEO. 
  
 Key components of the plan include the following.

  

	 	1.	Threshold Level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million). This is consistent with the other incentive plans as a trigger
for plans being initiated. It represents a “stretch plan”, i.e., a plan that is perceived as difficult to achieve, especially if there is little change in the interest rate environment. 

  

	 	2.	Key measures – the measures for the President and CEO shall be as follows: 

  

	 	a.	Net Income (15%) 

  

	 	b.	Implementation of Strategic Plan Objectives (25%) 

  

			
	i.	  	Growth in Assets Above Plan/Budget
		
	ii.	  	Increase in Average Number of Products/Services per Customer
		
	iii.	  	Efficiency Ratio (Cost Controls)
		
	iv.	  	Bank Organization

  

 20 

			
		
	v.	  	Development/Modification of Strategic Plan

  

	 	c.	Evaluation of and by Direct Reports (15%)  

  

	 	d.	Evaluation by Board of Directors (10%) 

  

	 	e.	Judgment in Decision-making Relative to Opportunities for External Growth (10%) 

  

	 	f.	Involvement and Visibility in the Bank’s Markets (25%) 

  
 Notice that some of the factors are quantitative and others are not. Each is defined below before we move on to the calculation of award. 
  

	 	•	 	Net Income (15%) – The basis of this measure is the absolute amount of net income (before incentives) above Threshold. This is a stretch plan that will be difficult to
achieve. It is 15% of the performance measure. If the incumbent achieves plan, this factor achieves 10%. If the Bank’s net income exceeds plan, the participant gets the full 15%. 

  

	 	•	 	Implementation of Strategic Plan Objectives (25%) – One of the primary roles of the CEO is to provide vision and direction for the future. This has been accomplished for
M&F Bank by the development of a strategic plan. That plan continues to be the primary driver for the Bank’s future. 

  

	 	•	 	Growth in Assets Above Plan/Budget – The primary focus of the strategic plan is growth. The Bank recognizes that with growth, profitability will come, especially as the
interest rate environment improves. The measure for success in this subcategory is the percentage of growth above the plan and budget. The strategic plan calls for the Bank’s assets to be $238,499,750 by the end of 2004. The budget calls for
$245,045,259. Success would be defined as meeting $238,499,750. Superior success in this category would be meeting $245,045,259. Exceptional success would be exceeding $245,045,259 in assets. Success would yield 1%; Superior would yield 2.5%; and
Exceptional would yield 4%. 

  

	 	•	 	Increase in Average Number of Products/Services per Customer – The Bank’s plan calls for increasing the product penetration for existing customers. We recognize
that it is less costly to sell additional products and services to existing customers that to go out and obtain new customers. Our revenues increase without significant increase in marginal cost. Success would be defined as increasing the average
number of products/services to existing customers by .3. Superior success would be to increase the average number by .75; Exceptional success would be increasing the average number by 1. Success would yield 1%; Superior would yield 2.5%; and
Exceptional would yield 4%. 

  

	 	•	 	Efficiency Ratio (Cost Controls) – Cost control is an issue with all Boards of Directors. The efficiency ratio of the Bank basically describes the cost to the Bank for
earning one dollar. The Bank is projecting its 2003 efficiency ratio to be 79.15%. That means that it costs the Bank $0.7915 to earn each dollar. The budget for 2004 calls for an efficiency ratio of 90.70%. Increases to efficiency ratio usually
indicate additional investments that need to be made to maintain or improve the Bank’s infrastructure. We believe that a Bank’s efficiency ratio should fall in the range of 65% to 75%. There are exceptions, especially in times of
significant expansion, for a short period immediately following an acquisition, or in the case of a significant system upgrade. Success for this factor for 2004 will be to achieve an efficiency ratio of 85%. Superior success would be to achieve an
efficiency ratio of 82%. Exceptional Success would be to achieve an efficiency ratio of 79%. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%. 

  

	 	•	 	Bank Organization – The strategic plan has as a significant strategy to “organize the Bank consistent with our desire to grow and in a manner that facilitates the
most effective and profitable growth.” There are various incremental changes to the organizational structure cited in the plan. Changes in the structure that improve the efficiency and lines of communication will be considered as successful.
This is a subjective measure and the Board will determine if the participant achieves Success, Superior Success, or Exceptional Success. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%. 

