Personalized Strategic Plans
To manage board and shareholder expectations, design a strategy that fits the unique composition of your institution

Balance sheets are healthier than they've been since pre-recession years, yet earnings remain stubbornly elusive for most financial institutions. In some cases, the challenge of achieving high-performance in a banking landscape that features persistently low rates, extreme regulatory burden, and intense competition on multiple fronts creates friction in the board room. If bank management, directors and shareholders don't share expectations for the bank's performance, time and energy will be wasted on efforts that don't drive the institution toward that unified goal. The bank's strategic plan is more important than ever as it serves as the bedrock and written understanding of that shared vision and the steps to achieve it. In order to maintain buy-in with the strategic plan over the course of its three- to five-year life, the plan must reflect the unique perspectives and priorities of the bank's shareholders, directors and management.

Start with a Shared Strategy

The best – and perhaps only – way to keep management, directors and shareholders on the same page as the institution moves into the future is for all three stakeholders to start with the same goals, risk tolerance and vision for the bank. The strategic plan can be a powerful tool in clearly defining those elements, especially when all parties do not have the exact same vision. "You don't need 100 percent agreement, but you do need 100 percent buy-in," said Thom Back, senior manager at Wipfli. Ken Johnson, principal of Ken Johnson Consulting, recommends all bank directors participate in an anonymous questionnaire prior to the strategic planning process; not only does this demonstrate how the board as a whole feels about the bank's current situation, but it also allows for discussion of any items where there is a large discrepancy. "It's helpful to have everyone grounded to what others' perspectives are," Johnson explained. "That starts you off in the same place and helps you set realistic goals."

In drafting the specifics of the strategic plan, management must balance the board's performance goals with the institution's clearly defined risk tolerance. "You have to ensure that there's a balance between growth desires, capital levels, and dividend targets and understand which of those goals is the highest priority," said David Koch, president/CEO of Farin & Associates. On a more granular level, Cass Bettinger, president of Cass Bettinger and Associates, explained that strategic planning should involve the board setting a target return on equity range and capital ratio based on the bank's risk management strategy, which then enables management to calculate what the bank's target return on assets must be. It is essential for management to have a crystal clear understanding of the board's risk tolerance in order to successfully balance that equation. "If the board and management work together on that basis, at the end of the day you'll have a strategic plan that is very clear about what it's designed to produce for shareholders and what all the objectives and strategies are," Bettinger said. 

Ultimately, both the goals and risk tolerance of the bank are guided by the directors' shared understanding of the institution's mission, which should be defined with input from directors, management and shareholders. "Good strategic plans are about a lot more than just the numbers," said Elliot Berman, principal of Bowtie Advisors. "There needs to be a strategic planning process, not just a budgeting process," Berman continued. "The board should get involved at the front end of that process. At the outset, they need to provide a high-level sense of direction for management, and at the end need to approve the plan."

Understand Your Key Stakeholder Groups

While each bank has a unique composition of key stakeholders, most have three main groups: directors, executive management and shareholders. All three contribute different perspectives and skillsets to the creation of the bank's mission and the strategic plan built on that mission. Directors connect shareholder interests with management's tactics by guiding the institution at a high level. "It requires business acumen and understanding to lead the organization toward a vision that will improve the financial performance of the bank," Johnson explained. The board's role is also to use their business acumen and leadership abilities to represent the shareholder's interests. "The board's responsibility to shareholders for strategic planning is the single most important responsibility the board has," Bettinger pointed out. Paying attention to increasing shareholder value can help mitigate investor dissatisfaction with the bank's performance as well as provide management with actionable guidance. "Management gets the most out of the board when they spend 70 percent of the time looking forward," said Berman. 

Management's role is to convert the board's vision for the institution with the specific tactics bank staff will need in order to accomplish that mission, as well as to ensure that the board is properly equipped to guide the bank. "Understand the strengths, skills and relationships that each director brings to the table," said Koch. "Strengths-based management is key to a successful, engaged board." The CEO needs to be the driver in aligning the expectations of directors and shareholders to the bank's performance. "The strategic planning process has to engage the board and management, working together to fulfill the mission of the bank," said Bettinger. The best way to accomplish that, according to Johnson, is for the CEO to ensure that the bank's strategic planning process includes the right people and the right information. "It's not easy, but the CEO is the one who is charged with organizing it," he said. 

