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Controlling Your Bank’s Destiny

Owners of family-owned and closely held banks meet at annual strategic retreat

By Hannah Flanders

Pictured (left to right) are: Peter Wilder, Godfrey & Kahn, S.C., Milwaukee; Richard Katz, Resource Bank, DeKalb, Ill.; Paul Foy, Cornerstone Community Bank, Grafton; and Chad Kane, WoodTrust Bank, Wausau.

Across the Midwest, many banks held primarily by a single investor or family face unique challenges in their day-to-day operations and future planning. As competition rises, it is critical that there are resources and networks dedicated to closely held bank owners as they navigate internal and external pressures in an effort to determine their own fate.

“It is important that we treat these banks for what they are first — family businesses,” said Peter Wilder, attorney at Godfrey & Kahn, S.C.

As such, closely held banks must not only consider regulatory, wealth, and succession pressures that all banks must balance, but interpersonal and family dynamics in addition. While challenges throughout the industry mount and opportunities for closely held banks to use their unique position to expand, resources and education pertaining specifically to family-owned or closely held banks remain marginal.

Banking on Family

It is no secret that operating a family business requires communication. While mutual respect between family members is vital, so too is having acknowledgeable peer network and counsel who are understanding of the unique benefits and challenges owners of closely held banks face. The growth and success of a closely held organization is dependent on one’s ability to navigate family dynamics, bank strategy, and the goals of all shareholders. In having the support of the family, educated advisors, and peers that can sympathize and share their perspective, bank owners will not only have the ability to avoid unnecessary difficulties, but gain valuable knowledge to facilitate the bank’s strategic next steps.

Family-owned banks must make special considerations when dealing with wealth and liquidity, succession, and estate planning. It could be, for example, that selling stock to outside investors to raise capital is not an option or that the next generation is not widely interested in running the family business.

While closely held banks face a variety of obstacles, opportunities for these banks are expansive. For one, family banks have the advantage of relating to their family business clients. Owners of family-run banks may not only serve as trusted financial advisors to local family business, but also as a resource for navigating challenges related to such structural ownership. Additionally, the overlap between bank management and bank ownership allows closely held bank owners to maximize efficiency and minimize conflict simply because there are likely fewer non-active owners to consult for every decision.

“It takes real commitment to plan for the future of a family-owned bank,” states Richard Katz, chairman of Resource Bank located in DeKalb, Illinois. “Family-owned banks are oftentimes the conjunction of a lifetime of personal effort, family legacy, and dedication to one’s community. With careful planning — aided by dedicated professionals — it is possible to envision a bright future for generations to come.”

Strategic Success

In order to assist bankers in navigating the unique challenges and possibilities available to closely held institutions, the Wisconsin Bankers Association (WBA), in partnership with the Illinois Bankers Association (IBA) and Godfrey & Kahn, S.C., began offering the Family-owned and Closed Held Strategic Retreat in 2019.

“Issues often seen in family-owned banks are usually not covered in broader events or conferences,” stated Wisconsin’s Cornerstone Community Bank President Paul Foy. “This specific retreat allows institutions to meet with legal and regulatory experts as well as network with peers facing similar challenges.”

“The Family-owned [and Closely Held Strategic] Retreat is specifically targeted at a group of bankers that do not often have access to similar resources,” highlighted Wilder. “The retreat underscores what succession, tax, and wealth planning may look like for each generation and how this planning gives ownership groups more control over their bank’s destiny.”

This year, bankers in attendance at the Family-owned and Closely Held Strategic Retreat had the opportunity to hear from several panelists ranging from the ever-important topic of wealth to planning for the future.

Thank you to our retreat sponsors!

The event opened on Thursday, October 13 with a peer panel featuring Foy, Katz, and Chad Kane of WoodTrust Bank in Wausau. Attendees enjoyed gaining perspective from the banker panelists on why and how their families dealt with wealth transfers and the succession of the bank as it transfers to a new generation or new owners entirely.

Panelists emphasized that the intimate nature of such retreat has allowed attendees to gain a detailed understanding of how their closely held peers tackle the unique benefits and issues brought forth by closely held ownership.

The following day, Godfrey & Kahn S.C. colleagues Wilder and Jeff Billings presented on estate planning and the corresponding regulatory issues that closely held bank owners need to consider as they look ahead and transition bank ownership into new hands.

