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FDIC Community Banking Conference
Strategies for Long-Term Success

Panel 4: Ownership Structure and Succession Planning

Moderator: Diane Ellis, Director, Division of Insurance and Research, FDIC

Panelists:

Transcript - PDF

Introduction

The most common form of community banking ownership structure is a closely held form, where ownership is concentrated within an identifiable primary group. In many cases, the key officer who exerts day-to-day control over the operations of the bank is also a member of, or affiliated with, this ownership group. This particular form of ownership and management structure may offer certain advantages to the bank in terms of aligning the interests of owners and managers and permitting it to pursue long-term strategic goals. At the same time, this organizational form could inhibit the ability of the institution to raise new external capital or to adequately provide for the succession of management and ownership over time.

Recent FDIC research shows that closely held community banks, where ownership and management overlap, have outperformed their peers in terms of standard measures of profitability and efficiency.[1] In practice, community bankers may use a variety of different strategies to structure their ownership and management teams to achieve these results. The two community bankers featured in this panel are cases in point. While one has depended on internal capital raises to weather adversity, the other has gone public to provide liquidity in its stock and raise funds for acquisitions. Both bankers have carefully cultivated the management talent and board experience that is needed to effectively operate their institutions.

Both closely held and widely held community banks face challenges with regard to succession and human capital development. The community banks represented on this panel have used a variety of strategies to identify potential future leaders for their institutions and to enable these individuals to gain the experience they will need to carry out these roles. Additionally, academic programs represent a promising avenue through which young professionals can gain the training and experience they will need to someday run community banks. Professor Sorin Sorescu described the partnership that has developed between the Commercial Banking Program of the Texas A&M Mays Business School and banks that have sponsored the program by conducting seminars and offering internships and post-graduate jobs to participating students.

To summarize, management succession and human capital development will remain areas of intense focus for community banks due to the prevalence of closely held management structures in this sector. However, there appear to be a number of different strategies for meeting this challenge. Therefore, further work in this area appears to be warranted.

Organizational Profiles

Mohave State Bank, Lake Havasu City, Arizona

Established in 1991, Mohave State Bank is the second-oldest and second-largest community bank headquartered in Arizona. The bank’s five branches are located in Western Arizona, approximately midway between Phoenix and Las Vegas. The core markets of the bank are in Lake Havasu City, Kingman, and Bullhead City, all in Mohave County. Mohave State Bank describes itself as a full-service bank providing deposit and loan products to individuals, businesses, and professionals in Mohave County. Most of Mohave State Bank’s shareholders are also its depositors and local customers. The bank has about $325 million in total assets and 77 employees.

Investors Community Bank, Manitowoc, Wisconsin

Investors Community Bank was established in 1997 by a group of four banking entrepreneurs who are well-acquainted with the dynamic business environment of this area. The bank is headquartered in Manitowoc County in Eastern Wisconsin, near Lake Michigan. Investors Community Bank is 15th largest by total assets (about $884 million) among more than 200 community banks headquartered in Wisconsin. The bank focuses primarily on agricultural and commercial lending. Investors Community Bank operates two branches and employs 102 people. The bank went public in 2015 and announced its first acquisition later that year.

Commercial Banking Program, Mays Business School, Texas A&M University

The Texas A&M Commercial Banking Program was created in 2009. The program provides a rich developmental environment by combining formal learning, industry experience, and professional mentoring. The program is designed to equip students with the best practices for a career in commercial banking. A key strength of the program’s curriculum is its ability to bring in executives to share their experience in the field of commercial banking. Over 100 bankers from 35 member banks in Texas and across the nation serve on committees that are engaged in the admission process, curriculum development, summer internships, student mentorship, and program events that bring together bankers and students. The program graduates about 30 students per year. Most graduates end up working in commercial banking for member firms of the program’s advisory board.

Research on Small, Closely Held Banks

Ms. Ellis noted that organizational and management issues are critically important to the success of community banks. She opened the discussion by noting that the ownership and management structure of community banks have historically been hard to measure and quantify. However, the FDIC recently undertook a research project to identify the ownership and management structure of community banks operating in 21 states of the central United States and estimate how their structure has been related to financial performance. Mr. Brown presented findings from this research.

