Step-by-Step Succession Planning for Community Banks

One of the most important duties of a community bank’s board is developing a plan for how to select and transition to a new CEO.

“It’s the single most important responsibility of a board of directors to make sure they identify the strongest and most appropriate leader for the next phase of the bank,” says Alan Kaplan, founder and CEO of Kaplan Partners, a retained executive search and board advisory firm in
Wynnewood, Pa.

Deciding the future leadership of your community bank can feel daunting—or even unnecessary if your current CEO is happy and successful in their position. But your bank’s future depends on having a workable plan in place for the inevitable time when your CEO steps down.

Here’s a step-by-step playbook to help your board craft and execute a viable succession plan.

1. Start early

When management teams don’t plan for succession, they may be forced into a reactive mode with limited time to make decisions. Instead, you should think of succession planning as a long process that allows for thoughtful consideration, says Brad M. Bolton, president and CEO of $183 million-asset Community Spirit Bank in Red Bay, Ala., and immediate past chairman of ICBA.

For example, nearly a decade before Preston L. Kennedy retired as president and CEO of $361 million-asset Bank of Zachary in Zachary, La., he had his eyes on a would-be successor: Mark S. Marionneaux, who was working for another bank at the time.

“He was a very personable young man, his wife was a pharmacist, his family was well-known in the community and he was very involved in their children’s school activities,” says Kennedy, who is also an ICBA past chairman. “For a community bank, all that means something.” 

Realizing Marionneaux’s potential, Kennedy hired him as a lender, expanding duties throughout the years with the goal of him eventually becoming the bank’s next leader.

You may well have a rising star who can be groomed for the top job. But don’t be afraid to look outside of the bank’s current emerging leaders.

“Board and management must think and meet with consultants who are there to support the bank for the long term, not just to meet to advocate to sell the bank.”

–Brad Bolton, Community Spirit Bank

“Just having the right people is tough, because a lot of community banks are having difficulties these days in attracting and retaining talent,” says Greyson E. Tuck, president of Gerrish Smith Tuck Consultants and Attorneys in Memphis. “It’s not uncommon for a community bank to go outside the bank for a successor.”

2. Decide the future of the bank

“The first thing I would say to people [is], ‘What’s the business plan and the timeline for succession?’” Kaplan says. “The decision of whether or not to sell the bank needs to be put in context of the strategy for the next few years.”

If your community bank decides to remain independent, choose a consultant who has a track record of providing a way for banks to do so, Bolton recommends. “Board and management must think and meet with consultants who are there to support the bank for the long term, not just to meet to advocate to sell the bank,” he says.

Then boards should consider establishing an employee stock ownership plan (ESOP), KSOP (a 401(k) combined with an ESOP) or some other mechanism that can reward current leaders while setting up future leaders with a potential path for ownership interest, Bolton says.

3. Assess potential candidates

“I believe really strongly that strategy informs profile,” Kaplan says. “Where the bank is heading determines the profile of the next CEO of the company.”

While your board may desire to “clone” the existing CEO, that person’s skill set may not necessarily include the skills needed to take the bank to the next level, he says. For example, a bank furthering its digitization strategy may need a more tech-savvy leader. In addition, all banks increasingly need someone well-versed in enterprise risk management, a more holistic view of mitigating risk across the entire organization.

When assessing potential would-be successors internally, bank boards often run a search for professionals outside their institution to have candidates for comparative purposes, Kaplan says.

Having industry experience and ties to the local community are always desirable traits for a CEO, but any next leader should be “sincere, reliable, compassionate and holistically caring—more interested in the group than they are in themselves,” or else the bank’s future could suffer, says C. Phillip Buffington Jr., community bank team leader and partner at the Jackson, Miss., office of Adams and Reese LLP.

4. Prepare would-be successors

Gradually give would-be successors more responsibilities, particularly in areas of the bank in which they have little to no prior experience, Tuck says.

