Why succession planning is key to bank independence

a woman overlooking the ocean

Independence is at the heart of many community banks’ ethos, but how do community bankers embed this core value into their strategic planning? Here are three critical strategies that use succession planning and board management to maintain independence.

By Colleen Morrison

Independence is on everyone’s mind this month, so, too, should the importance of independence in community banking. So far in 2020, as community banks play a vital role in the country’s economic recovery amid the COVID-19 pandemic, M&A activity has slowed.

For community banks that plan to maintain their independence, this change is an opportunity to shore up strategies to protect themselves against undesired or unplanned sales.
In fact, industry experts agree there are three critical steps that community banks can take to help ensure they remain independent.

1. Prioritize making an executive management succession plan

While many bank sales happen with strategic forethought, others are forced into play due to unexpected circumstances, such as losses of leadership. An executive management succession plan prepares a bank for a variety of scenarios and identifies either specific internal replacements for leadership positions or a thorough process for filling them as turnover occurs.

“Banking is competitive, so you want to make sure that if you lose a key member of your team, you have a fairly efficient process to replace them or you may be left behind,” says Chris Doyle, president and CEO of $1.5 billion-asset Texas First Bank in Texas City, Texas. “I know a bank that lost their [chief financial officer, who] died unexpectedly, and it was a critical time in their operations to replace him. Without their succession plan in place, it could have been devastating to the bank.”

“You want to make sure that if you lose a key member of your team, you have a fairly efficient process to replace them.”
—Chris Doyle, Texas First Bank

Developing a succession plan helps a bank to better prepare for varying scenarios. The process of evaluating staff roles and responsibilities may also reveal places to bolster existing capabilities with staff professional development. With that in mind, conducting succession plan reviews annually—or more frequently if an executive departs—provides greater line of sight into areas of threat or opportunity. Another benefit of regular assessment is that it can flag areas where support from outside consultants or staffing resources may complement a bank’s current planning.

2. Consider the importance of your community bank’s board and its makeup in independence planning

A community bank’s board of directors plays a pivotal role in its governance and market approach. Ensuring diverse representation—but shared mission and vision—in its makeup assists in safeguarding a bank’s independence. And forethought is critical to continuity in executing against this strategic initiative.

“It takes time to find, to train and [to] equip board members,” says Charles Gullickson, a partner in the financial services practice of Davenport, Evans, Hurwitz & Smith, LLP, in Sioux Falls, S.D. “It’s important for board members to be looking down the road several years in terms of what’s the current composition of the board, who might be retiring within the next three to five years [and] what should [the bank] be doing to recruit new board members.

“And, of course, that board has to make sure that they are fostering a culture that finds, trains and engages future management.”

Doyle agrees. “You need to think about not only your executive and officer-level succession, but you’ve got to think about your board succession, because they are setting policies and driving strategic decisions that will affect everyone in the future,” he says. “And one of those decisions is, ‘Do you want to remain independent?’”

3. Don’t underestimate the impact of your community bank’s legal, financial and community responsibilities

Beyond the leadership composition of management and the board, there are the core legal, financial and community responsibilities of running the bank to consider in terms of remaining independent. Each of these factor into a community bank’s decision and therefore need to be evaluated, particularly if unsolicited offers raise their heads.

“In those cases where there is overlap between management, the board and ownership, sometimes the distinctions for what you need to do for succession planning get blurred a little bit,” Gullickson says. “Those in management and on the board need to be careful not to blur their personal interests with the interests of shareholders who may not be part of the management team. Their core legal obligation is their fiduciary obligation to their shareholders.”

So, the fiduciary responsibility weighs heavily for community banks in their decisions, but they also need to consider that requirement in light of the bigger picture. Beyond strict dollars and cents parameters, the community bank’s impact on its community must be evaluated in any decision to remain an independent institution.

“The thing that you have to think about as an independent community bank is the financial commitment you need to make to your community,” Doyle says. “Our budget—different than banks that aren’t community banks—will certainly look different in respect to the expenses related to investments in our community.

“I’m not talking about just donations, although we all pride ourselves on what we do there, but investments in the community for foundations for the future, leadership and development programs, financial literacy programs, and not just giving money to things like that, but being involved in things like that.”

Considering the impact that community banks have within the communities they serve, when contemplating its role as an independent institution, Gullickson points out that a community bank also must ask itself if it has an unstated obligation to the community to remain independent. In short, if it sells, will the needs of its community continue to be met in the same way?

“[Our] leadership and employees live directly in the communities we serve, which fosters a long-term commitment and dedication to enhancing the vitality and health of our local communities,” says Jenna Kesecker, executive vice president and chief financial officer at $327 million-asset Jefferson Security Bank in Shepherdstown, W.Va. “We believe in our community and feel strongly that remaining an independent community bank provides the best opportunity for our neighbors and local businesses to thrive.”

“We believe … that remaining an independent community bank provides the best opportunity for our neighbors and local businesses to thrive.”
—Jenna Kesecker, Jefferson Security Bank

By exploring management and board succession plans and looking at them in light of potential pitfalls, community banks can better prepare to maintain their independence and prime themselves to remain facets of their communities. And, armed with these strategies, no matter the market fluctuations, unforeseen environmental developments or shifts in technology, banks that strive to remain independent can find the wherewithal to do so.

“While there have been many challenges we have faced through the years,” Kesecker says, “there have been just as many opportunities to embrace, which have allowed us to stand strong in the communities we serve.”

Why it’s important to have a Plan B

Remaining an independent community bank means having to navigate competition, compliance and technology costs, not to mention out-of-the-blue challenges like COVID-19. Yet, while economic and environmental restraints may play a role in a community bank’s decision to sell, experts point to the intersection of liquidity and leadership as the biggest hurdle community banks should plan for.

“It’s important for family-held banks, as the board worries about succession planning, [to consider] how the current generation is going to get some monetary value out of its ownership while still leaving ownership to the next generation,” says Charles Gullickson, a partner of Davenport, Evans, Hurwitz & Smith, LLP in Sioux Falls, S.D. “You need to identify sources other than just the capital of the bank to monetize some portion of ownership’s current assets, so they can have the cash and the liquid assets they need for the end of their years.”

In addition, it’s imperative that community banks plan far ahead so life’s challenges don’t take them by surprise.

From environmental concerns to unexpected developments within the institution, community banks need to be resilient, and resilience is achieved by having planned for a multitude of scenarios.

“It comes up from time to time that a significant owner passes away in some untimely fashion and there just hasn’t been enough planning for how to generate enough cash to take care of the spouse, the kids and the federal estate taxes,” Gullickson says.

Colleen Morrison is a writer in Maryland.