Part of ensuring the right people are included is cultivating a thorough understanding of the bank's shareholder base. "The board and management need to have an understanding of what their shareholder base is looking for, because that will influence the strategic plan," said Mark Koehl, CPA, partner at Wipfli. "Knowing the shareholder group is key to helping the bank's plan be successful." It's unwise to generalize with shareholders, and each bank will have a unique mix of investors depending on its size and ownership structure. However, there are a few categories of shareholder that many banks share: 1) mature shareholders who may be nearing retirement, and therefore are looking for dividend growth and liquidity, but also community involvement; 2) second- or third-generation shareholders, who may no longer be based in the community and therefore are primarily interested in earnings per share growth and return on equity; 3) mid-life investors who may feel disillusioned with community banking due to current political and economic headwinds, and therefore wish to maximize the bank's sale price and look for a partner. 

In addition, from each of these groups (or others that exist at your institution), sometimes activist investors arise. Between 2012 and 2014, only 8 percent of SEC filings showing at least 5 percent ownership and "activist intent" came from financial institutions. However, in 2015, that jumped to more than 17 percent. "Activist investors see the value of the bank differently than the board and management," Back said. "It doesn't translate to 'wrong,' they just have a different vision for the bank." The best way to prevent this dissonance is through consistent and clear communication between all stakeholder groups. "Activist investors make noise either because they see a financial opportunity being missed or because they care about the bank but feel like they aren't being heard," Koch explained. "Shareholders need to feel that the strategic plan reflects their needs and their input and their priorities, and the only way to do that is to engage them in the process," Bettinger agreed.

Keeping In Step

Communication and transparent monitoring are the two essential drumbeats that management should use to keep all stakeholders in step for the duration of the strategic plan. "Transparency is a very key aspect," said Back. "Not transmitting exactly what your intentions are can sometimes paint you into a corner worse than laying out the plan. It also maintains trust, which is critical." Koch also said transparency on the key goals and objectives of the plan should be a top priority. "Senior management's role comes down to consistent positive messaging with the board and staff," he said. "There's no magic there, just understanding the audience and being honest, and if the message isn't positive speak to what can be done to turn things around." Another part of management's role in open stakeholder communication is to solicit input from large shareholders on a consistent basis, especially as it pertains to the strategic plan. "CEOs and directors aren't performing their job properly if shareholders are not involved in the strategic planning process," said Johnson. This doesn't need to occur monthly, or even quarterly, but the lines of communication should never be closed. "You're not necessarily seeking out input from shareholders who aren't on the board on a frequent basis, but you have to always be open to answering questions," said Koehl. 

While responding to shareholder questions and expectations for bank performance is a complicated interaction that involves a lot of different factors, not just the strategic plan, Berman suggests using the strategic plan as a framework when communicating with shareholders. "You don't have to get into details, but use the plan and what you're doing with it as the outline," he advised. The most important feature of stakeholder communication, especially to shareholders, is the effort you put into it. "If you focus on your communication with your shareholders in the same way you focus on communication with major customers or prospective customers, you'll see results," said Berman. 

The other vital aspect of transparency is how stakeholders monitor the bank's progress in accordance with the strategic plan. This requires clear communication timing, specific numerical goals and metrics for measurement. "It's really important that management and the board discuss the timeframe," said Bettinger. "For community banks in particular, it's not about short-term profits but long-term value." Specific numerical goals can help avoid rewarding a focus on short-term gains by providing specific long-term targets. "Once you define the mission or vision, the CFO needs to put it down on paper as a pro forma balance sheet and income statement. Then you know what's supposed to be happening," Johnson advised. "While the numbers are not the plan, there do need to be specific, measurable goals," Back agreed. 

