When bankers discuss succession planning, they typically consider the most senior positions — president, CEO and other C-level officers. But one of the most critical positions on an organization’s staff is the senior lender, and the shortage of senior loan officers is reaching a critical point.
Experienced lenders are more difficult to recruit and retain than it might seem. Quality training programs for senior lenders are few and far between. The lack of formal training, coupled with the relative inexperience of today’s lenders, creates a particular challenge in succession. Many banks believe that because they have loan officers with 10 or 12 years’ experience, their succession is set. However, consider that those loan officers have yet to experience a down credit cycle. Because of the booming economic times of the past decade, many lenders do not have the requisite experience to fill the role of senior lender.
Until these mid-level lenders have experienced a downturn in the credit cycle, the number of bank officers qualified to fill a senior lending position will continue to be low. The only “fix” for this lack of experience is unfortunately an actual economic downturn, which most economists agree is approaching to some degree. Historically, when there is a negative difference between Fed funds and 10-year Treasuries, a recession is likely to occur within 24 months. Currently, we are facing that negative differential. Consequently, some of the mid-level lenders are going to gain that requisite experience in the near future.
But at what price? Facing an economic downturn with inexperienced loan officers is a risky prospect. Creating effective succession and mentoring plans for mid-level lenders can mitigate some of that risk.
Every bank should have a succession plan that encompasses the entire organization, beginning with the most senior officer. Part of the problem is that many CEOs are reluctant to implement succession planning because it inherently implies their own removal from their current positions.
But consider these facts: The average age of a bank CEO is 56, and at the top 40 banks in the country, the average is even higher at 58. However, in corporations outside the financial world, the average age for a CEO is just 51. Banking, then, is a relatively “old” industry. In addition, corporate governance dictates that a CEO should not be in his or her position for more than six years, and the average community bank CEO has held the position for between 15 and 20 years. These statistics indicate that the community banking industry as a whole is facing some relatively significant turnover at the CEO level, and the most common successor to the CEO is the senior lender. Without succession planning in the lending function of the bank, organizations end up losing their senior lenders to another position without a properly trained individual to assume the senior lending role.
Implementing succession planning
A simple definition of a succession plan is a matrix of individual career paths that chart the short- and long-term prospects for each individual officer at the bank, and ultimately for the entire organization. A succession plan will provide detail for each individual’s career continuum, including what kinds of positions they may be qualified to assume and what training they will need to get there. Regular performance assessment should tie into that career path.
Community banks should structure programs that allow for the most senior officers at the bank, including existing senior loan officers, presidents, chairmen and retired lenders, to mentor those mid-level lenders through this upcoming economic cycle. Such mentoring relationships will not only mitigate the potential risks of problem loans, but they will also provide some much-needed leadership for tomorrow’s senior lending officers.
Lending succession plans must include pay for performance components. Larger banks with experienced lenders are creating compensation for their lenders that will retain them. In addition to providing competitive and incentive-based pay, financial organizations should either take advantage of existing credit training programs offered by various universities and associations or create an internal training program that fosters lending knowledge, experience and growth.
The bottom line
Inside the dark cloud of an impending economic downturn is this silver lining: today’s mid-level lenders will gain some much-needed experience at managing problem loans. So although we face a few years of problematic
Geri Forehand is director of strategic services for Brintech in Atlanta, Ga., and is a certified professional consultant to management. He can be reached at 800-929-2746 or GForehand(at)Brintech.com.
Copyright 2006 by Western Banking (BankNews Publications)