Rapid growth can be a trial by fire for a community bank’s staff and leadership alike. As those who have been through it tell us, the keys are preparation, consultation and a willingness to admit when things need to change.
By Katie Kuehner-Hebert
ommunity banks that grow rapidly, particularly through acquisitions, can quickly turn into entirely new animals. This can leave many leaders scrambling to figure out how to adjust the organizational structure—and their own management styles—to handle the resulting growing pains.
Most leaders can navigate the new waters, particularly if they’ve come from other community banks that have successfully grown, or if the community bank’s management and board have sought consultation and are adequately prepared for growth. But there are times when boards have to oust the founding CEOs if the transition proves too rocky.
Sometimes, CEOs step aside willingly, acknowledging they just don’t have the necessary skill sets required to lead an institution that has to operate much differently than the one they helped nurture.
One such CEO was Gary Sirmon of Banner Corp. in Walla Walla, Wash., who led a series of acquisitions from 1995 to 2002 that turned the $450 million-asset First Washington Bancorp thrift into a $2.1 billion-asset regional commercial banking company operating in three states.
The buying spree and subsequent charter conversion had resulted in myriad growing pains. Back-office integration issues proved costly, for one thing. Inadequate monitoring of a check-kiting scheme and credit quality problems surrounding one Seattle loan officer were other stumbling blocks; bank employees were wearing too many hats for the institution’s new size and complexity to catch the problems early.
Sirmon stepped aside and let the board hire D. Michael Jones, a veteran banker who had more experience running larger companies.
Jones served as Banner’s CEO until he retired in 2010 but remains on the board of the company, which now has $9.8 billion in assets.
Learning to let go
As community banks grow, the rank-and-file staff—particularly compliance officers—need to stop wearing multiple hats, as does the CEO, says Kevin Kane, founder and president of Financial Regulatory Consulting Inc. in New York City.
“The CEO has to let go of micromanaging,” Kane says. “They can’t continue to be so intimately involved, sitting in on the new product committee or deciding which newspapers the bank is going advertise in. They have to let other people do that and communicate to them. They have to become an administrative manager, and that is hard for many community bankers to do.”
Community bank boards also have to evolve as the institution grows, Kane says. Many startup directors are chosen because they invested in the bank or can bring in business from their particular industry sector, and they’re often friends of the CEO.
“[This] means that in small banks, the CEO has a lot of say, and sometimes that can hinder a bank’s performance as it grows rapidly,” he says. “As banks grow, boards need to have members with more financial expertise, and there needs to be more directors who are independent.”
Trust your people
CEOs can only be successful at leading fast-growing community banks if they hire the right people and trust them to make good decisions, says John W. Allison, chairman of Home BancShares Inc. in Conway, Ark., which grew from a startup in 1998 to its current asset size of $10.7 billion.
“I’m blessed with the people around me,” he says. “I have 25 rainmakers in the company and about 15 could run the company tomorrow. My job is recognizing talent and putting people in the right slots.”
He also believes strongly that bankers should have experience running businesses of any type before they become CEOs of a financial institution—preferably a decade of “hardcore” experience.
“I grew up in the business world and had a manufacturing business with 1,000 employees, which gave me a distinct advantage,” Allison says. “As a bank CEO, I already knew how to meet payroll, and I ran the bank off a daily P&L statement.”
Sometimes CEOs who successfully nurtured de novos have to step aside if they simply can’t manage a bigger bank, particularly when thresholds are hit that trigger more involved corporate governance and other regulatory compliance requirements, says Randy Dennis, president of DD&F Consulting Group in Little Rock, Ark.
“The bank might be a great $250 million-asset bank but not a great $1.5 billion-asset bank,” Dennis says. “When a bank gets to $1 billion in assets, the world shifts.”
But if a bank CEO continues to hang on, it often takes spurring by regulators for board directors to take action.
“That doesn’t mean that examiners will say that the CEO has to go; they very seldom do that,” Dennis says. “But they will look board directors in the eye and say, ‘You’re responsible for this institution, not Joe Smith here. We’re looking to you to really start the ball rolling.’”