  

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	 	•	 	Development/Modification of Strategic Plan – No strategic plan is successful in driving an organization if it remains static. It must be a document that changes to
reflect accomplishments and changes in the environment. Presenting an updated strategic plan and obtaining concurrence from the Board is a measure of success. The Board Compensation Committee will determine if the participant achieves Success,
Superior Success, or Exceptional Success. Success would yield 1%; Superior would yield 2.5%; and Exceptional would yield 4%. 

  

	 	•	 	Evaluation of and by Direct Reports (15%) – A measure of success is completing timely and constructive performance evaluations for one’s direct subordinates. This
year, for executive management and senior management (including City Executives) we will be instituting a “360” performance evaluation system. This means that subordinates will also complete an evaluation of their supervisors primarily
focused on the effectiveness of their supervisor in providing supervision, assisting in preparation for advancement, and providing direction in the achievement of goals. 

  
 Evaluations by subordinates will be sent directly to The Sage Group for compilation. A report will be prepared and provided
to the Compensation Committee Chair. Success for this factor will be the timely completion of all subordinate performance evaluations (prior to deadline). Success will also be defined as a “satisfactory” evaluation by subordinates under
the “360” performance evaluation. Superior Success will be to receive an average “above average” evaluation from subordinates; Exceptional Success will be to receive an average “excellent” evaluation from subordinates.
Success would yield 5%; Superior would yield 10%; and Exceptional would yield 15%. 
  

	 	•	 	Evaluation by Board of Directors (10%) – The Board of Directors should set expectations and goals for the President and CEO. The Board should also be in a position to
judge leadership, vision, and capacity for driving the Bank toward and beyond its goals. The Sage Group will be presented to the Chair of the Compensation Committee to enable the Board to establish evaluation expectations. Success will be based on
receiving a satisfactory evaluation from the Board or the committee designated by the Board to perform such an evaluation. Superior or exceptional success will correspond to those evaluations. Success would yield 5%; Superior would yield 8%; and
Exceptional would yield 10%. 

  

	 	•	 	Judgment Relative to Opportunities for External Growth (10%) – Throughout the year there will be various opportunities for the Bank to undertake transactions that will
result in growth through acquisition. Recognizing it is not appropriate for the Bank to undertake every deal nor is it advisable to pursue any particular transaction, the Board’s Compensation Committee will evaluate the judgment demonstrated by
the President and CEO in assessing the risks associated with the transactions considered, in making decisions regarding the level of investment to make in determining the desirability of pursuing transactions, and in making the decision to go
forward or cease further evaluation. Success would yield 3.5%; Superior would yield 7%; and Exceptional would yield 10%. 

  

	 	•	 	Involvement and Visibility in the Bank’s Markets (25%) – The President and CEO is the key person in the organization to represent the Bank in the various
communities it serves. While he cannot be at every function, there are critical functions at which it is appropriate and necessary that the President represent the Bank. The evaluation of this factor will be based on the President being in
attendance for key events (branch openings, new product or service kick offs, press conferences, significant community events). Also a measure of success for this factor is the amount of times the President is quoted in the media. This factor is a
somewhat subjective measure and the Compensation Committee will determine if the participant achieves Success, Superior Success, or Exceptional Success. Success would yield 15%; Superior would yield 20%; and Exceptional would yield 25%.

  

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 AWARD PAYOUTS 
  
 Below is a description of the basis for payouts for this plan as described above. 
  

The total of all factors equals 100%. The President and CEO will be eligible to earn up to a maximum of 50% of his base salary. Therefore, if the incumbent achieves
100% of the factors above, he will receive a payout of $76,672. If the incumbent achieves 50% of the factor measures, he will receive a payout of $38,336. 
  

 232004 Executive Incentive Compensation Program

 EXHIBIT (10)(i) 
 The Sage Group 

					
	 CONSULTANTS TO MANAGEMENT
	  	 	  	10409 LESLIE DRIVE
	 	  	 	  	RALEIGH, NORTH CAROLINA 27601
	 	  	 	  	(919) 844-9783
	 	  	 	  	E-mail: steve@sagegroupconsulting.com

  
 MEMORANDUM

  

			
	DATE:	  	May 1, 2004
		
	TO:	  	Lee Johnson, President M&F Bank
		
	FROM:	  	Steven A. Savia, CMC
		
	RE:	  	Final 2004 Executive Incentive Compensation Program
		
	CC:	  	 

  
 This year’s incentive
compensation program will have multiple components. 
  