Eide Bailly’s Michael Holdren followed with an in-depth discussion on valuations specifically highlighting why closely held banks may consider a valuation; what the typical valuation process looks like; and how inflation, potential recession, reliance on net interest income, and regulatory oversight may impact the future of valuations.

The retreat concluded with an advisor panel featuring David Fritz and Patrick Marget of Executive Benefits Network (EBN); Brendan Freeman, First Business Bank; and Andrew Spillane, Godfrey & Kahn, S.C. The panel covered the role of life insurance, tax planning, and private fund investments to arm families with several resources to consider when wealth planning.

In addition to the thorough discussions and panels held at the retreat, many bankers state that the extensive networking opportunities remain the main attraction in returning each year.

“Not only are the various speakers geared specifically at closely held banks, but the intimate discussions I find myself having each year have been increasingly valuable in recognizing our goals as a family and as an institution,” said Foy.

“This event is not simply networking as you may perceive it from other events,” agreed Katz. “It’s partnership, friendship, deep connections, and the ability to share knowledge.”

Overall, the end goal of the Family-owned and Closely Held Retreat is to ensure shareholder value. From preparing the next generation for new responsibilities to understanding what options there are for those no longer keeping the business, the retreat presents bankers with an intimate setting to connect with their banking peers and other advisors who understand the intricacies of closely held banks.

“This program has been invaluable to the continued success of our bank,” stated Katz. “Its niche target has opened my eyes not only to the strategic opportunities that will benefit both the personal and professional aspects of the bank, but to the experts that are able to help us in implementing the change we wish to see.”

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Investing in Your Team

Always remember that your employees are your greatest asset

By Loni Meiborg

“People don’t leave bad jobs; they leave bad managers.”
— Unknown

“Those who have a best friend at work are twice as likely to be engaged in their jobs.”
— 2018 Gallup Poll

“Alone, we can do so little; together, we can do so much.”
— Helen Keller

We’ve heard it all. We’ve read it all. We’ve experienced most of it. But how, in today’s tumultuous employment atmosphere, do we keep our team engaged, grow great talent, and keep everyone happy without breaking the bank (both the brick-and-mortar and the piggy bank)?

With average costs of onboarding a new employee exceeding $4,100, it’s in every bank’s best interest to crack this code. Taking a page from the marketer’s playbook, it is much more cost effective to focus on growing existing relationships than acquiring new ones. And that adage adds up for employees as well. Here are six strategies to consider to build strength and longevity among your team:

Purpose

Most people will agree, without purpose there’s no point. In fact, performance soars when you can tie an employee’s work to a bank-wide purpose. Providing a strong purpose to an employee’s role will ensure a deeper level of engagement, and even increased satisfaction.

To do this, make sure you are providing transparent communication. Explain the goals of the team, the bank, and offer a big picture perspective. Take an active interest in their development, both professionally and personally when possible. When their service positively impacts the overall goal of the bank, make sure they know that they are part of that success, it will encourage them to find more ways to contribute.

Development

Each year Fortifi Bank surveys its employees to measure satisfaction. And each year, the number one desire is for more career advancement opportunities. An interesting response since, if you asked senior management, they would say the sky is the limit for every employee. So where is the disconnect?

During monthly check-ins, have open conversation about what each employee wants to be “when they grow up.” Then find the appropriate training and development opportunities to support that. Let them know you’re grooming them towards their goals, even if it’s in a different department. Once the right position opens, they’ll be ready and set-up for success. Don’t let your stellar employees leave for a “perceived” growth opportunity — offer it to them first.

Recognition

No matter how long you’ve been a leader, rewards and recognition take constant focus and practice. Set up a system — whether it is a Microsoft® Outlook reminder or an assistant who follows through — to ensure your rewards and recognition efforts are timely and consistent. Although major performance achievements and milestones are important to note, don’t miss the little things either. Post their achievement on the intranet for all to celebrate, send flowers to a new parent or grandparent. When that big project wraps up, acknowledge their work and share your appreciation. Making that human connection with each employee will quell fears, instill trust, and develop a lasting relationship.

Voice

Okay, one more quote —

“In teamwork, silence isn’t golden. It’s deadly.”
— Mark Sanborn

This topic is multi-faceted. In part because when an employee has a voice at work, it opens the door for them to influence decisions. The other part is building the confidence that when an idea, concern, or perspective is expressed, there will be no workplace consequences.

