In an American Banker Viewpoint last June I noted what problems face the new chief executive of a troubled or otherwise challenged bank — those Main Street community banks with few clear options.
Since then, an obvious problem has arisen: Just how can a board of directors, or controlling investors, entice a highly qualified candidate to take on a troubled bank or turnaround situation? What chief executive candidate in their right mind would?
Until 2007, the position of chief executive officer of a community or independent bank, though never easy, has been highly prized, regarded with esteem and rarely met with scrutiny by regulators, investors, customers or anyone else. But the position is hardly unassailable today.
I mean, who actually seeks the spotlight of taking on a bank that might fail? "Oh, you were in charge of that bank that went down last week?" (Polite hesitation, then run — it might be catching.)
Every CEO selection now is influenced, if not controlled, by the bank's principal regulator and the Federal Deposit Insurance Corp. The agency will not tell you who to hire but, once names are presented for consideration, whom you can't. This can be paralyzing to both banks and candidates. Precious time (considering orders by date certain to get key metrics in place or face seizure) and recruiting humiliation can be saved by understanding today's bank chief executive selection jigsaw and thinking correctly about what the bank will really need while hiring a competent executive search firm.
Not negotiable is that a candidate must have been a chief executive to qualify for taking on a troubled situation. If not, don't bother. A board's candidate will probably have to have precisely the right experience. If your bank is bigger than something around $1 billion of total assets, then smaller-bank experience won't cut it. On-the-job training on the cusp of seizure is the last place a first-timer should be. Likewise, if your bank is a small community institution, a candidate accustomed to the spectacularly big organization chart of a major institution would be equally handicapped. Has he or she steered another bank not just through but out of trouble before? A must. (This, by the way, also vetoes internal promotions.)
If a chief executive candidate passes those tests, the next step is to informally run your choice through the regulatory channels. You won't get approval, just a "nonobjection" — or they'll signal you immediately if you're on the wrong track.
Then regulators rightly insist that pay and benefit packages meet the post-Tarp straitjacket of requirements, particularly cash bonus plans, long-term bonuses tied to passage of time and change-in-control or termination benefits. These have always been incentives for new bank chief executives, and from both the troubled bank and CEO candidate perspectives, they have never been more important than now just to get a serious proposal on the table.
One of the market disconnects for a bank with significant regulatory constraints, for which the regulators have not yet come up with a solution, is the axiom that the more challenging the problems and expectations, the bigger the payoff should be.
Since the beginning of this crisis, the one absolute priority — the toughest challenge for any new chief executive the day he or she walks through the door — has been the restoration of capital. Impossible to raise for most since 2007, expensive for everyone else, it is the magic bullet for survival. Never more than now, you had better have all the right stuff to attract it.
Without appropriate incentives, why would any outstanding, qualified chief executive take that on?
The new chief executive also faces a new paradigm of scale. Just a few years ago, in most areas of the U.S., banks with total assets of as little as $100 million — with a reasonable market share, a true community platform and a tightly managed cost structure — could make money, guaranteed. In metropolitan areas, the talk is now of an asset size of at least $1 billion, and the pressure to increase size and share is relentless, regardless of all other factors. (An obvious endgame: consolidation.)
The new chief executive must also have total agreement, be on the same page with, the bank's board from Day One about "performance." Rare is the bank that comes even close, today, to the performance metrics of five years ago. That horizon will only be seen again when we navigate past the shoals of anemic loan growth, weakening real estate prices and a political-regulatory environment that still cannot move past finger-pointing to intelligent change.
So here's what we offer the bank CEO: the hardest work imaginable; an uncertain long-term future (even if you succeed, you may be out of a job, as happened recently at a bank in the Pacific Northwest, courtesy of new investors); potential personal and board liability for your actions, however long or brief your tenure. No guarantees — for anybody.
The ideal candidates have done this before — and successfully, in situations where the scale and issues vary.
Clear-eyed, thick-skinned, harboring no illusions, they are prepared to move with ruthless speed, yet possess a fundamental patience with process and panic-prone personalities. They will have the clarity to make the huge changes immediately. In the mantra of the great UCLA basketball coach John Wooden: "Be quick — but don't hurry."
At Sept. 30, 860 banks were officially designated as "troubled" by the FDIC, a surprisingly big number to those who had told each other the worst was over. Many of these banks happen to be capably led, well focused on their problems and, if properly supported — or just left alone and unhassled — would come out the other side healthy and stronger.
But for the others, the old, formalized, internal succession planning will not work. In the end, it is not a regulatory problem or a recruiting problem. It is a board of directors problem.
Because the people who got you into this cannot get you out.