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How upcoming merger wave will hit credit function in community banks

Will the leaders and the lenders be right for the jobs?

What will credit leadership look like in your bank a year from now? In five years?

In recent months I've developed a sense, from conversations with bankers, that there is considerable merger activity among community banks likely to occur in the next year or two. Some of this is due to the "fatigue" of the last few years. Some is due to the realization that in many locales, there is too much capacity for all the current players to prosper as they would like.

This means considerable dislocations for some people ... and for their customers. This is a facet of the process of "creative destruction" inherent in all capitalistic businesses.

What I've been thinking about, though, is the sometimes unproductive results of new management. This often rears its head when management is not local, and is bringing in its own people and thereby denying staff of the acquired institution any opportunity for one of the top jobs that results post-merger.

When the "golden boy" clunked

I faced this situation myself several years ago as the new outside CEO. Within a few weeks, I had what I considered reliable information from a couple of astute directors that the official staff was generally very good. But, in addition, I learned that they had not been managed very well through the turbulent months preceding the management change.

My own quick assessment was that there were three senior people who had to go. Firing them would be both for their own good and the bank's good. And that I would only need to replace one of them.

• Mr. Going Any Day Now. One was a long tenured senior manager who had been talking of retirement for a couple of years. I simply accelerated his timetable.

• Mr. Personality. Another was a young EVP who was either loved or loathed, depending on one's view. Regardless of competence, I wasn't about to tolerate a divisive personality during the delicate time of rebuilding. So he was invited to find work elsewhere and he soon enough did.

• Mr. Betwixt and Between. The third person, a very senior middle-aged officer, was in a painful situation. I felt that he got caught in a grinder between the regulators and the directors.

I'm sure he felt he was just doing his job. But in the process he had managed to please no one for months prior to my hiring. He was fully competent, yet had managed to wear out his welcome through no direct fault of his own. I couldn't help that, though I resolved to soften the financial impact and did.

The one replacement hire that I had to make was the senior lender. I honestly had no one that I wanted to seriously consider from my previous. The couple of really good candidates I might have brought along were set better than I could have assured them.

So we went on a national hiring search, though the ownership family wouldn't authorize a fee-paid "head hunter."  That was OK with me, as senior jobs in banks the size of mine were often successfully filled by ads in the national financial press.

However, a wrinkle came. The family had talked to a candidate from out of state who had been referred to them by a customer and they liked him. I met with the fellow and was not as impressed as the family.

In fact, I concluded that the fellow was a bit of a "legend in his own mind."

I dug in my heels and this proved the first of several confrontations about who would ultimately decide on the next senior lender for the bank. One day one of my directors stopped by my office, closed the door, and gave me wonderful advice.

"Stick to your guns. Present to the board the candidate that you want. We'll support you."

I did just that and ultimately prevailed a couple of months later with the hiring of a very well qualified 45-year-old from a large bank in New England.

Lessons learned, painfully

Happy ending? Unfortunately, not quite.

Unfortunately, the New Englander was a disappointment.

He was qualified and fit the part as if he'd been sent from central casting. What I didn't appreciate, and probably could not have anticipated, is that within a few months he had run afoul of two important internal control mechanisms: the head of credit administration and the manager of the central loan closing unit.

There were a couple of enormously important lessons I learned.

1. No job can be about personalities.

We're all paid to get along with our coworkers. If we can't, we're not earning our pay. It's as simple as it sounds.

2. Disagreements were one part professional differences of opinion and nine parts clashes of egos and personalities.

A sound credit culture rests on a basis of rigorous enforcement of internal controls. There's no room for outsized egos compromising any of that.

And so my basic moves flowed from that conviction.

Tolerating that as I did for a while was my fault but strict justice would have required three terminations and that was three more than I wanted and two more than I needed.

How a hot-shot flopped

Not very many months ago I was contacted about an expert witness job in a nearby state. The longtime president of a conservatively run bank retired and was replaced by a "hot shot" 43-year-old lender from one of the bank's upstream correspondents.

The new man brought in two colleagues from his old bank and set about to aggressively build the loan portfolio by organic growth.

The year was 2005 and so you can probably imagine what happened.

The loan portfolio grew too fast and in somewhat new and less familiar business lines. When the local economy stumbled it was very hard to regain both a balanced book of business and the lenders' equilibrium.

The bank didn't fail, but it was forced into a highly dilutive recapitalization by the regulators. The big losers were the stockholders who lost a lot of paper (yet real enough) equity. The new fellows lost their bonuses; not their jobs.

The harm was tangible. But the makings of a sustainable lawsuit was pretty slim.

A picture of your future

We are entering into a period where unvetted newcomers will be common in the C-suites of many community banks in the next few years.

It's not that nobody knows the new people and is unable to give solid references. But it's hard-to-impossible to judge interpersonal relationships and fidelity to internal controls in advance.

Bear in mind the stories I've told about the lessons I learned. I don't particularly like them although I was the prime beneficiary. Usually, the new people are basically unvetted and their behaviors and ultimate success are very hard to gauge accurately.

That's a big risk to take on top of the risks many banks have absorbed and paid for to get to that point in the first place.

If you don't like the potential outcomes, do something now to strengthen your internal talent pool.

When the closing date with the new owners has been set, it's too late.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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