When both are accomplished appropriately, you will get the feedback you need to achieve better results as well as having the team’s full support along the way. Make sure you’re asking for their
input regularly.

Share ideas and concepts well before execution to give them time to process and come back with a thoughtful response. And, whether you take their suggestions or not, it is important to circle back to share why their thoughts were accepted or rejected; and regardless of which, recognize their contributions to the conversation.

Solutions

When building trust among your team, you need a sharp focus on being solution oriented. You might say, “well then what am I paying them for,” but I’m not talking about the day-to-day blocking and tackling. I’m talking about the issues that impact their passion, purpose, and drive to do a good job.

If a team (or individual) is toxic, they look to you for resolution. If they’ve hit a hurdle (or brick wall) on a project they want to see through, they look to you to remove it. If they need a change in process that is outside of their authority, they look to you to have their back. So, ask yourself, do your employees have frustrations? Take them seriously. Work with them to build an action plan and then see it through. You will have their loyalty in return.

Compensation

It is not by accident I list this one last. Don’t get me wrong, money is still a high priority for many, however, with the right mix of compensation strategies, it doesn’t just come down to dollars and cents. In fact, if you jump right to money and skip the previous five strategies, you’ll find your employee turnover rate growing.

Nowadays people expect flexibility. And no, this doesn’t only mean “work from home.” They want to make it to their child’s dance recital at 3 p.m., they want to work at night sometimes to accommodate a later start to their day, they want to take a vacation without feeling guilty. That’s flexibility.

So do your due diligence when setting your compensation philosophy and dive into market research, but keep an eye on what else their package includes. Take an interest in their mental and financial health to keep your employees feeling appreciated. And, when you can, give them grace and stop watching the clock.

If you plan to adopt these or other strategies to engage your employee base on a deeper level, be sure to align your efforts with your entire management team for consistency as they will not be as effective when administered in a silo. In fact, if done in a here-or-there approach, it could cause animosity between teams and break down your culture even faster.

Engagement strategies should also reflect your company’s core values, which are truly the cornerstone of your culture. Consider your values when creating strategies, and how you deliver those strategies — it will make all the difference.

We know things will likely get harder when conducting business and the competition is fierce. Recognize that employees are your greatest asset and take good care of them; in turn, they will take good care of your customers. The dividends are priceless and the rewards vast.

Meiborg is senior vice president – organizational development at Fortifi Bank, Berlin, a member of the 2022–2023 WBA Marketing Committee, and serves as past chair of the WBA BOLT Section Board of Directors.

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Creating Innovation – A Post-Pandemic Imperative

Nearly every banker I’ve spoken with in the past few months has posed the same basic question: What’s next? With the promise that the pandemic will eventually be behind us, everyone is trying to predict the “next normal” and imagine if they have what it will take to succeed — or even survive — in a post-pandemic economy.  

Obviously, there are many factors that will determine the answer to those questions. But if you pay attention to some of our industry’s favorite buzzwords, there are many characteristics that bankers will have to master in order to succeed. Agility. Adaptability. Empathy. I’d say yes to each one. But the core competency that will be critical for every bank’s long-term survival is a familiar term: innovation. 

I know what you’re thinking. Innovation has always been key to sustained success. Yes, that’s true. But if you don’t count big banks and fintechs, you’d rarely find banks on the list of the most innovative companies. Admittedly, this past year saw banks of every size innovate quickly in order to meet the crisis brought about by the pandemic. And while there are many banks that can point to instances where operational efficiencies were achieved or new ideas were implemented, it is important to remember that these innovations were not routine — and they were not always enterprise wide. Too often, innovation is seen as a short-term assignment rather than a long-term mindset.  

Moreover, banks usually equate the term innovation with technology and digital transformation. You may consider yourself innovative if, as an example, you brought in ITMs before your closest competitor or armed your personal bankers with iPads. But innovation must reach way beyond technology. Future success in financial services will require innovation in all areas: customer experience, staffing, remote work, marketing, even business models will need to evolve. In fact, our industry could learn from former Starbucks CEO, Howard Schultz, who said “innovation must be disruptive. And by disruptive, I mean disruptive. You gotta fracture and break the rules.” Let’s face it, banking has a lot of rules. 