Measuring the institution's performance against those goals requires metrics and testing, because no institution will ever be in total alignment with their strategic plan at all times. "Every plan is wrong in some way," said Koch. "If it's not, your plan either isn't specific enough or you're very lucky." One popular way to quantify the alignment between the plan and performance is found by examining the key assumptions that may not be right via stress testing. "It's not about sticking one number out there as your plan. It's also about knowing the three or four most important factors in getting there," Koch explained. "In the risk management process we tend to focus mainly on what might go wrong, but it is only useful to the extent that it helps you identify what needs to go right in order for you to hit your goals." Those benchmarks and milestones are crucial signs on the roadmap of your strategic plan, so all stakeholders should be able to identify them. 

Clear communication of the bank's strategic objectives and how to track them is also how the bank leadership determines when it's time to reassess the strategic plan as a whole. "The strategic planning process isn't an annual event," said Bettinger. "It's ongoing. You always have new opportunities and new threats emerging." As those new opportunities and threats arise, it is inevitable that the strategic plan will adapt accordingly. With the joint efforts of shareholders, directors and bank management, the bank will also rise to meet them.

By, Amber Seitz

Responsive by Design
Strategic Plans Must Allow for Detours on the Road to Success

You're on a road trip, and the GPS on your dashboard (or smartphone) assures you that you're following the right path. Then, you hit road construction. You can't follow the path you originally mapped out. What happens? "Recalculating…" Your GPS guides you down a different road that leads you to your intended destination. Your bank's strategic plan should follow the same philosophy: create a plan, but allow for detours. "High-level, when you're looking at the strategic plan and where you're going, you have to be open to modification," said Marc Gall, vice president at BOK Financial Institutional Advisors. "The strategic plan is a roadmap, but you need to react to the environment, too."

Plan for Spontaneity 

The key to designing flexibility into your strategic plan is to avoid pouring time and effort into creating one, only to have it collect dust on a shelf somewhere. "Get away from thinking of the strategic plan as a standalone item," advised Ed Depenbrok, principal at dbrok group, LLC and a director at Ridgestone Bank, Brookfield. "It is a part of how you run the organization." In other words, there must be a connection between the strategic plan and day-to-day activities at the bank. To forge that connection, clearly lay out the specific tactics of how each larger strategic goal will be achieved. "It's a top-down, bottom-up process," said Nate Zastrow, executive vice president – chief financial officer at First Bank Financial Center, Oconomowoc. "You have a macro strategy and the micro-strategies beneath it. It keeps us fluid and flexible." Identifying the specifics beneath the overarching goals links the strategic plan to operational items like short-term budgets.

Executing your strategic plan in this manner may require a shift in both thinking and culture at your institution. "When you're trying to work from a place of being nimble, responsive and efficient, your team has to internalize those characteristics," said Jim Perry, senior strategist at Marketing Insights. "You can't just pick those attributes off the shelf. They have to be supported in your culture." However, making the change to a responsive plan often has a positive impact on bank staff. For example, if the original plan called for an increase in agricultural business lending, but the current market doesn't allow for that, adjusting the plan prevents your lenders from feeling pressured to do the impossible. "Don't make loans just because your strategic plan calls for it," Gall advised. "The worst thing you can do for morale in an institution is stick to goals that have become unachievable regardless of what's possible in the current market."

Identify Bellwether Metrics

So how do you determine when to call an audible? The metrics laid out in your strategic plan are the road signs that tell you which way to go and when to turn. "Without fundamental information about where your market is headed, you really can't make the right strategic choices," said Perry. "Making knee-jerk reactive decisions rather than basing those decisions on timely, accurate information makes it much harder to achieve your strategic goals." Monitor the economic and demographic shifts happening in your market and compare them to your original plan. This provides the perspective you need to make the determination of when to adhere to the strategic plan and when to take a detour. "You can't just put in your strategic plan that you're going to grow loans by six percent over the next three years," said Depenbrok. "You need to know if that's possible in your market, and whether you need additional talent or products."

That perspective is why identifying key metrics and monitoring them frequently is critical to having a successful, responsive strategic plan. For example, according to Zastrow, FBFC's process involves a monthly meeting to highlight areas where benchmarks were not met, identify why, and then adjust accordingly. An investment in business intelligence technology facilitates that process. "We leverage that technology from a management standpoint so that we're not driving blind," Zastrow explained. "We have a very robust business intelligence program with analysts who can generate reports that allow us to compare and contrast where we're at with where we want to be." That analysis will also help management and the board find the right balance between following the original plan and pursuing new opportunities. "There's a balance between striking while the iron is hot if opportunities are identified, and following the strategic plan and your risk tolerance," said Gall.

