9 tips for smooth succession planning

Planning for future leadership is something every community bank must contend with, but it’s not always an easy process. That’s why community bankers and other experts are using succession planning to benefit the entire institution through better communication, recruiting and planning. Here are their tips for finding the best future leaders with as few bumps in the road as possible.

By Kelly Pike

Community bank leaders know their people are their greatest asset—but what happens when their best people leave the institution?

From retirements to unexpected departures, no community bank is immune to turnover. Employees leave, and when they do, it’s important to have capable leaders waiting in the wings who can minimize disruption to the community bank and its customers. Failure to have heirs apparent in place can threaten everything from a bank’s profitability to its very existence.

“If you don’t have a plan to have people ready and prepared to step into those roles, then every time you have an event where you need a new person, you’re delayed in filling it,” says Phil Buffington, community bank team leader and partner at the Jackson, Miss., office of Adams and Reese LLP. “If you can’t fill it immediately, the financial institution suffers.”

The future of every community bank is therefore tied to succession planning. A good succession plan protects a bank from losing strategic focus and institutional knowledge while providing a roadmap for installing new talent to keep the bank moving forward.

Here, succession planning experts and bankers share their best practices for cultivating a culture of ongoing recruiting and career development.

1. Succession plans need proactive updating

A succession plan drafted today may look totally different than one five years from now. For example, a community bank might open a mortgage division three years after its most recent succession plan was put into place. If the bank doesn’t update its plan, and over the next two years that division becomes one of the bank’s primary fee generators, fee income could be severely affected if the person running the division leaves.

“The most important issue is that [succession] has to be a regular discussion point for the board and executive management,” Buffington says. “Don’t just think about updating the written plan because the regulators say to. Talk several times a year.”

Succession planning is not a task that can be delegated to human resources. It requires engagement at all levels, including the board. If the board isn’t supervising succession planning, things can fall through the cracks.

2. Don’t limit your plan to the top role

While it’s critical to plan successors for the president and/or CEO role, other C-suite positions, such as chief financial officer and chief risk officer, should be part of succession planning, too. Bankers should look at their org charts to identify roles that are vital to continuing their operations and success. Would it set the institution back significantly if those roles were suddenly unfilled? If so, there should be a succession plan, Buffington says.

“If you just look at the CRO, CEO and CFO and aren’t looking at the divisions that make up the bulk of the bank’s activities,” he says, “then you may be shorting yourself on the planning process and leaving yourself open to gaps where you might have an immediate need for a successor.”

3. Customize your succession planning

It’s never a good idea to take another bank’s succession plan and use it as your own. A succession plan should be tailored to the community bank. “Any plan you start with has to be adapted, because each institution has separate and distinct needs and issues that must be addressed,” Buffington says.

One bank may have an individual in position if the president wins the lottery and moves to Fiji. Another might have to temporarily divvy up responsibilities among existing staff and then hire an executive search firm. Another might have to hire interim help right away.

The same is true when it comes to updating the bank’s succession plan. Community banks change over time. Updating a succession plan means looking beyond retirements and staffing changes to understand how an institution has changed and what roles are important today and in the future.

4. Set realistic goals

Succession planning was a lot easier back when financial institutions hosted internal programs that produced a large pool of trained bankers. Now that those programs are rare, community banks have to be realistic about growing and nurturing the next generation of management.

“If you see someone who is a great loan officer who seems well-suited to be the senior credit officer someday, don’t just let them sit there and be the best loan officer they can be. Start giving them the skills, education and training now so they don’t walk away.”
—Doc Bodine, Gerrish Smith Tuck Consultants and Attorneys PC

Buffington says community bankers shouldn’t get too hung up on looking for a successor who fits some ideal. It’s not always possible to find the perfect person for a role. Instead, banks should look for a candidate who can be groomed to fill the position with the right training.

Doc Bodine, managing director of Gerrish Smith Tuck, a consulting and legal firm for community banks in Memphis, Tenn., says it’s best to start early. Hire interns and recent college graduates, identifying those who have great potential and investing in them.

“If you see someone who is a great loan officer who seems well-suited to be the senior credit officer someday, don’t just let them sit there and be the best loan officer they can be,” Bodine says. “Start giving them the skills, education and training now so they don’t walk away.”

Not only does this keep employees engaged and more productive; it also ensures that there are people who’ve been prepared to step into a role instead of being thrown in it in the event of an unexpected emergency.

Community bankers may worry about investing in a person who could potentially leave the bank, Bodine says, but this worry is overblown.

“Which situation would you rather be in as a community bank: having a bunch of staff that everyone else wants or having staff that no one wants to hire away?” he says.

5. Loop in potential successors

Succession plans can’t be based on unfounded assumptions, including the assumption that the replacement you’re eyeing is interested in the job.

When grooming an employee for a future role, it’s smart to be direct and proactive, letting them know that the bank is hoping to develop them for a position over the next few years. While you shouldn’t promise that someone will be bank president one day, the bank can recognize their potential and let them know that with continued hard work and development, they could be an executive or even bank president, and that the bank would like to help them achieve that goal if it interests them.

This can also help with retention, Bodine says, as it gives an employee a reason to stay.