But why is innovation so critical now? The answer is found at the intersection of at least three trend lines: humanity, diversity and technology. Let me explain. 

Humanity — I use the word humanity to express the idea that innovation becomes critical as shifts in human needs and human behaviors continue to accelerate. The pandemic and the subsequent recession have prompted changes in human needs on physiological, socioeconomic, and psychological levels. Social isolation, unemployment, and economic uncertainty influence most financial decisions — from daily to long-term. Will the 25-year-old customer need a car loan? Will the 65-year-old be able to retire?  

Think for a moment about how the pandemic caused customers to quickly adopt the digital and mobile behaviors that bankers have been promoting for years. Early indications are that customers have assimilated these new behaviors well and they’ve done it long enough now that new long-term habits are being formed. According to a 2009 study published in Psychology Today, the average length of time required for a new behavior to become a habit is 66 days. The pandemic has gone on for nearly a year and your customers have been making deposits with their mobile app, paying bills online, applying for loans without entering a branch. They have been using your drive through and other self-service options on their terms, often 24/7. What makes you think they will return to pre-pandemic ways of banking?  

Depending on your community, it may take some time before the profile of your average customer returns to pre-pandemic levels. And regardless of demographic profile or degree of affluence, the pandemic has influenced perceptions about convenience, health, safety, and simplicity and consumer needs and behaviors will be in flux for months, if not years, to come. Will your institution be able to adjust products and customer experience to align with those new needs and behaviors? When was the last time you connected with your customers and sought their input in the product development lifecycle? A bank’s ability to provide contextual, personalized, and relevant products and services will require more than collecting Net Promoter Scores and attempting infrequent improvement. 

Diversity — both inherent (ethnicity, gender, etc.) and acquired (life/professional experience) — unlocks innovation by creating an environment where different opinions can be expressed, and new ideas pursued. Diversity enhances creativity. It provides different perspectives and promotes better problem-solving. Diversity helps banks become much more dynamic and able to understand their customer base. Research from Harvard Business School found that a team with a member who shares a customer’s ethnicity is 152% likelier than another team member to understand that customer.  

Technology — Rapidly maturing digital technology will keep pushing the industry forward. The rapid improvements in artificial intelligence for fraud detection, credit risk modelling, etc. will reinvent how banks operate and how bankers spend their time. Enhancements to mobile technologies and expansion of 5G networks will compel banks to find newer, faster ways to bring mobile updates to market. Open banking and blockchain integration will restructure the banking landscape. These are just a few examples of how technology will shape future innovation.  

Netflix is a perfect example of a company that discovered customer-focused innovation at the intersection of humanity, diversity, and technology. As the pandemic hit and shelter-in-place orders were issued, people were looking for entertainment and escapism to get through the early days of the pandemic. They were already in a strong position to meet that need, but they quickly adjusted marketing, repurposed content and added more original programming for streaming. Early in the crisis they launched a $100 million coronavirus relief fund for out-of-work creatives to help ensure their content pipeline. As subscription numbers grew, they adjusted their technological capacity to meet demand and made news when they announced plans (at the height of civil unrest in the US) to put up to $100 million toward financial institutions and other groups that directly support Black communities in the U.S. It is no surprise they were among BCG’s list of the Most Innovative Companies of 2020. 

In the past 23 years, Netflix has gained nearly 200 million subscribers in 190 countries. That growth is directly attributed to their innovation-oriented culture of reinvention. So how can your bank become more like Netflix? Start by creating an innovation culture. When you elevate innovation to the status of a core value — an organizing principle for your bank — you begin to change the outlook and culture of your organization; and you transform the conversation in your board room, and your break room. 

