CEO Succession at Rural Banks

The replacement of baby boomers retiring from rural workforces is discussed sometimes in terms of “how to keep ’em down on the farm.”

“Employers in small towns and rural [areas] … face the challenge of replacing a wave of baby boomers approaching retirement as a burgeoning number of younger residents leave rural areas,” according to a recent newspaper article. “The number of people leaving these areas continues to grow.”See McMullen.

A different picture, however, emerges in data showing that workers in urban and rural areas, as percentages of total populations, are similar across all adult-age brackets—except for those in the oldest bracket of 60 to 64 years old, in which rural workers are underrepresented. This creates an apparently anomalous juxtaposition of a migration of younger people from rural to urban areas and a rural workforce that in some respects is young, relative to urban workforces, within older age ranges.

We examined this anomaly using the banking industry as an empirical laboratory. Our analysis focuses on the ages of incoming chief executive officers (CEOs) at rural commercial banks. The people we are looking at, in other words, are those who are brought in to “run the farm” rather than those who are brought in to work on it—that is, the newcomers are older. But are they older or younger in rural areas than in cities? And, perhaps more importantly, have they been growing even older, or younger, over time?

CEO Succession in Banking

Banking is a prominent example of an industry with perceived problems in attracting workers to jobs outside cities. Management succession was a topic at two recent conferences on community banking, one sponsored by the Federal Deposit Insurance Corp. (FDIC) and the other by the Federal Reserve System and the Conference of State Bank Supervisors (CSBS).FDIC Community Banking Conference (spring 2016) and the 2017 Community Banking in the 21st Century Research and Policy Conference (Federal Reserve Bank of St. Louis and the Conference of State Bank Supervisors [CSBS]). Bankers at these conferences cited difficulties in attracting new employees to “remote or rural areas,” with one banker declaring that “our best high school graduates are going off to college, but they are not coming back.”

Banking also is often seen as a bellwether of local economic activity. And although banks do not typically employ a lot of people—the entirety of the financial sector, of which they are a part, accounts for only about 5 percent of rural employment—the industry is still meaningful if only in comparison to the agricultural industry, which accounts for less than 10 percent of rural employment.See U.S. Census Bureau, American Community Survey 2011-2015.

To conduct our analysis, we obtained data from S&P Global Market Intelligence’s banking database. The data set, originally created and maintained by SNL Financial as part of its coverage of mergers and acquisitions in the financial sector, contains more than 55,000 observations on individuals serving as officers at U.S. commercial banks.

From this database, we identified the ages of 981 incoming CEOs, from 1997 to 2016. We break out these hires by bank location (rural versus urban) and date (through 2008 versus after 2008). Our sample consists of CEO replacements at 313 urban banks through 2008, 519 urban banks after 2008, 94 rural banks through 2008 and 55 rural banks after 2008.Our conclusions regarding ages of rural and urban CEO replacements must be qualified by a sample that is very small relative to the industry. (See Table 1.)

Table 1

Ages of Incoming CEOs

SOURCES: S&P Global Market Intelligence and authors' calculations.

In the period through 2008, the mean age of incoming CEOs at rural banks, 62.9 years, exceeded the mean age of their counterparts at urban banks, 61.4 years. The difference, of 1.5 years, was statistically significant, but only at the 90 percent confidence level. This suggests that age-related hiring outcomes in the replacement of rural and urban CEOs were not radically at odds in this earlier era.

The mean age of incoming CEOs dropped after 2008 for banks in both rural and urban areas. The decline for rural banks—from 62.9 years to 54.4 years, representing a change of 8.5 years—was larger than for urban banks—from 61.4 years to 58.1 years, representing a change of 3.3 years. (The differences in ages for both rural and urban banks in the latter period, compared with their respective ages in the prior period, were statistically significant at the 99 percent confidence level.) The mean age for rural banks in the latter period, 54.4 years, was now less than the mean age of their counterparts at urban banks, 58.1 years. (This difference also was statistically significant at the 99 percent confidence level.)

We concluded that the age-related hiring of all banks changed over time: Incoming CEOs got younger, and they were even younger at rural banks relative to urban banks. The average age of incoming CEOs at rural banks was higher than the average age of incoming CEOs at urban banks through 2008, but was lower afterward.

Our findings appear to be inconsistent with a belief that, across all industries and all levels of employment, rural employers are increasingly unable to hire relatively younger workers. It is consistent, on the other hand, with a lower percentage of rural, relative to urban, workers in the demographic category comprising 60- to 64-year-old workers. Among older workers, those in rural areas are relatively younger.

The relative “youth” of rural bank CEOs may convey advantages in energy, risk-taking, creativity and familiarity with new technologies—all of which may mitigate delays in the implementation of banking technologies in rural areas that were observed in a previous article in the Regional Economist.See Dahl, Meyer and Wiggins. It also may serve as a harbinger of progress made in overcoming a long-discussed resistance to the adoption of new ideas in rural areas.

Explanations for younger hires at rural banks are tantalizing to consider but difficult to document. From this perspective, we acknowledge that the differences we observe between rural and urban banks, using univariate comparisons, are unable to specify underlying rationales. They are capable only of identifying a trend observed only at the highest management level and only in one particular industry.

There is one potential factor, however, worthy of further attention: What if the decisions of boards of directors at rural banks to increasingly hire younger managers were imposed rather than made voluntarily? Rural banks may prefer more-experienced (older) managers but, because of their small size, may be unable to offer salaries that are competitive with those offered by larger banks in cities. This may have become more pronounced over time with increases in executive compensation.

We examined this issue by creating subsamples of smaller and larger banks within which comparisons of urban or rural location can be more narrowly drawn. Smaller (larger) banks are defined as having less than (more than) $500 million in assets at the end of the year prior to the year of CEO replacement. We assumed that financial constraints on hiring are similar within each group.

Results presented in Table 2 are consistent with those previously reported: Regardless of size category, the average age of incoming CEOs at rural banks is lower than at urban banks in the period after, but not before, 2008. This appears to suggest that the increasing reliance on younger CEOs at rural banks is not predicated solely on compensation limitations.

Table 2

Ages of Incoming CEOs, by Bank Size

SOURCES: S&P Global Market Intelligence and authors’ calculations.
NOTE: Assets are expressed in millions of dollars.

Conclusions

We provided evidence of a generational shift over the past 20 years, from older to younger in the replacement of bank CEOs. Our key finding is that this shift is amplified among rural banks. It suggests that it may be possible to keep relatively younger people down on the farm—at least if you make them CEOs.