The researchers surveyed FDIC examiners in the Chicago, Dallas, and Kansas City Regions on the ownership and management structure of over 1,300 community banks. They found that three-quarters of these institutions can be considered closely held by ownership groups that are frequently linked by family or community ties or both. Moreover, in over half the closely held community banks studied, the day-to-day manager of the bank was a member of, or affiliated with, the ownership group. Given the generally small size and closely held status of these banks, Mr. Brown said that he and his colleagues wondered if they might face special challenges associated with limited access to external capital and with incentives to pursue goals other than strict profit maximization. Their research showed otherwise. They discovered that closely held institutions in which ownership and management overlapped tended to outperform their peers in return on assets, even after controlling for other firm characteristics (see Chart 1).[2]

Chart 1 - Closely Held Community Banks Where Ownership and Managerial Control Overlap Have Consistently Reported Higher ProfitablilityD

However, the researchers found that succession was an issue for both closely held and widely held institutions. Only around half of the institutions in each group had already identified a successor to their current key officer, and substantial percentages of both closely held and widely held institutions were deemed to be not in a good position to attract managerial talent from outside their organizations. So while closely held ownership, and overlap between management and ownership, appear to be successful organizational structures, they could pose significant challenges when new managers must be put in place or when existing owners wish to liquidate their shares. These challenges put a premium on efforts by the bank to continually develop future leaders from within, as well as to devise strategies to pass the institution along to new owners when that becomes necessary.

How Bankers Address Ownership, Succession Plans, and Human Capital Development

Individual community banks meet ownership structure and succession strategy challenges in different ways. Mr. Riley explained that Mohave State Bank of Lake Havasu City, Arizona, stays continually focused on sustainability and succession. A number of the bank’s key shareholders are nearing retirement age, and there are questions as to whether the next generation of shareholders will show the same type of long-term commitment to the community and to the institution. Mr. Riley described some of the steps the institution has taken to address these concerns, including an ongoing share repurchase program and a strong effort in investor relations. During the Q&A session, he addressed a question about his bank’s capital raises during the recession. Mr. Riley described how the raising of new capital started with him, as President and CEO, and how the members of the board and the community then stepped up to support the bank and replenish its capital position.

Mohave has also taken a number of steps to address the issue of management succession. Mr. Riley is actively working to identify and develop possible successors from within Mohave’s current staff. While it can be difficult to attract new employees to a remote or rural area, Mr. Riley reported a degree of success in recruiting millennial-generation employees that has created what he described as “an unbelievably outstanding second tier of leaders.” Mr. Riley described some of these junior and mid-level employees as people who came to work for the bank after high school, and then moved up through the ranks, thanks to the bank’s training and development programs.

Mohave tries to identify specific career paths through which these emerging leaders can rise to management and executive positions. The bank has provided tuition reimbursement for several employees and has also sent some to banking schools. Emerging leaders are frequently given the opportunity to attend board meetings so they can gain a comfort level with making presentations and participating in the discussions. They also participate in a formal mentoring program and rotate among executive officers for three-month assignments.

Yet effective career development may also require employees to gain experience that they cannot obtain at their own institution. Mohave has addressed this need by offering “secondments,” or assignments at companies in other locations that expose employees to new experiences on the condition that they return and apply their knowledge at the bank.

Mr. Schneider was a co-founder of Investors Community Bank and became CEO in 2013. In a novel arrangement, the former CEO and Mr. Schneider served in “co-CEO” roles for two years. The former CEO took a decision-making role during the first year, and Schneider took the reins during the second year.

Investors Community Bank has implemented formal succession plans for its eight executive-level roles, as well as an internship program to address the challenge of attracting new talent. It also sends employees to a graduate school of banking.

One element of the bank’s succession planning process is a mandatory retirement age of 70 for its board members. To ensure that the board has a varied skill set that is matched to its business needs, Investors has adopted a formal board matrix and tries to use its succession and retirement process to see that any gaps in that matrix are appropriately addressed.

The bank’s 2015 public stock offering was part of an overall strategy to diversify beyond agriculture and to attract new talent to the bank. The offering facilitated an acquisition that same year that gave Investors offices in both Appleton and Green Bay. During the Q&A session, Mr. Schneider was asked how the public offering had affected the bank’s regulatory compliance burden. He explained that while compliance costs increased, these costs were more than offset by the benefits associated with making the bank’s shares more liquid.