As you begin to consider your institution’s capacity for innovation, take an honest look at how your current culture reflects these four characteristics: 

  • Innovative cultures encourage autonomy. From day one, Netflix focused the culture on employee empowerment and independence. The typical banking leadership style of command-and-control is difficult enough with five generations in the workforce and a talent crisis on the way; and is certainly less viable in the work-from-home era. Let go of the reins and create an environment where individuals and cross-departmental teams have freedom to express ideas, experiment and make decisions. Try identifying one customer-facing problem and give 3-5 people a budget and a deadline and then get out of their way.  
  • Innovative cultures also foster alternative solutions. You have likely heard the old saying that the definition of insanity is doing the same thing and expecting a different result. That thinking is the antithesis of innovation, and unfortunately it is alive and well in banking — but it doesn’t have to be. Tried and tested practices may feel safer, and trusted partners feel comfortable. But new solutions are often found by exploring new approaches and engaging new partners. When was the last time you asked a front-line employee, rather than a senior manager, how they would solve a particular problem?  
  • Innovative cultures give people permission to fail. Your team members will try new things when they know that they will not be fired or reprimanded for giving something a try. Once again, Netflix offers an interesting example. When an employee makes a mistake, they are encouraged to let it be known so fellow employees can learn from the errors and new ideas can be stimulated. Permission to fail allows employees to step outside of their comfort zones, to take more risks and to bring forth an innovative idea.  
  • Innovative cultures promote action. Decisions need to be made quickly and the right actions (based on data, customer feedback, analytics, etc.) must be taken, acknowledged and celebrated. Fast and effective decision-making structures exist, and fast and efficient communication supports implementation.  

A recent report from Accenture noted “Yesterday’s expectations for innovation are out the window. Even though the stakes for innovation in banking were rising even before the coronavirus arrived, now a true culture of innovation is a matter of survival through, and beyond, the pandemic.” 

I’ve used Netflix as an example of an innovative company, but there are leaders in our industry who have focused their banks on finding innovative solutions for their customers. And it isn’t just the large national and regional banks. Take the time to learn about institutions like Cross River Bank in New Jersey and discover how they reinvented themselves and deployed APIs to originate loans for Affirm or Rocket Mortgage. Or discover the innovative leadership at Citizens Bank in Oklahoma, who partnered with Shark Tank’s Mark Cuban to create the nation’s first bank exclusively to originate and fund PPP loans for businesses across the country.  

As you take the time to consider your own institution’s capacity for innovation, ask yourself “Do I have it in me?” Innovation requires fearless leadership that doesn’t use legacy technology as an excuse for maintaining the status quo. The pandemic has created an opportunity to break the inertia that has kept innovation from flourishing. Now is the time to commit to innovation and begin the work of reinventing your institution. I’ll admit, some consumers will return to pre-pandemic behaviors, and so will some banks. But given the changes we’ve already seen, I’m confident that banking will continue to evolve as consumers demand more innovation. 

Sullivan will be a keynote speaker at the WBA Management Conference, September 13–14 in Green Bay.

About the Author 

Joe Sullivan is CEO and founder of Seattle-based Market Insights, a consultancy with expertise in strategic planning, delivery optimization, culture transformation and leadership coaching. He can be reached at jsullivan@formarketinsights.com, or on Twitter — @mi_sullivan.

By, Ally Bates

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What’s in a Name? The Intersection of Brand and Community

Bank name changes go beyond charter conversions

What's in a (bank) name? It's branding, but so much more. Competition, growth and expanding markets, local history, M&A, relationship with the community… An inexhaustible list of influences can impact an institution's strategy for its name. Changing names is not a decision made lightly for any business, but when approached strategically it can be an effective way for banks to retain or gain target customers or to deepen its connection with a wider community. 

A bank's motivation to change its name could range from compliance (i.e. a charter conversion), to significant changes in corporate strategy, product/service mix, or the bank's target market, to differentiating or refreshing the bank's current brand, according to John Verre, president and CEO, Leap Strategic Marketing. Regardless of the reason behind the name change, more and more banks are choosing creative, non-traditional names. "What we see reflects banks recognizing the value of a brand and trademark," explained Jason Hunt, attorney at Boardman & Clark, LLP. "Traditionally, many banks picked names reflective of their local geographic community or descriptive of their position in the community, but as they expand they want to have more of a unique trade name or brand." 

Fortifi Bank, formerly known as 1st National Bank of Berlin, is a perfect example. The bank is 142 years old and originally chartered in Berlin, Wis. Over the past two decades, however, it expanded its footprint well beyond its name. "We now reach from Waunakee to Green Bay," said President/CEO Eric Cerbins. "We were being confused with a few other First National Banks within that footprint." The bank rebranded a few years ago in order to differentiate, but the market confusion continued. "It used to be there was just one First National Bank in each community, but as we grew our territories started to overlap," explained SVP – Marketing Loni Meiborg. When the bank decided to convert from a national to a state charter, it also used the opportunity to change its name in order to achieve the market differentiation it was looking for. 