Watch the Road Ahead

In today's rapidly changing banking environment, a responsive strategic plan is essential for institutions to adapt quickly and reduce overall risk, particularly with regards to technology and compliance. "You have to assess technology and regulation in your strategic plan because they're part of the world we operate in," said Depenbrok. "There are so many more fixed costs today to operate a bank, and if you don't plan for them, it's going to be even worse." A responsive strategic plan will outline when the bank needs to invest in certain areas, and allow for allocation adjustments as customer and staff needs change. "Industry-wide, if you look at the high-performing community banks, they're investing in order to grow their business and build scale," said Perry. "They know that by expending capital to bring in new technologies that will reduce expenses long-term, they're positioning themselves for growth."

Bank staff can help identify areas where operational changes can be made to increase the institution's overall productivity, according to Gall. "Many times staff haven't been given the incentive or charge to think about how they can do their daily work differently to help the bank reduce expenses and operate more efficiently," he said. In addition, a responsive plan should allow for new ways of executing the same strategy, i.e. adjusting internal processes. "When looking at what you have to shift moving forward, look first at areas where either people or processes need to be adjusted in order to improve results," said Perry. "The people and processes are the things you can immediately control, rather than external market conditions."

Finally, a responsive strategic plan should accommodate increased spending in areas banks can't control, such as regulation. "Once the rules are made, you can fight to try to change them, but that takes a lot of time and energy that could be reallocated to being the best at playing by the new rules," said Zastrow. With all of the recent change in the industry, an investment in third-party advice can be a competitive advantage, according to Depenbrok. "Change is happening so quickly in our industry from a technological point of view and a regulatory point of view, figuring it out on our own is very difficult," he said.

By, Amber Seitz

Making More from Less
Five ways banks can enhance the value of their branch network

Between products like mobile and online banking, ATMs, fintech solutions and digital wallets like PayPal, it's no wonder some people are questioning whether brick-and-mortar bank branches are still relevant. However, consumers still crave the trust and assurance that comes with human interaction, especially when it comes to their finances. Bank branches aren't on the brink of extinction; they're evolving. Here are five key actions banks can take to transform their branch networks and enhance their value: 

1. Focus on Customer Needs and Behaviors

Consumer demands will drive nearly every aspect of branch transformation in the future, so identifying exactly what your customers want and need is critical. "Branch transformation is not up to us, it is up to the customers," explained Darren Dewing, senior vice president, director of retail distribution at Associated Bank, Milwaukee. "Their behavior will determine the future of the branch network." Dewing noted that while direct customer feedback is important, it's also essential to measure their actions. With the current upheaval in the financial services industry, bank branches will need to transform in order to survive; it will be the customers, not the banks, who ultimately define what they turn into. "It comes down to what customers demand of us and adapting accordingly," said Jeff McCarthy, vice president – marketing director at First Bank Financial Centre, Oconomowoc and a member of the 2016-2017 WBA Marketing Committee.

2. Re-Think Technology 

Many bank executives still consider technology to be a threat to the banking business model, either because of its potential for security gaps or because it eliminates many traditional customer touchpoints. However, customers who utilize digital banking products typically develop a deeper relationship with the bank, and technology can also greatly reduce a branch's cost per transaction. "Transactions are cheaper without employees handling them," explained Jennie Sobecki, owner of Focused Results, LLC and a speaker at the recent WBA Branch Manager series. "In order to leverage your investment in your branches, you need to also invest in technology to make those branches more efficient." When reconsidering how your branch network leverages technology, keep the customer (and customer service) front-and-center. "We view technology as another way of serving the customer," said McCarthy. "We want them to be able to bank with us when and where they want to." 