The two community bankers among the panelists agreed that the problem of liquefying outstanding equity shares is a long-standing challenge in community banking, particularly among privately held organizations. Many community banking organizations reach a stage in their life cycle when aging shareholders begin to look for ways to cash out for retirement or estate planning purposes. In this sense, ownership succession can be every bit as challenging as management succession.

Academia’s Role in Developing New Community Bankers

Professor Sorescu described Texas A&M’s Commercial Banking Program, which provides selected undergraduates in the Mays School of Business with a concentration in commercial banking. The program was developed in response to requests by Texas bankers who wanted to fill a perceived talent gap in the community banking industry.

The program recruits students who have a strong academic background and an interest in community banking. It is sponsored by an advisory board of community bankers who visit the campus regularly to meet with students and to lecture. These lectures are important, Dr. Sorescu noted, because the board members can teach a range of practical skills based on their community banking experience. These lectures address topics such as evaluating unaudited financial statements and making lending decisions.

Each student is assigned an advisory board member as a mentor, and each student is provided with a summer internship with a participating institution. Dr. Sorescu noted that the internships frequently give the students an opportunity to be considered for full-time positions after graduation.

Most graduates of the program go on to work in commercial banking for one of the institutions represented on the advisory board, Dr. Sorescu said. The program’s success rests in large part on the ability of the board members to show participating students that community banking is a challenging and exciting career. While many business school students are initially attracted to higher-profile segments of the financial sector, such as hedge funds or investment banking, the purpose of the Commercial Banking Program is to provide students with a skill set that is well-matched to the needs of community banks in Texas.

The program faces two primary challenges—growth and diversity. At present, there is a larger supply of available internships and jobs than there are students motivated to concentrate in this area. There is also a desire to make the graduating classes more closely resemble a cross-section of the state population. In spite of these challenges, Professor Sorescu stated that the long-term goal of the program is to be the premier educational program in commercial banking not only in the state of Texas, but in the United States.

During the Q&A session, the panelists addressed a wide range of questions related to financial education and bank ownership structure and succession. Dr. Sorescu was asked why he thought other colleges around the country do not have similar commercial banking programs. In his response, he stated that while advancing knowledge in new and innovative financial areas remained an important mission for business schools, it should not be pursued at the expense of preparing students for a variety of real-world professions, such as community banking.

During an exchange with one of the audience participants, Dr. Sorescu explained that one of the factors that may have contributed to a talent gap for community banks is that larger institutions cut back training programs as their lending decisions became more automated, and as they sought to cut costs. Mr. Riley and Mr. Schneider also emphasized the notion that on-the-job training was an essential complement to formal education in the process of developing successful community bankers. Finally, Mr. Riley and Dr. Sorescu described how the preferred methods of communication among millennials tended to differ substantially from those used by previous generations. While millennials rely more on technology, their communication style is frequently described as being highly collaborative and empathetic.

Conclusion

The panelists agreed that the organizational and management issues are both complex and critically important to the success of community banks. Closely held institutions are prevalent among community banks, and the overlap between ownership and management at these institutions appears to contribute to their near-term success. Nonetheless, community banks face considerable long-term challenges associated with succession in both ownership and management.

Recruiting talent and training employees remain high on the agenda of community bank managers as they develop strategies for long-term success. While academic programs do not appear to be a substitute for the on-the-job training that community bankers continue to rely on, it appears that business school programs can play a larger role in developing the next generation of community bankers. A case in point is the Texas A&M Commercial Banking Program. A greater focus by U.S. business schools on commercial banking skills could help to demonstrate the appeal of a banking career to talented students and contribute to the long-term success of the community banking sector by addressing succession management challenges.


Footnote:

[1] John M. Anderlik, Richard A. Browm, and Kathryn L. Fritzdixon, “Financial Performance and Management Structure of Small, Closely Held Banks,” FDIC Quarterly 9, no. 4 (2015), https://www.fdic.gov/bank/analytical/quarterly/2015_vol9_4/article1.pdf.

[2] Ibid.