	 	1.	Executive Plan 

  

	 	2.	City Executive Plan 

  

	 	3.	Loan Production Plan 

  

	 	4.	Branch Customer Service Plan 

  

	 	5.	Corporate Support/Teller Plan 

  
 This memo addresses the Executive Plan. 
  
 Overall for all plans, we will put in place the following: 
  

	 	1.	Threshold level of Net Income - the Threshold level for 2004 will be $1.448 million (2003 = $1.389 million). 

  

	 	2.	Key factor measures for each of the employee participants. Schedule B presents the 2004 executive management measures. 

  

	 	3.	Once the threshold has been exceeded, the overall Bank pool will be created by 65% percent of the increase in net income marginal difference between budgeted net income
($1.484 million) and actual. The Executive Management Plan Pool will be composed of 26% of the increase in net income marginal difference between budgeted net income ($1.484 million) and actual. 

  
 The Executive Plan is based on the assumption that the award will be a percent of base
salary. The Bank’s income would therefore always be more than budget if awards were being made. 
  
 Schedule A is a listing of the quantitative measures that the program will include and where in the Bank’s information system or other reporting processes the data for those measures is found. Other measures,
especially those using scorecard methodology, are noted in the specific schedules of personnel. 
  
 Non-quantifiable or project specific related measures may require the individual participants to submit support documentation detailing the achievement and the role they played in the achievement, especially if
there is no correlating system measure. 
  

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 SCHEDULE A – PERFORMANCE FACTORS 
  

			
	 Measurement Factor

	 	 Where Available

	Growth in Average Assets	 	General Ledger/ Finance
	Return on Average Assets	 	General Ledger/ Finance
	Efficiency Ratio	 	General Ledger/ Finance
	Total Deposits	 	General Ledger/ Finance
	Total Assets	 	General Ledger/ Finance
	Growth in Portfolio Loan Levels	 	Credit Administration
	Net Income	 	General Ledger/ Finance
	Percent Recovery Of Loan Loss	 	General Ledger/ Credit Administration
	Service Charge Income	 	General Ledger/ Finance
	Classified Loans as a % of Capital	 	General Ledger/ Credit Administration
	Non-Performing Assets as % of Loan Loss Reserve	 	General Ledger/ Credit Administration
	Income per Employee	 	General Ledger/ Finance
	Assets per Employee	 	General Ledger/ Finance
	Level of Earning Assets	 	General Ledger/ Finance
	Audit Exceptions	 	Internal Audit
	Loan Originations ($)	 	Loan Production (Retail Bank Admin)
	Loan Origination (#)	 	Loan Production (Retail Bank Admin)
	Average Closing Days	 	Credit Administration
	Exceptions From Quality Control	 	Credit Administration
	CRA Rating	 	Compliance
	Target Customer Calls (#)	 	Loan Production (Retail Bank Admin)
	% Loan Portfolio > 30 Days Delinquent	 	Credit Administration
	Document Exceptions Not Cleared 30 Days	 	Credit Administration
	Operating Losses	 	General Ledger
	Transactions per Employee	 	Operations
	Loans Processed (#)	 	Credit Administration
	Delinquencies as % of Loan Portfolio	 	Credit Administration
	Monthly Branch Mystery Shop Score	 	Operations
	New Deposit Accounts Opened	 	Operations/Branch Reports
	Deposit Accounts Closed	 	Operations/Branch Reports
	Loan Referrals	 	Loan Production (Retail Bank Admin)
	Branch Profitability	 	Finance

  
 Each of the above factors relates to
one or more positions in the Bank as a measure of their contribution to the Bank. In some cases the measure is an overall measure of the success of the Bank as a whole (such as Return on Average Assets). In other cases, the measure is more specific
to the nature of the position, e.g., Growth in Portfolio Loan Levels for the Retail Banking Group Executive and City Executives; Number of New Deposit Accounts for Customer Service Representatives and Branch Operations Managers. 
  
