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