“If they come from the operations side of the bank, they may need experience in lending and also working out some problem credits,” he says. “The loan portfolio is a bank’s biggest asset and also greatest source of risk, so the individual definitely needs to get experience there.”

At the Bank of Zachary, Marionneaux gradually took on more responsibility both across the organization and on projects in the community to gain more visibility, Kennedy says. “It became clear to people in and out of the bank that he was going to be the next leader.”

5. Clearly communicate your plan

It’s important that your plan is transparent for both employees and customers, Buffington says.

“If you’ve got a strong CEO who's been there for a long time, people look at that individual as the bank and wonder how you're going to replace that person,” he says. “You need to show that you’ve got longevity and that institutional knowledge is not going to be lost.”

That’s one of the biggest things that Kennedy and Marionneaux got right, the former says.

“At many banks, it’s just presumed that a particular person would succeed, but if it’s not expressly communicated, there can be misunderstandings, confusion, hurt feelings and a lot of times separation, and that’s no good for anybody,” Kennedy says. “But we actually talked about it—timelines, mileposts—and we talked about it frequently.”

6. Update your plan regularly

“You can have the greatest plan in the world in 2023, but if by 2024 you’re just resting on your laurels and haven’t gone back and looked to see if it needs modifications, then it will get outdated,” Buffington says. “There are going to be changes not only from a human capital standpoint but also technology changes—things you didn’t address initially but now you may need to address to make sure you have the right people in place to manage those changes.”

Community banks need both a “normal” succession strategy and an emergency succession strategy, Tuck says. They should not only identify someone who can be groomed long term to eventually take the reins but also someone who could immediately take the reins if the CEO suddenly leaves, even if it’s a temporary role.

“We had a few surprises the last few years, and fortunately we were prepared. In one case, we identified where technology could be a factor in the replacement, along with elevating two employees.”

–Kathy Underwood, Ledyard National Bank

At $742 million-asset Ledyard National Bank in Hanover, N.H., senior managers are asked to give a two-year notice, if possible, though circumstances sometimes change their plans, says Kathy Underwood, CEO of the bank.

“We had a few surprises the last few years, and fortunately we were prepared,” Underwood says. “In one case, we identified where technology could be a factor in the replacement, along with elevating two employees. In more than one case in senior management, we had to go outside, which is not unusual in a bank our size. But we are fortunate that our culture is one that is attractive to candidates, and we can’t underestimate how that helped us bring in top‑notch talent.”

7. Plan for the transition

Bank of Zachary’s original plan was for Marionneaux to become president while Kennedy remained CEO for two to three more years. But they learned from a bank consultant that such a transition should never last more than a year, as it could lead to staff confusion and the possibility of conflicts, Kennedy says.

Instead, he transitioned to president emeritus, just offering advice, but that arrangement became virtual due to the pandemic shutdowns. By the end of 2021, Kennedy had retired altogether.

“One thing a lot of outgoing CEOs don’t get right, but it is common sense, is to take less compensation when you’re taking less responsibility and the successor is taking on more responsibility,” he says. “If the outgoing CEO is making fewer decisions, they should be paid less. That’s fairer for everyone concerned.”

Moreover, during the transition period, boards need to support the incoming CEO’s decisions, even if it’s not what the outgoing CEO would do, Buffington says.

Tuck adds: “Unless you think the new direction is really just wrong—if they are just going to walk you off the cliff—deference needs to be given to the new individual’s decision. If you undermine the person that you charged with this responsibility by deferring to the former CEO, then the new CEO will think they were just put there to be a figurehead.”

Sometimes a clean break is best, so there’s no misgivings about who is in charge, he says. The board must decide how the bank will make the transition in a way that is the least disruptive and the most beneficial.

Kennedy agrees that if the outgoing CEO does stay on for a while, they should not second guess the replacement. “If you’ve hired the right person, you’ve got to let them make their own decisions, and if they do things differently than you, do not carp, throw stones, roll your eyes or any other thing that would undermine their authority,” he says. “A CEO transition is a new day and a new relationship.”