However, while technology allows banks to expand their markets well beyond their branches, most institutions will find they cannot bolster one at the expense of the other. "Customers don't want either technology or branches," said Sobecki. "They want both." The best way to ensure that your branch network gets the most value possible out of any technology investments is to constantly encourage customer adoption. "Make sure your customers are using the technology!" said Dewing. "You've spent the money, so make sure you're optimizing your investment by showing the customers the value you've created for them." That can be as simple as training front-line staff to demonstrate online or mobile transactions for customers when they come into the branch, or as complex as remodeling the branch to include tech stations and teller pods. 

3. Leverage the Value of Physical Space

One of the most valuable elements of any branch network is the physical branch buildings. Even with today's real estate market, that is a tangible value that banks can enhance in a variety of ways. Some banks choose to purchase their branch spaces, rather than lease them. "Our philosophy is to find great real estate and own it if we can," said Dewing. "That is not always possible or practical, but it's preferred." Whether you own or lease, many of today's bank branches are larger than they need to be to support current foot traffic. Sobecki suggests "right sizing" existing branches by walling off unused space and either leasing it out or converting it into a community room for the bank's commercial customers to use as meeting space. Make sure your branch buildings do a good job of promoting your brand, as well. Signage and décor both make a difference. "Potential customers don't walk in the front door if they don't know you're there," Dewing pointed out. Seeing the branch also keeps the bank top-of-mind for customers. "There's a real sense of strength and security for customers when they see a physical branch," said McCarthy. "There's still a sense of reassurance when you drive by the branch and know, that's where my money is." 

4. Update your Metrics

Before making any changes to your branch network, it is important for bank management to update the metrics that will be used to measure the success of those changed branches. Some of the traditional measures are not as valuable as they once were. "Sometimes we spend too much time on lagging indicators, like transactions and/or net income, and not enough time on leading indicators of future value," said Dewing, specifying that branches that add or deepen quality household relationships will provide that future value. Sobecki recommends measuring wallet share, product penetration by branch – that is, identifying which branches are the top sellers for the most profitable products – and revenue per square foot. "Retail bankers need to think of themselves as retailers," she said. "Revenue per square foot is how retailers evaluate their space." She also recommended measuring your mobile banking platform as a branch in addition to physical locations.

5. Recognize Each Branch is Unique

When planning changes to your branch network, it is crucial to recognize that every branch is as unique as the community and clientele it serves. "There isn't one silver bullet to make this work," Sobecki said. "Each individual bank needs to find out what works for them and their culture." Market research is an essential tool here, but so is individual involvement. "You have to understand the needs of the community if you're working there every day," said McCarthy. "We encourage our branch staff to be involved in the community, so we make sure that we have the right people in the right place." Ultimately, each branch within the network will operate according to the needs of its community and customers. Some will focus on wealth management and host community events, while another will primarily serve commercial customers and drive online usage. "The most important thing a community bank can do is make sure they have the right type of branch in the right market," Sobecki explained. 

No matter what you may have read on the internet, rumors of the Bank Branch's death have been greatly exaggerated. "When people are going through major life changes, whether it's buying a house, getting married, or retiring, they still want to come in and talk to an expert face-to-face," said McCarthy. "Branches are still alive and well, and still serve a purpose for customers."

By, Amber Seitz

Structural Integrity
Make compliance part of your institution’s DNA

Compliance is top-of-mind for every bank executive today – it might even keep you up at night – but do all of your employees feel the same level of responsibility? They should.

There’s a difference between following prescribed protocols from regulators and having a truly effective and efficient compliance system. In the struggle to keep ahead of new and changing regulations and complex expectations from examiners, some banks have fallen into the rut of using their compliance department as the last line of defense. However, a holistic approach to compliance, where key elements are knit into an integrated whole and every employee feels personal ownership of their role within the compliance system, tends to be more effective (and more efficient) than viewing the compliance department as a safety net.

Key Features

The foundation of a holistic compliance system is the distribution of ownership across all departments and the bank’s strategic plan. “Compliance is the responsibility of the organization as a whole, so it needs to be distributed,” explained Elliot Berman, Principal at Bowtie Advisors. According to Berman, distributed compliance systems are one of the most effective responses by financial institutions to the continuing challenge of meeting the resource needs of today’s regulatory expectations about compliance. A distributed system is not just an idea; it must be put down on paper as part of the bank’s plans and processes to create accountability. “It is critical that each area of the bank examine its compliance risks and articulate in their operating plans how they will manage them,” said Joe Fikejs, COO of Bank Mutual, Milwaukee. “Then, they need to be held accountable to the goals and plans that are set. This best practice also reiterates the message that compliance is not just the responsibility of the compliance department.”

