The secrets of successful family-run banks

Family bankers share how they successfully transfer their businesses from one generation to the next—and the potential pitfalls to avoid in the process.
By Katie Kuehner-Hebert

Every bank has succession challenges, but the transfer of a family-run institution can be especially daunting. Families must not give undue preference to would-be successors above other employees and must be sure that younger generations have the proper training to one day take the reins. Moreover, issues between family members can be tricky, particularly over ownership rights and the overall strategic direction of the institution.

But with upfront communication, the right counsel and a commitment to mutual respect, many family-run banks have thrived for generations.

Emily Hofer is chief financial officer at $154 million-asset Merchants State Bank in Freeman, S.D., where she has worked as CFO since 2005. Hofer represents the third generation to own and manage the bank. Her grandfather, Harris L. Hofer, purchased Merchants State in 1968 and ran it for years with her grandmother, Wyona. Her father, Ted, first came to work for the bank in 1973 and led it from 1989 until his retirement in 2010. Currently, longtime bank employee Dean Dreessen is president and CEO, and Hofer is being groomed for the position.

Be especially respectful of older, long-term, experienced personnel at the bank. Be available to do whatever needs to be done, even the smallest task. Others are watching, so you need to set a good example. You have to earn the respect of the staff. You can’t make them respect you.”
—Paul T. Bennett, South Banking Company and Pineland Bank

While Hofer may be the child of the bank’s former leader, she’s earned her stripes. After graduating in 2002 from Tulane University and becoming a certified public accountant, she served as an auditor of financial service companies for PwC, working with bank examiners at the Atlanta office of the Federal Reserve Bank.

“There’s no better experience than to go into other banks and conduct an audit or a bank exam,” she says. “I’ve actually met a lot of people from family-owned banks who have gotten jobs as bank examiners first.

“You can see so many different things over the course of the year about how things are done at other banks, and that training from other banks and examiners is valuable.”

The family learned a hard lesson about succession planning when Hofer’s grandfather, Harris Hofer, suffered a stroke in 1989, and Ted, her father, had to step in to run Merchants State Bank. Now, succession planning is a priority. Emily Hofer is the only family member involved in the community bank’s day-to-day operations, but a handful of other family members serve on the board of the holding company. She says the bank is the only place where the family talks about banking issues.

Any family person should be able to succeed based on their own merits – that should be the key driving force. The current CEO and the people who hold the majority of stock ownership need to be really honest with themselves about whether this person is literally the right stuff.”
—Joseph H. Cady,
CS Consulting Group LLC

“My grandmother was on the board for many years, and now she’s 87,” Emily says. “She hasn’t been involved for over 10 years, but she still feels as if it is her baby. So we really make a point of not talking about the business unless we’re at the bank. We’re just cognizant of everyone’s feelings and what they think should be done.”
Still, it can pose a challenge when closely held businesses have to be creative to create liquidity for shares without diluting ownership of other family members. “It’s very emotional,” Emily says.

However, on a day-to-day basis, the rest of the Hofers are comfortable giving Emily a wide berth.

“Everything at the bank is going well,” she says. “We’ve never been doing better financially, and we’re at the edge of technology. All of the changes I’ve made in the last few years have been great, and I guess it’s easy for my family to let me handle things right now, as we’re making so much money. Of course, let’s see what happens if we go into a downturn.”

Ownership issues
Ownership transition at a family bank has to be dealt with along with management and director succession. Both can be tricky, says Jeffrey C. Gerrish, founding director of Gerrish Smith Tuck Consultants and Attorneys in Memphis, Tenn. “Sometimes when the older generation passes away, the ownership is structured so that it lies more heavily—[in other words,] a higher percentage—with whoever is actually managing the bank,” Gerrish says. “Other siblings would typically receive assets other than the bank holding company stock. Sometimes it is just divided equally.”

Difficulties can arise when some of the siblings working at the bank draw a salary as well as distributions of the Subchapter S dividends, while other siblings only receive distributions of the Subchapter S or dividends, he says. Those outside the bank may think the management siblings are not working hard enough and are taking out too much in salary and bonus. On the other hand, siblings working for the bank may be reluctant to declare dividends or distributions because they want to keep the capital high, yet the outsiders depend on the dividend or distribution.

“My general recommendation is that the matriarch and patriarch give some serious consideration to what the ownership is going to look like after they pass away to avoid some of these problems,” Gerrish says.