Another bank that recently moved beyond geographic names is Bluff View Bank, formerly Bank of Galesville (as well as Seven Bridges Bank, Holmen and Bank of Trempealeau). "The name change is a larger rebranding of the bank and the result of several years of strategic planning and consultation with our marketing agency," said President/CEO Scott Kopp. "When we first went into new communities we wanted to be part of that community, including the name." However, maintaining separate entities for each community the bank served presented problems. "We found it was difficult to market three different entities with different names and logos," Kopp explained. "It was cumbersome, and some of our customers weren't aware that we were affiliated with our different locations."

4 Steps to a New Name

While changing a bank's name is not a small undertaking, there are several steps you can take to make the transition smoother. 

1. Generate a list of possible names. First, make sure you understand the regulatory constraints on your name. "DFI's Division of Banking interprets Wisconsin law to require a state-chartered Wisconsin bank to include the word 'bank' in its name," explained Patrick Neuman, attorney at Boardman & Clark, LLP. It's also important to keep in mind how important differentiation is to your institution when you begin brainstorming. "Most banks want to use words that reflect their values, but oftentimes banks have similar values," Hunt pointed out. "Banks have to start thinking outside the box." Banks should consider formal research into how its new name or brand can differentiate it from competitors. "Some changes require research involving customers, prospects, and employees," said Verre. "Think of it as a gap analysis. Look at banking in your community and ask what's missing."

The name "Fortifi Bank" began at a facilitated session with 16 bank staff members of different demographics and backgrounds who focused on the bank's present and future identity. From there, they generated a list of 200 different words that the bank's marketing department filtered, combined, and narrowed down. "We got really creative and reviewed everything that was generated," said Meiborg. "We could have stuck with a more traditional name, but we took the opportunity to evaluate our target market and deliver a name that is better aligned." Bluff View Bank used a similar approach, seeking employee opinions very early on. "I asked all of our employees to give us suggestions, and they, along with our marketing agency, really came up with some outstanding names," said Kopp. "We then had to get them vetted and trademarked. We narrowed it down to three, and then had a voting process to get input from employees again." 

2. Conduct an initial screening. As Kopp stated, it is critical to vet the list of potential names before investing any time or money in the new brand or name. "Banks get very far down the road and very excited about a new name before doing an initial screening, and then are disappointed if it's not available," Hunt cautioned. "I highly recommend doing that initial screening first. It's inexpensive to do an initial trademark screening through a law firm and it's better to do it at the beginning than to spend a lot of money creating a new name and brand only to discover a problem down the road." If the bank has plans to expand its market area in the future, Hunt strongly recommends registering the new name with the U.S. Trademark Office. "Assuming the name is available, a U.S. trademark registration will give the bank constructive rights to use that name even in areas where the bank has not yet started doing business or using the name," he explained. "The advantage is, as the bank expands, it can continue to use the name and won't be forced to change."

3. File with the Wisconsin Department of Financial Institutions' Division of Banking. This is the step where the bank formally adopts its new name. "The way a bank changes its name in Wisconsin is to file an amendment to its articles of incorporation," Neuman explained. "That requires a majority vote of the bank's shareholders." Since most Wisconsin banks have a holding company, this requirement is simpler to accomplish than some banks assume, since the holding company board can vote on behalf of its shareholders. Banks also have the option of delaying the effective date of the change up to 90 days, if that fits their rollout strategy better. 

4. Communicate, communicate, communicate! Of the dozens of action steps involved in launching a renaming/rebranding campaign, the most essential is clear, effective, and timely communication with regulators and vendors, customer/clients, and the community. "Make sure you work with your core data processor to have your new legal name on all of your contracts," Neuman advised. Other important considerations include correspondent debt held at the holding company level and the bank's insurance policies. "A legal name change should not affect the validity of your contracts, but it's still a good idea to let all of your vendors and providers know ahead of time," he continued. "Name changes are mostly a state-driven issue. However, the state-chartered banks do need to file a FRY-10 with the Fed and should notify the FDIC in writing of the name change."

