It's a Family Affair - Jeff Bagby
It's a Family Affair
by Jeff Bagby, Regional Examiner, Oklahoma State Banking Department
Thanks Dad. Thanks Mom. No, I'm good. You just enjoy retirement and leave all the heavy lifting to me. There can't be anything to it, really. A little new blood in the driver's seat will be good for the bank. Trust me. Your life's work is in good hands. First, I'll make myself Chairman with a nice salary, the corner office, a country club membership, a new company car, expense account, ?..
The family owned bank. The institution's history and success forged over several years, decades in many cases, is passed on to offspring who by virtue of their birth now control the destiny of the family business. This is not a new concept. Parents have bequeathed businesses and assets throughout history. No sane person would expect any less. Who hasn't wished at one time or another that their dad would have owned a whopper company so they could enjoy unrestricted monetary pleasure when Pops went the way of all flesh.
There are unique issues at play for banks however, and they call it the government. Getting your government involved back in the 1930's was a two-edged sword for banks. It established an insurance net for depositors, but it also dramatically increased regulators' authority to dictate how banks are run. Now Junior can't just take the keys to the family fortune and run it into the ground without grappling with regulators on the way down.
IN THE BANKER STORE
Years ago, we supervised a bank that was effecting the generational change. The banker that had developed the institution from total assets of a few million dollars to becoming one of the largest banks in the community was ready to retire. To prepare for his departure, the banker brought in his son to "learn the business of banking". The son had been in computer sales prior to returning to the family business and the role of incoming leader.
To the bank's detriment, the father quickly entered into a semi-retired state only following the progress of the bank through monthly Board meeting data and periodic conversations with the son. Strike One.
Unbeknownst to the father, the son proved his primary skills remained in computers and not in running a bank. But even those skills were suspect. While he was proficient at solitaire, the son also supervised a complete computer system crash at the bank. What's worse, it was during an examination. The son applied this same work ethic to banking and the deteriorating slide was on. This environment fostered resentment in the employees due to the son's inability to recognize policy and procedural weaknesses that had developed. Also, the bank's chief lender had become reckless in his credit administration largely because the son offered no recognizable oversight. Strike Two.
With the addition of overzealous examiners, the bank quickly found itself in a quandary. Capital was at critical levels and management did not have the instinct, initiative, ingenuity or deep pockets to dig its way out of the mess. Strike Three.
Other transitional banks have not reached the critical stage . . . yet. In days gone by, Bank B was commandeered by an aggressive manager who exploited a niche that brought success over two decades. His untimely death left a significant void in bank management and created uncertainty whether the family would retain ownership. Not to worry. The recently departed president had offspring that were eager to fill his shoes regardless of training or experience which was little or none. The children took over the bank because they could. Flamboyant spending for "marketing" purposes is now the norm for a few, and the Board approved trust preferred securities to supplant exorbitant dividend payments to the controlling family. When good, long-term employees are replaced by operatives that better fit the philosophical direction of the young owners, the potential for trouble will rise exponentially.
Not every bank is accepting excessive risk when handing the institution off to their children. One thing that appears to be a constant is that the individual who grew the bank out of scratch has elected not to simply drop it into the lap of the child. He or she retains an active role in the bank while allowing the offspring increasing amounts of authority - which is equally offset with increased responsibilities. This permits the younger manager to develop their skills under a wise, watchful eye and it sustains the rank and file employee's trust in the quality and longevity of the institution (translation: the boss isn't going to let that yoyo ruin the bank, therefore I won't lose my job).
Any bank's risk profile is indelibly tied to the status and quality of management. Regulators will always be on edge when a son or daughter is bequeathed the lead position in the bank until that person proves their moxie. Either way, it takes time. Time under authority, or time under fire. But that's a family decision.
Jeff Bagby is a Regional Examiner with the Oklahoma State Banking Department. He has spent nearly 20 years in bank regulation which includes a wide spectrum of knowledge and experience. In the early part of his career, the banking industry in the central region of the United States endured its most devastating era since the FDIC was established bringing with it numerous bank closures. In addition to writing examination reports and working with bank management, Jeff teaches Loan Officer Seminars which is aimed at revealing to bank lenders how and what an examiner looks for when reviewing loans.
Jeff received a B.B.A. from the University of Oklahoma in 1985 and is a graduate of the Conn Graduate School of Community Banking.
First published on BankersOnline.com 08/10/05
print
share