Published in Finance

Community banks show renewed focus on succession planning

BY Sunday, January 10, 2016 10:33pm

Dan Bitzer’s ascension to the role of president at First National Bank of Michigan followed a process that directors at the Kalamazoo community bank outlined years earlier.

Bitzer took over as bank president last month from Larry Lueth, who had held a dual role for nearly a year after assuming CEO duties in early 2015 from John Schreuder. The 67-year-old Schreuder, who founded the bank nearly a decade ago with Lueth, retained the role of board chairman.

Planned out well in advance, the succession process assured a smooth leadership transition for FNB of Michigan.

However, a succession plan is not something that every community bank has in place in the post-Great Recession era. In many cases, the process fell by the wayside for many community banks during the downturn as asset quality and balance sheet issues seized and held the attention of senior management and directors, said Rob Bondy, a partner at the Grand Rapids office of Plante Moran PLLC who works with community banks.

“For five or six years, it was about survival, not advancement,” Bondy said. “(Succession planning) was not even put on the back burner, but had been taken off of the stovetop altogether.”

That’s now changing. Lately, Bondy has observed a “significantly renewed interest” in succession planning among his clients, particularly as a generation of aging community bank executives starts to retire — or at least considers it — after steering their organizations through the financial crisis and economic turmoil.

“And it’s not just at the CEO level. It’s at every critical position,” Bondy said.


STRATEGIC IMPERATIVE

At the Kalamazoo-based FNB of Michigan, the eventual succession to new executive leadership had been on the minds of Schreuder and Lueth for years.

Five years ago, directors formally made succession planning a part of the bank’s strategic plan. FNB of Michigan started executing that plan a year ago when Schreuder transitioned CEO duties to Lueth and retained the role of chairman.

The process took another step in late 2015 with the promotion of Bitzer, who joined the bank in December 2011 as market president in Grand Rapids. Bitzer came to the bank with succession planning in mind.

A peer of Schreuder and Lueth throughout their careers, Bitzer was FNB’s senior lender and executive vice president prior to his promotion to president.

“As we were getting older, we saw that it was going to be an important issue going forward,” Schreuder said. “We are talking about life after Larry and I are out of the picture.”

Succession planning for the bank has since filtered into far more than senior management positions.

To remain a privately-owned and independent community bank, FNB needs to cultivate talent across the company, from entry-level positions to branch and credit administration to senior lenders and management, Lueth said.

“It’s ongoing and has been for a number of years now. We’re always having some discussion, some more in-depth or detailed than others. ‘OK, who’s the next layer of middle management? Who’s the next layer in our branch system that will step up as folks retire or leave the bank?’” he said. “It’s really not a topic or agenda item that ever gets taken off of the agenda.

“In my mind, we cannot let our foot off the pedal in terms of that pipeline of individuals to fulfill our growth opportunities.”
FNB of Michigan has three offices in Kalamazoo County and one in Grand Rapids with total assets of $406.0 million as of Sept. 30, 2015.


LACK OF SUCCESSORS DRIVES M&A

Unlike FNB of Michigan, not all community banks have been able to focus on the issue and plan out their leadership transition. That lack of succession planning has even played into a consolidation trend nationally among community banks.

In the 2016 bank M&A Survey by Bank Director magazine, 21 percent of respondents who sold their bank in the last three years cited CEO and executive succession as a primary reason. Among publicly-owned community banks, succession planning was a primary reason for 29 percent of transactions, according to survey results.

“It’s not unusual to see a bank sold because there is not a successor,” said Jack Milligan, editor-in-chief at Bank Director.

Nearly one in 10 respondents to the publication’s compensation survey also cited succession issues among their boards of directors during the three-year period as a primary reason for a sale.

In another survey last year by Bank Director, more than one-third of respondents said that developing a succession plan was a top compensation issue, and 61 percent indicated retirements drove the hiring of new executives during 2014.

The issue is more acute at small community banks than at their larger competitors that are much more likely to have extensive career development and executive training initiatives in place, said Plante Moran’s Bondy. Smaller banks tend to lack the resources and financial ability to run such an ongoing effort, he said.

“Community banks are still managing a pretty thin organization from an organizational standpoint,” Bondy said. “It’s a lot harder for them to have two or three or four people in a seat for succession.”

While the need for succession planning is obvious, doing it well is not easy, Milligan said. For one, it requires a lot of time and effort by directors and the willingness of existing executives to help plan for the transition to — and in some cases the grooming of — their successor, he said.

If a community bank has a CEO with a strong or “larger than life” personality, that individual may not always want to participate in a planning process to identify a replacement, Milligan said. Other times, the opinions of those executives may not completely align with the bank’s directors on when their eventual departure should occur, he said.

“When you see successful succession planning, it’s when the CEO and the board are both equally committed to it and spending a lot of time on it,” Milligan said.


INTERNAL CANDIDATES ENSURE CONTINUITY

That process typically begins by identifying a potential in-house candidate that the bank can put on a career path toward senior management. If not, the directors need to go out and hire a lead executive.

When Sparta-based ChoiceOne Financial Services Inc. began formulating a succession plan five or six years ago, directors decided to look not just internally but externally for candidates “to make sure we didn’t miss anything,” said CEO Jim Bosserd. They ended up finding their candidate in-house in Kelly Potes, who in June 2015 was promoted to bank president and appointed to a seat on the bank’s board of directors.

Potes, a 30-year industry veteran, previously served as senior vice president of retail services and general manager of ChoiceOne Insurance Agencies Inc. He is positioned to succeed Bosserd.

That ChoiceOne directors selected an internal candidate after a process that included looking externally means “we were probably doing some of the right things” already in preparing for the future, Bosserd said.

While the process can become time-consuming, not properly planning for leadership transitions can result in having to go outside of the corporation for a new CEO, potentially generating problems in the continuity of the operation, Bosserd said. In Potes, he said, ChoiceOne has a “well-rounded” executive who has spent a good portion of his career with the bank.

ChoiceOne directors began succession planning several years ago “because they didn’t want to be blindsided” when they needed to seek a new chief executive, Bosserd said. Community banks, or all businesses for the matter, need regularly to consider the question of “where does the next generation come from,” he said.

“Succession planning is something you have to work on continually,” Bosserd said. “Time marches on quickly. You always have to keep it on your mind.”

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