Another key feature of a holistic compliance system is compliance personnel that are seen as collaborative partners to be consulted in the early stages of every project rather than gatekeepers or the final step in a process. “I prefer the ‘compliance first’ approach,” said Ami Dregne, compliance officer at Citizens First Bank, Viroqua. “I don’t like being the last stop before something goes out.” Berman also prefers this model of spreading responsibility because it allows the compliance team to be subject matter experts. “That’s a more effective use of their expertise,” he said. “I’ve seen organizations where compliance is viewed as the ‘department of no’ and that’s not conducive to success.” Dregne also advocated for a collaborative relationship between compliance and the rest of bank staff. “You don’t want staff to feel like the compliance officer is ‘Bad Cop,’” she said.


When implementing a distributed compliance system, first lay the groundwork with communication and support from upper management. “Having management involved is key so that the employees know and trust the compliance team will tell them how things need to be done in order to stay compliant, rather than just make their jobs harder for no reason," Dregne explained. A hands-on management approach is also essential to foster a sense of ownership for all staff. “You won’t have a strong risk-conscious culture until all employees feel they have key roles that they take ownership of,” said Fikejs. “It is as simple as connecting the dots between regulation and key processes.” Drawing those connections for staff doesn’t require that management be subject matter experts, either. “It’s not a compliance issue, really,” said Berman. “It’s a communication and operations issue.”

Another facet of this holistic approach to compliance that cannot be overlooked is the need for ongoing training. “Weaving compliance and risk management across all key areas of a financial institution’s strategic plan is the start, but it cannot stop there,” said Fikejs. “It needs to be reinforced on a regular basis at key meetings, training and in communications.” Compliance training doesn’t have to be torturous, either. “Compliance is not as exciting as other functions in banking, so try to have fun with it,” Fikejs suggested. “Use gamification at meetings to reinforce key messages.” It’s also important not to let your compliance training schedule slip into “peaks and valleys,” according to Berman. Even though changes to regulations and procedures require mandatory training to update employees, it is also important to provide ongoing refresher training. “Find a balance between the ‘big training’ and the reminders,” he advised.

Finally, equip your compliance personnel for success by ensuring they have access to all the tools and resources they need to coordinate your compliance program. One of the most powerful resources out there is a wide network of peers. “It’s important to have a peer network you can rely on for perspective,” said Dregne. “Many compliance officers wear many hats and some are stronger in certain areas, so we lean on each other a lot.” Regular contact with industry thought leaders and other compliance experts will help your team guide the institution to consistent success.

As with many business functions, the bank’s compliance system should also undergo a continuous improvement process. “Review processes and workflows frequently to ensure unnecessary complexities and controls are removed,” Fikejs recommended. “The more simplistic the process, typically the better.” The ultimate goal is to empower everyone in the bank to work in tandem with the compliance team and take ownership of their individual compliance role. With that approach in place, the whole institution will benefit from a more efficient and effective compliance system.

By, Amber Seitz

What if Your Employees Owned The Bank?
A crowdsourced succession solution

Ownership succession is a critical concern for closely held financial institutions. As majority shareholders age and start to look for liquidity from their investment, bank management can find themselves facing a sale if there is no obvious successor. An Employee Stock Ownership Plan (ESOP) is a lesser-used solution that may work well at some banks. An ESOP is a federally regulated retirement plan that invests in the stock of an employer on behalf of its employees. When the employees leave or retire, they either sell their stock on the market or back to the company. As such, ESOPs are often thought of as simply a tax-advantaged employee benefit. While true, they can also be a powerful piece in a bank's ownership succession plan.

Nationally, nearly 800 banks offer ESOPs, but most control relatively small blocks of stock. Very few bank ESOPs own more than a quarter of their institutions, though there is a tiny fraction with 100 percent employee ownership. In order to determine if this strategy is a good fit for your institution, you must first understand why forming an ESOP can be beneficial and the process for implementing one.