Jeffrey C. Gerrish, founding director of Gerrish Smith Tuck Consultants and Attorneys PC in Memphis, says he likes to lead strategy sessions with bank boards to help them be better prepared to grow by acquisition.
“One of the things they’ve got to decide is whether they have the infrastructure to take it on, and they also have to have their own culture set in place, and then look for target banks with a similar culture,” Gerrish says.
For example, one of his community bank clients had a “family-type” culture. There, he says, “people got along, everyone pulling in the same direction, not a lot of
“They were one big happy family for the most part, and they didn’t want to pick up another bank and lose that somehow,” he says. “But when a bank does an acquisition, it’s not for the fun of it. It means you’ve got to cut out duplicative people in the back office, which causes people competing for positions—and that can put a strain on a family-type culture.”
Look after your stars
Community bank leaders also have to be prepared to cut their own staff if there is overlap after an acquisition. “Don’t make assumptions that your people are the best people,” says Paul Schaus, president and CEO of CCG Catalyst Consulting in Phoenix, Ariz.
Moreover, as a bank grows, it needs to start “siloing” operations, which also often entails bringing in professionals with specialized expertise, such as Small Business Administration lenders or wealth management advisors, he says.
Community banks that experience rapid organic growth need to watch out for “star burnout,” Schaus says. “When a bank is in an aggressive growth mode, nobody wants to hire people, and that puts pressure on existing staff.”
A red flag to watch for is a combination of a low efficiency ratio and a trend of double-digit growth, which can result in a “wave of burnouts,” says Schaus. Community banks that book business quickly also typically outgrow their infrastructure: physical facilities, back-office systems, technologies, HR, compliance and other support staff.
“There’s a risk to outgrowing an organization and not compensating accordingly,” he says. “But there’s also a risk of overdoing it, investing too much and then it becomes a drag on them. The key word is that you have to manage your growth.”
Community bank CEOs who have no M&A experience should consider consulting investment bankers who have the necessary skill sets to successfully integrate acquisitions, says Joseph H. Cady, managing partner of CS Consulting Group LLC in Lake Arrowhead, Calif.
If such bankers try to do it themselves, “when opportunities come up, they often hit the bottom of the barrel because they didn’t take the proper approach,” he says.
Bringing it all together
But even if bankers are able to strike a good deal, it can go south quickly if they don’t have experience with integration.
“When structuring any M&A deal, far too much emphasis is placed on making the financials work and far less attention is paid to integration, and that is often the biggest failing point,” Cady says. “There are studies that show that due to failure to properly integrate, only about 30 percent of acquisitions truly add shareholder value.”
Standard Bank in Monroeville, Pa., just completed a merger of equals with Allegheny Valley Bank in Pittsburgh, Pa., doubling its size overnight, says Timothy K. Zimmerman, who remains CEO and is also ICBA’s chairman elect. Andrew W. Hasley, who had headed up Allegheny, is now president of Standard Bank and its holding company, the $927 million-asset Standard AVB Financial Corp.
Zimmerman says the team is prepared for the next step: integration. Before the merger, the top leaders made sure the cultures could mesh, the lending philosophies were in alignment and the blended board could work together. Staff who had been wearing multiple hats have now been trained to take over more specialized positions.
“We carefully put people in place within both of our organizations who have the capacity, and we don’t think we have to hire anybody outside for any of the key positions,” Zimmerman says.
Still, they are prepared for any hiccups. Because many of the back-office processes at both community banks had been done manually, the combined bank is bringing in new technology, and the staff is adapting.
“Of course there are going to be times when things don’t mesh very well,” Zimmerman says, but he believes the combined bank should be able to successfully navigate the growing pains.
“But if we don’t build efficiencies with the combined bank, then I don’t know how successful we’re going to be,” Zimmerman says. “You can’t run a $1 billion-asset bank the same way you ran a $500 million-asset bank.”
It also helps that both Zimmerman and Hasley have extensive experience at larger banks. Moreover, they know they can always tap the expertise of fellow ICBA members who have successfully led fast-growing community banks.
“Other community bankers are more than happy to share their experiences, give advice and answer questions,” Zimmerman says. “It’s a very close-knit group, and people are very willing to help.”
Katie Kuehner-Hebert is a writer in California.