Family-owned banks are often seen as the heartbeat of Wisconsin communities. However, recent legislative, regulatory, and technological pressures have inflicted financial hardships that make it difficult to keep small banks afloat, especially family-owned banks that have been passed down through multiple generations. These banks are then forced to make a difficult decision: to sell or not to sell?
“I think there is an absolute desire to continue the family legacy,” said Philip Smith, president of Legal and Consulting at Gerrish McCreary Smith. “But sometimes the reality does not match up with the desire.”
The nature of the banking industry has changed dramatically in recent years. According to FDIC reports, 280 banks resided in Wisconsin in 2010. By 2018, the Banconomics Wisconsin Performance Benchmark Report indicates that number dropped to 210. Many of these banks disappeared due to a merger or acquisition.
“The underlying issues that ultimately lead to the sale of a family-owned bank are more pervasive than many family ownership groups realize, but these issues are often not recognized as they develop over the years or decades,” said Godfrey & Kahn, s.c. Attorney Peter Wilder. “When they really bubble to the surface, it can be too late to address them short of a sale.”
Often, the banks most worried about mergers and acquisitions are family-owned. This is because family-owned banks tend to be smaller in size. When regulations intended for larger institutions are passed and put into practice, it is almost always most burdensome on smaller banks.
“The cost to run a typically smaller community bank that is family-owned is almost unbearable when you look at the regulatory needs, the staffing you need to include to cover the IT and compliance work, and the normal banking responsibilities,” said David Fritz, managing partner with the Executive Benefits Network.
In addition, the pressure to implement technological advancements for smaller, family-owned banks in order to stay competitive with larger banks may provide financial hardship. Because some family-owned banks do not succession plan for the future, these challenges boil to the surface and eventually explode, forcing the owners of the bank to sell the bank when a sale was otherwise not intended.
In order to combat against these factors, family-owned banks look for ways to achieve their goal of remaining independent in today’s banking industry. While there is no magic formula, patterns show similar characteristics among successful family-owned institutions that have allowed them to remain independent.
Regular meetings to talk strategic planning.
The most important strategy for a family-owned bank to remain independent is for family members to have frequent and honest communications about the intentions of each individual family member and if those plans include the bank. These strategic planning meetings need to occur early and frequently in the next generation’s lives, or the bank may be forced to lose its independence because there is a communication gap among generations.
“The children go off to college, get a degree in finance, and would much rather go and work in Chicago at a big firm and have that lifestyle rather than move back to the small community working for the local bank,” said Smith. “If it’s not talked about early enough, and [working at the family-owned bank] is only an expectation and not an actual plan, then that leads to sometimes a potential sell when otherwise they would not want to sell.”
To avoid this situation, family members need to be blunt with each other during the bank’s strategic meetings. However, those meetings are not the place to hash out old family feuds. Families should discuss if all family members want to keep ownership of the bank, if some members want to grow the bank, and if some members want to give up their ownership. Wilder suggests that families annually talk about their personal wants and needs in order to ensure transparency and to keep one another in the loop as significant life events occur such as births, marriages, sending kids to college, or health challenges.
In addition, for most family-owned banks, the family is not the only entity invested in the bank. The ownership also needs to include other stakeholders in the bank’s strategic planning.
“The more there is a good level of communication and the updating of what the goals of the stakeholders are, I think the buy-in of the staff is that much better and you have more of a productive bank,” said Fritz.
Think outside of the family.
The reason family-owned banks are successful is the same reason larger institutions are successful: they continue to focus on generating shareholder value. The difference is that the shareholders are members of the family. Therefore, family-owned banks should focus on more initiatives than just distributions out to the family.
“A normal bank wouldn’t give a hundred percent of the distributions outside of the bank,” said Smith. “It would use funds for reinvesting in the growth of the organization, build new locations, invest in technology, etc.”
While family-owned banks differentiate themselves by offering values and operating styles unique to the individual families, the family-owned bank should consider expanding leadership outside of the family.
“We often talk about a family bank and default to the idea that the chairman, president, CEO and major stockholder are all one person, and that could be the case,” said Smith. “But the most successful family banks I’ve seen are also not afraid to let non-family members run the business.”
By investing in leadership outside of the family, a bank can avoid a merger or acquisition. Instead of selling the bank after the family linage expires, successful family-owned banks bring in an outside party that maintains the values consistent with the family’s values and continues the family legacy. The bank can then remain independent and still uphold the family values, even if a non-family member owns the bank.
Go beyond the bank’s walls for advice.
Independence does not mean isolation; family-owned banks do not have to work alone. Seeking outside advisement or outside counsel can be instrumental in maintaining a bank’s independence. Smith emphasized the importance of working with outside counsel for establishing a proper organizational structure, like a sub-chapter S structure for tax planning. Professional advisement can also assist with succession planning, estate planning, or budgeting for important technological developments. Wilder adds that assistance by outside advisors with preparing or reviewing a shareholder or buy-sell agreement can quickly bring issues to light that should be put on the table.
“[Outside advisement] can provide some really valuable insights and they can see outside of the bank walls which makes them more objective than the director group that has been so immersed in the bank as-is,” said Fritz. “It's hard to see the bank outside of the current structure and what opportunities are out there and what really needs to happen.”
Networking with other family-owned banks can also be a helpful strategy to maintain a bank’s independence. By asking other banks about their business models, succession planning, and technology implementation, a bank is essentially gaining free advice about what really works in the current industry.
“Family ownership groups need to talk to each other and have a relationship with other families who own banks,” said Wilder. “Owning a bank is an exclusive club, and families can learn from each other’s best practices and mistakes so that they can continue to nurture and control the family’s legacy within the bank and the community.”
Kallien is a content creation associate/editor at WBA.
Godfrey & Kahn, s.c. is a WBA Bronze Associate Member.
EBN is a WBA Bronze Associate Member.