Reasons to form an ESOP

Companies choose to form ESOPs for a variety of reasons, but the four most common motivations are to supplement an existing employee benefit plan, to promote growth, to create shareholder liquidity, and/or for its tax advantages. "The benefit is if you sell 100 percent of the company to an S-corp ESOP, you pay no federal and state income tax post-closing," explained Kevin Hanson, director at Business Transition Advisors, a consulting firm that specializes in succession planning at closely held businesses. BTA consults with ESOPs frequently because ownership succession is another very common motivation for forming an ESOP. Nearly two-thirds of ESOPs nationally were created to provide a market for the shares of a departing owner of a profitable, closely held company. "It's sort of a 'have your cake and eat it, too' situation with ESOPs and staying independent," said Horicon Bank President Fred Schwertfeger.

Promoting growth is another common reason for implementing an ESOP. "Studies have shown that there is improved performance when you compare whole or partial ESOPs to non-ESOPs," said Community First Bank President Dan Klahn. ESOPs can also increase employee engagement and retention when staff are educated on the benefits they're receiving. "It helps us attract and retain talent," said Horicon Bank Executive Vice President Jay Vanden Boogart. "When they have meaningful skin in the game through the ESOP, they value that." That value is enhanced when the ESOP is added on to an existing benefit structure. Over half of ESOP companies nationally have at least one additional employee retirement plan. For example, the ESOP at Community First Bank, Boscobel is set up as a complement to their 401k plan. "From the employees' perspective, it's another added benefit," said HR Officer Tammy Nelson.

How to set up an ESOP

The process of implementing an ESOP is a complex one with many variations depending on the specific institution. However, every company – banks and non-banks – must start with being profitable enough to support the debt service of the ESOP. "Profitability is key," Hanson explained. "This isn't something you can do if the company is struggling financially." Scott Huedepohl, president/CEO of Community State Bank, Union Grove, advises starting out with a thorough understanding of what the bank will need in order to support the ESOP from an administrative side, as well. "It's critical to turn over every rock and make sure you really know what you're getting into," he said. "Make sure you have the support structure in place because you're moving from multiple ownership to employee ownership. The trustee will carry a lot of power and a lot of liability risk."

After verifying the institution's financial capability and conducting research, bank management's next step should be to hire outside assistance. "Find a firm that can help with the ESOP implementation," Hanson recommended. That firm can help the bank conduct a preliminary analysis, which will look at the bank's ownership structure, number of employees, and most importantly the value of the company. "If you don't have the value, an ESOP can't happen," Hanson stressed. The bank's ownership structure will also impact its ability to take full advantage of the ESOP's tax treatment. "Having an S-Corp in place is helpful," said Schwertfeger. "Getting your structure to the right place is important."

If bank management determines that an ESOP is still a good fit for all stakeholders, the next step is an in-depth feasibility study. "The feasibility study defines what the structure of the end company will look like from an ESOP trust perspective, a corporate perspective, et cetera," Hanson explained. It will also define the timing and cost of the ESOP implementation. The results of the feasibility study create the groundwork for the purchase price negotiations for the transaction. Once the transaction is finalized, the ESOP must be implemented and rolled out to the bank's employees. "It can be quite complex for the employees to understand, so we focus on education so they understand all the components," said Nelson. "We've also created an Employee Ownership Council who serve as ESOP ambassadors to other staff." This council has members from each of Community First Bank's five branches, with positions ranging from CSR to the manager of the mortgage banking group.

Is it right for your bank?

ESOPs look different at different companies, depending on their intended purpose, maturity and a host of other factors. When deliberating whether to form an ESOP, management must determine early on if this strategy fits well with the bank's overarching strategic plan. For example, the average Wisconsin ESOP has been in place for 19 years, and many have been around for much longer. This longevity requires that bank management be forward-thinking and anticipate potential challenges that may arise for their successors. "Where your ESOP is at in the maturity cycle will impact the kind of challenges you have," Huedepohl explained. "There's a huge difference between an ESOP that's mature and one that's new." Schwertfeger advised the same prudence: "Consider the long-term nature of the decision," he said. A related question to consider is the bank's ability to weather potential cash liquidity issues. Community State Bank's ESOP is 30 years old, and with that maturity comes the challenge of ensuring that all departing employees' shares can be bought back. "One of our major challenges is managing our liquidity," Huedepohl explained. "We're privately traded, so we have to make sure we have plenty of liquidity to buy those shares back."