 Schedule B is a listing of the senior and executive management employees that will be
included in the Senior and Executive Management Plan. 
  

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 SCHEDULE B – EXECUTIVE AND SENIOR MANAGEMENT PLAN PARTICIPANTS 
  

			
	 EXECUTIVE MANAGEMENT

	 	 POSITION

	Becote, Fohliette	 	SVP/CFO/Financial Group Executive
		
	Christopher, Wesley	 	SVP/Retail Banking Group Executive
		
	Small, Elaine	 	EVP/Operations Group Executive
		
	 SENIOR MANAGEMENT

	 	 POSITION

	Harrington, Walter	 	SVP/Credit Administration
		
	Parker, Lucera	 	Marketing Director
		
	Powell, Anthony	 	Audit Risk Manager
		
	Satterfield, Debbie	 	VP Manager of Commercial Lending and Senior Underwriter
		
	Sellars, Harold	 	SVP/Quality Assurance/Lending Administrator
		
	Sturges, Allan	 	VP and Controller

  
 The next step is putting the factors
with the personnel and their positions. Schedule G, beginning on the next page, has the measures and the weighted percentage for each employee who will participate in the Executive/Senior Management Plan this year. A number of the measures are less
quantifiable than in the past year, reflecting the scorecard approach. These are special projects for which the individual is responsible and the successful completion of those projects. Where necessary we have provided definitions for the factors
and their measures. These definitions will also appear in the full Program Plan Document. 
  
 SCHEDULE G – 2004 EXECUTIVE AND SENIOR MANAGEMENT PLAN PARTICIPANTS – 2004 MEASURES 
  

			
	 EMPLOYEE

	  	 MEASUREMENT FACTORS

	Becote, Fohliette	  	 Efficiency Ratio (25%) – Standard Definition in Plan Document
  
 Contributions to Income (20%) – The position has the ability to contribute to the Bank’s income through a variety of
initiatives within scope of responsibility and occasionally outside the specific scope of responsibility. This factor tracks specific addition to income directly resulting from projects initiated or substantially managed by the employee. Levels will
be based on achieving increments of $25,000.
  
 Facilities Management –
Achieving budget on revenue and expenses (15%) – This factor is based on the management of the corporate facility as well as responsibility for the Bank’s other facilities. Achievement of budgeted revenues and maintaining the budget
level of expenses is deemed satisfactory. Achieving additional revenues above budget or reduced expenditures results in an incentive award.

  

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	 	  	 Net Income (15%) – Standard Definition in Plan Document
  
 Special Project Completion (10%) – The successful completion of special projects assigned by the CEO or the Board of Directors
through the CEO as defined by the objectives set out in the assignment.
 Audit Exceptions (10%) – Standard Definition in Plan Document
  
 Performance Evaluation (5%) – Standard Definition in Plan
Document

		
	Christopher, Wesley	  	 Total Portfolio Loan Levels (30%) - Standard Definition in Plan Document
  
 Net Income (15%) - Standard Definition in Plan Document
  
 Non-Performing Assets as % of LLR (15%) - Standard Definition in Plan Document
  
 Audit Exceptions (5%) - Standard Definition in Plan Document
  
 Target Prospect Calls (number) (20%) - Standard Definition in Plan
Document
  
 Performance Evaluation (15%) - Standard Definition in Plan
Document
  

	Harrington, Walter	  	 Credit Administration (15%) – defined as maintenance of the on-line credit policies, including timely updates as needed;
administration of updated procedures required to maintain Bank Compliance; timely reporting to all users regarding the condition and quality of the loan portfolio.
  
 Classified Loans as a % of Capital (10%) - Standard Definition in Plan Document
  
 Complete Securitization of Loans in Portfolio (15%) – This is a special project
to be completed to protect the Bank’s position. Successful completion is defined as having all loans at the end of the year in a position for securitization and potential sale.
  