On the other hand, if there are three internal CEO candidates, only one can have the role. The succession plan needs to consider how will this be communicated to the candidates and how the bank will handle it. While competition can be a motivator, it doesn’t always have the best results.

“The really successful candidates are the ones motivating themselves and who are driven to succeed and do their best,” Buffington says. “They aren’t driven by competition with other candidates.”

6. Make sure your plan includes processes

It’s not enough to say that a community bank is going to look internally or externally for candidates to fill an open position. There needs to be a process that outlines how to identify candidates and where to look, Buffington says.

For example, if there isn’t anyone in the IT department, the bank should develop a plan stating where in the technology space the bank will look and how it will identify candidates who can learn and thrive in a regulated environment.

Central Valley Community Bank relied on its succession plan when president and CEO James Ford announced his retirement in March 2021. The $2.3 billion-asset community bank in Fresno, Calif., had hired James Kim, a former community bank CEO, as its chief operating officer in 2018. The board had been evaluating his work and recognized Kim as a likely successor within two years of his arrival. As a publicly traded company, however, the bank felt it was important to also evaluate external candidates, Ford says. Ultimately, the job went to Kim.

7. Use succession planning for business continuity planning

While succession is a long-term issue, it can have short-term implications in an emergency situation, as COVID-19 reminded us. A succession plan can identify staff members who may be prepared to step up and fill a role if the bank has to enact its business continuity plan.

“Regardless of the cause, if we lose a key decision maker, we need to know what to do,” Bodine says. “Who fills the role? That’s something regulators are looking keenly at.”

Farmers National Bank in Canfield, Ohio, is constantly evaluating employees and conducting annual succession planning for about 10 to 12 executive positions and 30 other key roles. Current leaders review and update their job descriptions and then evaluate employees both within and outside their chain of command, scoring them on a matrix of leadership and performance. The $4.1 billion-asset community bank then tailors development plans for the top two or three people for each role and has the board review it, says Mark Nicastro, senior vice president and chief human resources officer.

“It serves two purposes: succession planning and disaster recovery,” he says. “It shows us who is the next person to promote into that role.”

8. Align succession planning with your strategic plan

Every business goes through a life cycle of startup, growth, maturity and continued growth or decline. Succession plans should consider where a bank is in its lifecycle and its goals for the future to ensure any new leader will have the skills to help the bank achieve them.

Francis X. Godfrey, a financial services tax partner in the St. Louis office of bank consulting firm BKD, LLP, recommends mapping a resource gap analysis to the strategic plan.

“Where do you want to be in the future, and who will help get you there?” Godfrey says. “Be realistic. We see a lot of community banks where they identify their lifecycle as the growth stage, but they are relatively flat. They are mature within their market and within their leadership team.”

9. Set up successors to succeed

It’s common to have a CEO or other retiring leader work alongside their successor for a period of time to transfer institutional knowledge. Other times, a CEO might remain on the board to ensure continuity of knowledge. The challenge, then, is ensuring the board gives the new CEO their due, listening to their thoughts and opinions instead of deferring to the old CEO they know and trust.

“I recommend you give enough time for the CEO transition, but you have to let the new CEO take over. My intent is to fade into the background.”
—James Ford, Central Valley Community Bank

“You need to work through that dynamic and give the new CEO an opportunity to succeed,” Buffington says. “You don’t want to undermine that role.”

Ford says choosing an internal candidate has made the hand-off much easier. He turned over the reins of Central Valley Community Bank on Nov. 1, but will be available to his successor until next April.

“I recommend you give enough time for the CEO transition, but you have to let the new CEO take over,” Ford says. “My intent is to fade into the background.”

Bonus Tip 1: Never stop recruiting

Community banks should constantly be looking for both internal and external candidates for succession, because a bank never knows when it’s going to have an opening.

This ongoing recruiting also helps ensure whomever a bank hires is a good fit, says James Ford, the now-retired president and CEO of Central Valley Community Bank in Fresno, Calif. He adds that the community bank has spent as much as two years prerecruiting a candidate.

“A longer recruiting cycle gives you time to help the person you recruit understand your culture,” he says. “They may look good on paper and interview well but then find out that they aren’t a good fit when they get there. Then you’re recruiting again in 90 days.”

Bonus Tip 2: Ask about future plans—delicately

Succession planning can be a sensitive topic for current community bank leaders. Some employees are uncomfortable talking about the personal reasons behind retirement, such as health or family matters.

When talking about retirement, steer clear of medical issues and putting any one person on the spot, says Doc Bodine, managing Director of Gerrish Smith Tuck Consultants and Attorneys PC in Memphis, Tenn.

Instead, ask a group of employees or board members about potential exits, reminding them that regulators need to know the plan. People will often volunteer information in a casual group conversation if they’re asked. Be sure to consult employment laws to avoid discrimination issues.

“I can’t tell you the number of times I’ve asked if anyone is thinking about resigning from the board or if an officer is thinking of retiring and someone says, ‘Oh yeah, I was thinking of not running for re-election,’” Bodine says. He recommends bringing in a neutral third party to lead the discussion, if necessary.

Kelly Pike is a writer in Virginia.