Community Bank Succession Planning

By April 16, 2015 August 28th, 2019 Spring Financial Lending Notes

Why It’s Especially Critical Today

About 8,000 baby boomers are now turning 65 years old every day, according to the American Association of Retired Persons (AARP). Included among these retirees and those soon to retire are many community bank leaders.

Unfortunately, many of these community bank owners and CEOs haven’t done very much in the way of succession planning. As a result, a leadership crisis could be looming on the horizon in the community banking industry.

Get Started Early

One of the biggest keys to successful community bank succession planning is starting the planning process well in advance of the date you plan to exit the bank. It’s never really too early to start thinking about succession, but serious succession planning should generally start between three and five years out from your planned exit date.

The first thing to think about when it comes to succession planning is to whom do you want to transfer ownership of the bank? If yours is a family-owned bank and you want to keep ownership within the family, then start by identifying family members or other management team members who are the best candidates for future leadership.

Once you’ve identified potential future leaders, it’s time to start grooming them for future leadership responsibilities. In particular, you need to identify at least one family member who will be groomed to take over your role as the bank CEO. Ideally, you will be able to identify two or three possible CEO candidates so you don’t have to “sink or swim” with just one.

Next, start giving these candidates real responsibility, empowerment and decision-making authority. It can be hard for community bank owners and CEOs to let go of the reins, but holding on to all the authority yourself is not the way to get your successors ready to take your place. Successors need to be put in positions of real responsibility and then allowed to succeed or fail on their own — without you necessarily jumping in to bail them out.

Conversely, yours might not be a family-owned bank, or there might not be qualified successor candidates within the ranks of family members. In this case, you need to decide if you want to recruit potential successors from outside the bank and bring them in and start grooming them for succession.

If so, clearly communicate your intentions to these candidates and make sure they understand the opportunity before them. Also structure a compensation plan that will incent them to stay with your bank during the succession planning and transition process, which will likely be a matter of years, not months.

As you search for qualified outside candidates you can groom for succession, keep in mind that the banking talent pool has been shrinking in recent years. Many big banks are cutting back on the extensive training they used to provide to young bankers, which means community banks have to shoulder more of the training load. The good news is that this gives you the opportunity to prepare your successors in the way you want them to be prepared to run your bank — not in the way that some mega-bank trained them.

Selling to Outsiders

Another option is to sell your community bank to a private equity group or another bank — usually a similar sized community bank in a merger of equals or via an acquisition by a larger regional bank. In this scenario, grooming future leaders is just as important as it is when getting family members or outside recruits ready for leadership.

One of the biggest things buyers of community banks look for in acquisition candidates is depth and stability in the leadership team. Buyers will usually pay a higher multiple for community banks with strong leadership, so building a deep executive and management bench will increase the value of your bank — and probably enable you to sell it for a higher price when you’re ready to exit.

As you groom future leadership for your community bank, whether as ownership or management successors, keep this important point in mind: There is a big jump when going from mid-level management to executive-level management at a community bank in terms of the skills required and the responsibilities shouldered. Mid-level management skills are more tactical in nature, while executive-level skills require more strategic and visionary insight.

Therefore, it’s important that you be intentional when it comes to helping future leaders be prepared to make this jump. Give them an opportunity to work on projects that will expand their horizons and skills beyond individual silos within the bank.

For example, future community bank leaders will need to have an in-depth understanding of technology, models and probabilities, and asset liability management, especially in light of the rising interest rate environment that is on the horizon. There is a whole generation of young bankers who have never experienced a normal interest rate environment and think that today’s historically low rates are normal.

Short-Term Succession Planning

While succession planning for the longer term of at least three to five years out is important, don’t forget about short-term succession planning as well. This is planning for the proverbial “hit by a bus” scenario.

If something were to happen to you tomorrow, is there anyone in your bank who is prepared to step in and assume your responsibilities right away? If not, is there a plan in place for finding and hiring your replacement as quickly as possible?

You should formulate a short-term succession plan to guard against the very serious risk posed by not having someone ready to step into your leadership shoes quickly in case of emergency. And this goes not just for the bank CEO, but for employees at every level of the bank.

Who’s Responsible for Succession Planning?

Your succession planning efforts should be spearheaded and driven by your CEO and board of directors, who should sit down together and look at succession planning for your community bank from a big-picture, holistic perspective. Some questions to consider:

  • What is the bank’s overall strategic plan and how might this change in the future?
  • What are the most important leadership positions in the bank and how might these change in the future?
  • What might the bank look like in five years from a competitive, technology and strategic perspective?
  • What knowledge and skills gaps exist in the bank right now and how can these best be filled in a way that will accommodate your current and future needs?
  • How will you make sure that future leadership safeguards the relationships your bank has built in the community and the culture you’ve built within the bank? These are two of the greatest competitive advantages for most community banks.

Give us a call if you would like to discuss succession planning for your community bank in more detail.