 Non-Performing Assets as % of LLR (15%) Standard Definition in Plan Document
  
 Audit Exceptions (15%) - Standard Definition in Plan Document
  
 % Loan Portfolio > 30 Days Delinquent (15%) - Standard Definition in Plan
Document
  
 External Audit Exceptions to Loan Portfolio (5%) - Standard
Definition in Plan Document
  
 Performance Evaluation (10%) - Standard
Definition in Plan Document
  

	Parker, Lucera	  	 Total Deposits (15%) - Standard Definition in Plan Document
  
 Total Portfolio Loan Levels (15%) - Standard Definition in Plan Document

  

 27 

			
	 	  	 Net Income (5%) - Standard Definition in Plan Document
  
 Media Hits (35%) - Standard Definition in Plan Document
  
 Increase in Average Number of Products/Services per Customer (25%) – Success would be defined as increasing the average number
of products/services to existing customers by .3. Superior success would be to increase the average number by .75; Exceptional success would be increasing the average number by 1.
  
 Performance Evaluation (5%) - Standard Definition in Plan Document

		
	Powell, Anthony	  	 Total Internal Audits Conducted (30%) – The total number of internal audits conducted versus the number determined necessary at the
beginning of the year
  
 External Audit Exceptions (30%) - Standard
Definition in Plan Document
  
 Document Exceptions Not Cleared 30 Days (25%)
- Standard Definition in Plan Document
  
 Performance Evaluation (15%)
- Standard Definition in Plan Document

		
	Sellars, Harold	  	 Net Income (20%) - Standard Definition in Plan Document
  
 Non-Interest Income and Fees (10%) - Standard Definition in Plan Document
  
 Document Exceptions Not Cleared 30 Days (15%) - Standard Definition in Plan
Document
  
 Complete ARTA training for loan personnel (10%) – Special
project
  
 Total Document Exceptions (15%) - Standard Definition in Plan
Document
  
 Average Days to Commitment (15%) - Standard Definition in Plan
Document
  
 Performance Evaluation (15%) - Standard Definition in Plan
Document

		
	Small, Elaine	  	 New Systems, Products, Services, Training and Efficiencies (30%) - Standard Definition in Plan Document
  
 Net Income (15%) - Standard Definition in Plan Document
  
 System Up-time (25%) - Standard Definition in Plan Document
  
 Audit Exceptions (15%) - Standard Definition in Plan Document
  
 Performance Evaluation (15%) - Standard Definition in Plan
Document

  

 28 

			
	Satterfield, Debbie	  	 Total Portfolio Loan Levels (30%) - Standard Definition in Plan Document
  
 Net Income (15%) - Standard Definition in Plan Document
  
 Non-Performing Assets as % of LLR (15%) - Standard Definition in Plan Document
  
 Audit Exceptions (5%) - Standard Definition in Plan Document
  
 Total Document Exceptions (10%) - Standard Definition in Plan Document
  
 Average Days to Commitment (15%) - Standard Definition in Plan Document
  
 Performance Evaluation (10%) - Standard Definition in Plan
Document

		
	Sturges, Allan	  	 Net Income (15%) – Standard Definition in Plan Document
  
 Audit Exceptions (10%) - Standard Definition in Plan Document
  
 Budget/Financial Statement Software (10%) – Research and evaluate options for budget and financial statement preparation and
present a recommendation to the CFO.
  
 Regulatory Reporting (30%) –
Timely completion of regulatory reports for the FDIC and FRB and preparing first draft of SEC reports.
  
 Transfer Pricing Model Software (10%) – Development or identification of transfer pricing model for branch financial statement preparation.
  
 Efficiency Ratio (20%) – Standard Definition in Plan Document
  
 Performance Evaluation (5%) - Standard Definition in Plan Document

  
 AWARD PAYOUTS 
  
 Below is a description of the basis for payouts for the Executive Plan. 
  
 The Bank-wide pool from which this plan’s awards are distributed is based on 65% of the
difference between budgeted and actual, assuming actual exceeds budget. 40% of that pool is available to the executives of the Bank (see Schedule B, page 4). Thus, if the Bank exceeds its net income threshold of $1.448 million by $200,000, then the
Bank-wide pool available for incentive awards is $130,000 of which $52,000 would be available for Executive participants. 
  
 Based on the available pool, measures of success are weighted against the percent for each individual’s performance factors. A percent is created and multiplied by
the individual participant’s base salary to create an incentive payment. As the Bank’s achievement of its goals grows, the pool also grows larger. 
  

 29

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