Many community banks may be facing a reverse form of “musical chairs” in the next few years, if they haven’t already. Each time the music stops, another chair appears, while there are fewer qualified people to put in the empty seats.
Experts interviewed cite several reasons for this trend:
• Financial crisis aftermath. Many community banks faced problems during the cleanup that were best solved by experienced bankers who knew the banks, says executive recruiter Alan Kaplan, CEO of Kaplan & Associates, Inc. So, Kaplan continues, CEOs and other senior officers sometimes outstayed their original plans. This creates more demand for strong replacements at a time when many corner offices have already turned quite gray.
And, going beyond merely “gray,” where current leaders resist turnover, ultimately they have no choice. Many corner office occupants will hit health issues in the next five to ten years. “They may believe that life will go on forever, or that they will go on forever,” says consultant John Szold of Planning for Succession, Inc. But that’s not reality.
• Fewer strong generalists. A trend towards increasing specialization among community bank employees has reduced the number of people who could make good leaders and who also have a broad understanding of community banking.
“We have much less cross-training of people in community banks these days,” says Kaplan.
• Smaller pool to draw on, as growing and training lenders decreases. In addition, many institutions no longer train lenders, who have historically been the bankers most likely to succeed to the corner office, according to Richard Parsons, formerly a senior BofA officer and now a consultant and author at 10X Risk Management LLC. Parsons acknowledges that operations and IT specialists and marketers have gained entry to the C suite in recent years.
“I won’t contend that everybody has to have the same pedigree,” says Parsons. But in his experience those top execs who came up other than through lending remain exceptions. Parsons believes that because lending is still the bread and butter of community banking, the best new leaders will be those who have had the experience of booking loans.
• Older lieutenants, unsuitable COOs. Two factors that experts point to concern the “obvious” heirs, who may not be suitable at all. In many banks, in part because of the crisis, the #2 banker isn’t much younger than the current CEO. Another such factor is that many COOs, though typically the bank’s second-in-command, aren’t necessarily suitable.
“A COO doesn’t always make the best CEO,” says Susan O’Donnell, partner at Meridian Compensation Partners, LLC. A COO by definition focuses internally, she explains, while CEOs must focus externally.
• Need for fresh inventory. To varying degrees, banks need somebody that isn’t a clone of the previous CEO. Traditional “command and control” leadership doesn’t synch with Millennial workers, for instance. And sometimes, says Kaplan, boards simply want fresh blood, someone from outside the organization to bring a completely different perspective.
The experts may disagree on one aspect or another of these factors, but they do agree that succession is an issue that must be confronted.
“The single best way to start dealing with succession is to start having a conversation about it at the board level that’s early and often,” says Kaplan. Succession contains many sub-issues, like those Russian stacking dolls, but none of them—strategic direction, gender diversity, racial diversity, leadership style—gets handled until people begin talking and thinking about succession overall.
“Your bank ought to have a written succession plan and it should be updated every six months,” says Szold. “It should be built into the bank’s strategic planning,” says O’Donnell.
Here are how four community banks have been dealing with aspects of the succession planning challenge.
First United Corp.: Early and often
When did Bill Grant begin thinking about management succession?
“I started from the moment I took the top job, 18 years ago,” says Grant, now chairman and CEO at First United Corp. and First United Bank & Trust, Oakland, Md. “It’s always blown my mind when such-and-such bank decided to sell because they had no management succession candidate in place.”
Over time, Grant defined and refined his thinking about succession, so that today, besides having a strong person to fill his shoes, he has a multi-level succession plan involving 15 people. The plan governs not only positions that would have to be filled, but the likely cascade effect on vacancies should an insider move up.
Not every potential vacancy has a candidate currently on First United’s payroll ready to step in—Grant says maintaining ultimate bench strength is too costly for a bank his size ($1.3 billion). The point is that the bank has looked far ahead enough that it knows where those holes could develop. This living blueprint receives board scrutiny at regular intervals. And Grant ensures that the people on it are known to the board through presentations and other opportunities.
Grant began thinking seriously about his own replacement eight years ago, and, in consultation with his directors, spotted someone who he thought had the right stuff. At the time she was trust sales manager. Grant himself began in Trust. The first step towards broadening her exposure was moving her into the finance function.
She became CFO. Along the way, the banker—Carissa Rodeheaver—received additional opportunities to learn. Grant, a lawyer by training, recognized that as a trust officer he had lacked credit experience when he became CEO, and found a way to give Rodeheaver that exposure. Grant directed that the bank’s chief credit officer would report to Rodeheaver. “That has given her a good steeping in the credit area,” says Grant.
First United’s preference, in filling any position, is to hire internally, and Grant says a key reason is trust. He and the board had considered some outside candidates as they discussed succession plans for his post, but having reliable lieutenants came out on top.
“I needed someone I could totally trust,” says Grant of Rodeheaver.
But reliability goes beyond trust, of course. Grant praises Rodeheaver’s technical skills—she and her people can decipher a new capital reg while doing their day jobs—and the ability to manage a team.
“She can pull people together,” says Grant, “and set them on a course they will follow.”
Centric Bank: Succession right in the boardroom
Centric Bank began life as a takeover of a troubled institution.
“We were kind of like a de novo, but with an elephant on our back that we had to get rid of,” says Patricia Husic, president and CEO at the $304 million-assets bank. Husic says succession has been on the minds of her executive team pretty much from the beginning.