Family members of family-owned banks should meet periodically, and no less than annually, and document agreements as to issues family members have discussed and resolved and get the agreements signed by all who are affected.”
—Jeffrey Tisdale,
Tisdale & Nicholson LLP

Managing management
The actual handoff on management succession from one generation to another is often dicey as well, Gerrish says. The older generation, as with any family-owned business, is sometimes reluctant to give total control to the “young kids.” Sometimes a matriarch or patriarch will remain on the board as chairman or remain involved in the bank in some other way.

“As long as they have some ownership, they will typically stay involved in the bank,” Gerrish says. “Typically, they have ownership until death, so a lot of times you have some pretty old owners, even though the management team may have transitioned.”

Jeffrey Tisdale, managing partner with the Los Angeles law firm Tisdale & Nicholson LLP, says establishing employee stock ownership plans (ESOPs) at family-run banks can be helpful to all involved, especially with respect to economic and sale-of-share issues.

“Moreover, for banks that have little liquidity in their shares, ESOPs can be used to help establish a market for the bank’s shares in part by buying outstanding shares,” Tisdale says. “This can add to the liquidity in such shares and helps a family member who needs to sell shares for emergency or retirement purposes and can provide support for the price of such shares.”

He advises that actively involved and passively involved family members at family-run banks should meet regularly and have everyone sign off on any resolutions of issues.
“Many family members won’t like such formality, but written agreements can minimize disputes later, thereby saving money and substantial angst,” he says.

Rajan Patel is chief lending officer at State Bank of Texas in Dallas, Texas. His father, Chan Patel, is founder and CEO of the $959 million-asset community bank, and his brother, Sushil Patel, is president. Rajan Patel says the three work well together, in part because they have equal ownership and in part because they check their egos at the door.

“It goes back to our upbringing. Growing up in a small business, you really had to rely on family members and neighbors,” Patel says. In fact, his father received the financial support of numerous members of Dallas’s Indian-American community to start the bank in 1987, including family members, with a focus on serving that community’s financial needs.  “Being in a tight-knit community really helps us get along with each other at the bank very well and helps us to provide a good working culture,” Patel says.

“The way we engage with our employees is that we do not micro-manage. We find good people that we trust, and we let them fly.”

Ensuring real-life experience
Patel graduated from Texas A&M University with a degree in finance and then attended the banking program at Southern Methodist University. He joined State Bank of Texas in 2005 as vice president of lending before advancing to chief lending officer.

But his hands-on training at the community bank began in high school, when Patel worked as a credit analyst, “with my dad giving me pointers from the get-go.”
“Schooling is great, but getting real-life experience on things happening day-to-day is very important,” he says.

Joseph H. Cady, managing partner of CS Consulting Group LLC in San Diego, says that boards of family-run banks can sometimes give undue deference to a CEO who is pushing for an unqualified family member to be the successor. Such was the case at one family-run bank that used Cady’s consulting services.

“He was grooming his son to be the CEO, but when the father retired, the son was nowhere close to being ready to take over,” Cady says.
“The son didn’t have the confidence of the board and the board did voice concerns.”

The matriarch and patriarch should give some serious consideration of what the ownership is going to look like after they pass away to avoid problems.”
—Jeffrey C. Gerrish, Gerrish Smith Tuck Consultants and Attorneys

In an ideal situation, board members should ensure that any would-be successor is skilled in all areas and takes the same pathway that any CEO needs to take so that he or she can step into the position based on merit instead of lineage, Cady advises.

Another challenge is passing the baton to someone in the younger generation who is “just not cut out” for leadership, he says.

“They’re not a visionary and they’re not good at strategy, which are the key attributes of a CEO,” Cady says. “They’ve got to be able to build a consensus and get people to follow an executive strategy plan. They can go to leadership training, but some people are natural leaders and some are just natural followers. It can be a very difficult or awkward situation.”

There’s no better experience than to go into other banks and conduct an audit or a bank exam. Before they sink their teeth into banking, let the examiners train them, and when the timing is right, move them back into the family business.”
—Emily Hofer,
Merchants State Bank

Paul T. Bennett, CEO and CFO of the $282 million-asset South Banking Company in Alma, Ga., says he and his brother, Lawrence, have “worked through the ranks” of the family’s various banks, which have now merged into Pineland Bank. Bennett is also the chairman of the bank, and Lawrence serves as vice chairman.
One of the main ways for members of family-run banks to be successful is to treat all employees “the way we would like to be treated,” Bennett says. He adds that he and his brother “have been cautious not to overstep and cause resentment among the staff.”

It is also extremely important for family members to show respect for each other, he says.

“If challenges were to arise, I would rather give some, rather than have any division among family members,” Bennett says. “I have always looked long term and what is in the best interest to keep the family intact and not get splintered.

“Good family relations are important for the continued success of any community bank.”

Katie Kuehner-Hebert is a writer in California.