Another consideration is if the bank has the expertise and time to administer the ESOP in-house, or if they will need to hire a third party. "It's fairly complex and highly regulated from an administration standpoint," Klahn cautioned. "With that complexity and regulation comes higher cost." However, some of that cost is offset via the ESOP's tax advantages. Management must also weigh the intangible benefits, in addition to crunching the numbers. For example, Community First Bank's ESOP is just over two years old, but Nelson says she's already seen a change in employee culture. "We've seen higher employee engagement over the past year or so," said Nelson. The ESOP has also helped as a recruitment and marketing tool. "Our community understands that the bank staff who help them every day are employee-owners, and they view that very positively," said Klahn.

Ultimately, the most important element for management to consider when examining the idea of forming an ESOP is whether their primary motivation for doing so fits within the bank's strategy and culture. "The motivation behind it will impact the structure of the ESOP," Klahn explained. The bank's shareholder base is the crux of both structure and motivation; to form an ESOP bank management must have an accurate assessment of shareholder needs. "You need to have shareholders who are interested in liquidity," Schwertfeger said. For some shareholders the ESOP's tax treatment may be the most lucrative option for the sale of their stock. "Shares sold to an ESOP can qualify for a capital gains deferral, which may save shareholders significant amounts of money as they exit their ownership of the bank," Nelson explained. No matter what the ESOP's purpose is, the concept of employee ownership suits the community banking model. "It's consistent with the community bank culture and mindset," Huedepohl said.


Questions about forming or administering an ESOP? The experts interviewed for this article recommended these resources: 

By, Amber Seitz

The Wisconsin Bankers Association offers the following consumer education column for your use. Your bank is free to use this as a community column in your local newspaper, a letter to the editor, a press release or in any other way you see fit. The purpose is to give our members an easy-to-use tool for promoting the banking industry to Wisconsin’s communities. 

Your credit score affects many aspects of your life, including making large purchases, obtaining loans, renting an apartment and even applying for a job! Do you know your current credit score? When was the last time you checked your credit report? Here are a few simple steps you can take to help improve your credit score and keep it working for you, not against you.

Monitor Your Debt Ratio

One of the major factors in your credit score is how much revolving credit you have versus how much you're actually using. The smaller that percentage is, the better it is for your credit rating. It's best to keep your debt-to-credit ratio 30 percent or lower. Since credit card debt is one of the easiest types of debt to accrue, it's best to monitor your combined balance closely to ensure you don't push your ratio up too high. Other types of debt like home equity loans and auto loans are less easily obtained and much more consistent. You don’t need to monitor those as closely, but research before those major purchases is much more important.

Don’t Avoid All Debt

One common misconception among consumers is that any debt on your credit report is bad, which is not entirely true. Good debt – debt that you handled well by making on-time payments – is good for your credit score because it shows that you are a reliable borrower. This is especially true if it’s old debt, because it extends your credit history. So don’t call the reporting agency to remove that car loan from your credit report as soon as you pay off the vehicle. Leave old debt and good accounts on your credit history for as long as possible. This is also why you should keep your oldest credit cards active, even if you don’t use them very often. Cancelling a credit card that you’ve had for a long time will shorten your credit history, which could negatively impact your overall credit score.

Check Your Report and Dispute Errors

Finally, be sure to check your credit report for errors. Look for new accounts that you didn’t open and large purchases you didn’t make, as these not only hurt your credit score, they can be signs of fraud or identity theft. You're entitled to one free copy of each of your three credit bureau reports (Equifax, Experian and TransUnion) every 12 months through It's a good idea to stagger each of the three reports throughout the year. Request one every four months, and you can monitor your credit for free all year. If you find an inaccuracy, you should dispute it immediately by following the instructions on the bureau’s report.

By, Amber Seitz