But at Centric, “management” succession thinking goes beyond the staff positions. Husic points out that when regulators set their “Management” rating in CAMELS, they have evaluated capabilities and performance of the board as well as staff. In recent FDIC and Pennsylvania examinations, she adds, examiners have asked about board succession in addition to management succession planning.
Board succession can be a challenge, because “it takes a while to recruit a new board member,” says Husic, who is in the midst of evaluating a candidate presently. Willingness to put in the hours, suitable experience, and comfort with a bank director’s potential liability are only part of the equation. Husic says that “fit” with directors already on the board can also be an issue—board members may be diverse, but they have to be able to work together.
In regard to both management and board makeup, continuing relevance to the bank, as it grows, rises in importance, according to Husic. A person suitable as CFO for a private bank, for example, may or may not be the right person should that bank seek to go public. Husic says this ongoing evaluation of existing team members is something not all bankers feel comfortable with.
“How do you replace a person who you’ve been working well with?” Husic asks. “Are they the right person to take the bank to the next level? Sometimes we stick with what’s comfortable.”
Husic adds that this thinking is all-inclusive. “I’m sure,” she says, “that Centric’s board does that with me.”
First Keystone Community Bank: “I’m your man”
Matt Prosseda, now president and CEO at $900 million-assets First Keystone, is that unusual succession solution who spotted an opening waiting to happen, and came in from the outside to get it.
J. Gerald Bazewicz, his predecessor at the Berwick, Pa., bank, was about three years away from his planned retirement when Prosseda, then the credit chief at another Pennsylvania institution, had the urge to move up to a top leadership role, and at the same time to return to his geographic roots in the Berwick area. Prosseda took the unusual route of calling Bazewicz and asking for his job.
Well, not quite that baldly, of course. In 2005 the younger banker called expressing his desire to move up. Bazewicz said he was willing to take Prosseda on as a potential successor, but only after proving himself in other active positions in the bank. “He said, ‘If you come here and do all the right things, you will be considered’,” says Prosseda. “No promises were made.” Prosseda met with Bazewicz and with First Keystone’s board to get a deep understanding of the bank and his prospects, and he came aboard.
“Jerry was an awesome boss, and taught me a lot about what it would take for me to handle this position,” says Prosseda. It helped that Prosseda and the bank shared a conservative credit philosophy.
Stage by stage, Prosseda branched beyond the credit work that he knew well—he came up in lending and has been a banker for over 30 years. Bazewicz coached him through ALCO and handling a CEO’s public relations duties.
“There are so many things you need to know how to do to be a community bank president,” says Prosseda. Bazewicz, who is now the bank’s vice-chairman, extended his stay by two years while Prosseda was being brought along, winding up as a 27-year veteran of the bank’s top job by the time the younger man stepped into the corner office.
Since then, Prosseda has had his own experience with succession, as the bank’s COO left earlier this year. These days that position is seen as a strong successor candidate for Prosseda’s job at First Keystone. Prosseda and the board considered four candidates—two internal and two external—and decided to promote the CFO to the COO role.
Besides the candidate’s qualifications, and her broad familiarity with the bank’s operations, she had been a point person on Dodd-Frank implementation. Yet Prosseda says an additional strong factor favoring an internal selection was the message sent by the board’s choice to other employees. Prosseda says it was important that employees see a potential path to advancement at the organization.
Bar Harbor Bankshares: New, but not a new broom
Joseph Murphy was retiring after nearly a dozen years at the helm of $1.4 billion-assets Bar Harbor Bankshares.
He would be missed. But he would not be cloned.
“We knew better than to try to clone him,” says Peter Dodge, chairman. “He was too good to clone, and his shoes were too big to fill. And we asked ourselves, did we want to go in a different direction with the CEO’s position?”
This was a fine line the board had set itself, says Dodge. On the one hand, directors recognized that banking is changing. On the other, Bar Harbor has a strong, capable core of middle and upper management, and “we didn’t want to spook them with what the new guy was going to do,” says Dodge. Maintaining the bank’s culture ranked high in succession priorities.
In his 27 years on the board, Dodge has seen half a dozen CEO transitions, and he says when Murphy was CEO no formal permanent succession plan was in place, only one accounting for temporary contingencies should Murphy become incapacitated.
“We were complacent,” says Dodge. “We were happy to have him there.”
Once the decision was made to seek a replacement for the retiring Murphy, the board established a time line for its succession search, and had both internal and external candidates. “We had some very worthy inside candidates,” says Dodge, but in the end, the “tipping point” to an outsider was possession of outside knowledge and the breadth of such knowledge, to help the bank adapt. The board named Curtis Simard, formerly of TD Bank, as president and CEO, as of last August. (Former CEO Joe Murphy had a non-voting role on the search committee, and continues to serve on the board as vice-chairman.)
One piece of advice from Dodge: Embrace the change and get the new CEO connected quickly. Simard went to every branch and was introduced to all of the bank’s larger borrowers, as well as other key constituencies. The bank’s 2013 annual report featured an interview with Simard, to familiarize stockholders and the public with the new leader.
Don’t faint at the price
An additional recommendation Dodge has for boards and retiring CEOs looking for a new leader from the outside: “Allow for possible sticker shock.” The price for an outsider may be higher than what the bank has been paying its CEO. Likewise, the mix of compensation the candidate seeks will differ by their age and lifestyle. Dodge points out that a younger CEO, possibly with children in school, may prefer more immediate income, while an older candidate might lean toward deferred income. Bar Harbor’s board itself has a preference for compensation plans that stress performance over several years.
“You’ll probably end up paying more,” says compensation consultant Susan O’Donnell. “You have to step up and pay for that talent.”