Community Banks Are Falling Behind in Succession Planning

Community banks are facing a growing succession crisis.

A recent wave of high-profile executive departures highlights the need for boards to regularly review succession plans and develop future leaders in an environment where it is getting increasingly difficult to find well-trained talent. Unfortunately, many of those initiatives were put on hold during the financial crisis, executive recruiters say.

"Banks that have gone through the last few years have this bunker mentality," says John Szold, chief executive of Planning for Succession, based in Miami. Ignoring succession "was an easy decision because they didn't have time."

Many banks eliminated formal training programs to cut costs, leading to fewer bankers with the necessary know how in areas such as lending, says Alan Kaplan, CEO of the executive search firm Kaplan & Associates.

"Everyone says it should be so easy to find a new CEO because there are so many unemployed people right now but, in reality, the number of people qualified to run a bank is much more limited," Kaplan says.

Several CEOs have made matters worse with a reluctance to retire, executive recruiters say. Some stay on out of a sense of dedication, Szold says.

Other executives refuse to retire because of concerns about their bank's financial stability and stock price, says Rod Taylor of Taylor & Co.

"If a CEO feels like they can't retire, they won't take any actions that will hasten their departure," Taylor says. "In too many cases, the board pushes the retirement issue ... and starts to look for successors without the incumbent's support."

Longer term, many bankers are worried that there is a stigma to their trade that could convince more young people to avoid banking as a career.

"The industry took a black eye during the financial crisis," Bryan Jordan, the chairman and CEO of First Horizon (FHN), said during a March 5 speech in Greensboro, N.C. "Will little kids still be interested in playing banker? It is incumbent upon us to solve the psychology that banking is bad."

Fortunately, there are steps banks can take to make sure that their best executives stay as they develop a CEO succession plan.

Directors must remember that it is their responsibility to select a new leader, Kaplan says. It must be an "active conversation," with boards discussing succession on a quarterly basis, or monthly if an executive is less than three years from retirement age, he says.

Regulators, analysts, employees and shareholders pay close attention to succession. For instance, it was a virtual nonevent last month when PNC Financial Services Group (PNC) said that William Demchak would replace James Rohr as CEO in April. It had been widely understood for years that Demchak, the $305 billion-asset company's president, was Rohr's eventual heir.

Still, banks need an emergency plan for replacing the CEO. Executive recruiters suggest that First Niagara (FNFG) may have turned to its emergency plan last week when John Koelmel was abruptly ousted as CEO. Gary Crosby, the Buffalo company's chief operating and administrative officer, was immediately named interim CEO.

The absence of a thorough succession could derail a bank's strategy, opening it up to a takeover. Since 2008, the average bank CEO age is roughly 58, while CEOs of banks that have been sold have averaged about 61, according to a study from Morgan Stanley. For the 35 bank deals announced during the first nine months of last year, the average seller's CEO was approaching 65.