Bluff View Bank and Fortifi were both pleasantly surprised by how positively their customers and clients reacted to their bank's new name. One thing that likely influenced that reaction: both institutions also had board members and/or staff, including loan officers, reach out to clients in advance to notify them of the upcoming name change. If the name change is not the result of a merger, Verre strongly recommends over-communicating that to your customers. "Take the same steps to communicate to customers and employees as you would if it were a merger, so you ensure they know it's not a change in ownership," he said. "Many consumers will assume when you change your name there might be M&A involved, so you need to communicate that it's the same ownership, locations, employees, and products and services." 

The key, according to Meiborg, is to make sure your customers and community know only the bank's name is changing, not its commitment to them. "We work very hard for our communities to know we're part of them," she explained. "Throughout the process it's important to remind the community that you're not changing what you stand for or interrupting your service. You're changing so you can be around longer and stronger to keep serving the community."

Boardman & Clark, LLP is a WBA Gold Associate Member.
Leap Strategic Marketing is a WBA Associate Member.

By, Amber Seitz

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Staying on Track: 5 Key Factors to Consider When Calibrating Your Capital Plan

Tactical allocation of capital is an integral component of success for every financial institution, so capital planning and strategic planning should be closely tied. Just as bank management and the board must regularly review their institution's strategic plan and make adjustments, an effective capital plan should be reviewed and recalibrated at least annually. That assessment has never been more critical, as the financial services industry approaches what could be a tumultuous period. "The full rollout of the capital conservation buffer under Basel III, CECL, and a potentially completely different economic cycle will be hitting at about the same time, so banks need to be considering and planning for that now," said Nick Hahn, director of risk advisory services at RSM US LLP. "It's a bit of a perfect storm." To adequately prepare, bank management and directors should consider the following five key factors as they look back at 2017 and forward to 2018 during the capital planning process: 

1: Strategy
The bank's strategic plan is the most significant influence on the capital plan, since different strategic goals require different capital strategies. According to Jon Bruss, managing principal and CEO of Fortress Partners Capital Management, there are several situations common to our industry that drive the need for capital: growth in assets exceeding the ability of the bank to retain earnings to support the growth, asset quality problems wiping out a large block of capital, or preparation for an acquisition as a buyer are among them. "There is no one solution that works for all banks in all situations," he said. Banks dealing with rapid growth in assets driven primarily by loan growth can fund a capital shortfall with common equity or with debt issued by a bank's holding company. "Any bank that's in the market for an acquisition and doesn't have a quote symbol for its stock is going to need to make that purchase for cash," Bruss explained. There are several options bank leadership should consider for sourcing those funds. "Cash at the holding company level can be sourced with debt raised via an investment banking firm, lent by a correspondent bank or by an offering in the communities served by the bank, each approach carrying a different cost," Bruss advised. Common equity can be used to raise cash to fund that purchase, "by selling shares to members of the community or via an investment banker-assisted community offering," he continued. "That requires thoughtful planning today, because tomorrow you may be an acquirer." 

2: Unexpected Occurrences
In addition to a yearly review, sudden, unplanned-for incidences should trigger a reassessment of the bank's capital plan. "If there's an unexpected loan charge-off that impacts your capital, for example, review your plan again then," said Lee Christensen, partner, financial institutions practice at Wipfli. "That way you know if you're on track or if you need to change the way you operate in order to get back on track." A cybersecurity breach or unanticipated findings during ALM routines and/or liquidity forecasting should also trigger a review. 

3: Competition
Today's financial services industry is highly competitive, and banks need to win against more than just their peers—credit unions, farm credit lenders, and even financial technology companies are all vying for the same customers. That can lead to dangerous choices. "You can sacrifice on term, price, or structure, and for many institutions pricing has reached the bottom, so now they're making decisions to sacrifice on term or credit risk monitoring controls, which ultimately increases credit risk," Hahn explained. "Financial institutions need to be very aware of the role competition in the market has played and how that could impact credit losses going forward and, ultimately, capital." To address this risk, Hahn recommends bank leadership maintain a thorough understanding of how potential losses could impact the balance sheet. "If we see any upticks in losses, you need to understand what's driving it and know if you need to extrapolate or do broader analysis of the portfolio in general to see if it will spread," he advised. 

4: Legislation and Regulation
Looking forward to 2018 and beyond, there are several legislative and/or regulatory factors to consider when doing capital planning. First is tax reform, which Christensen says will be a big event for banks if it comes to fruition because many banks currently hold a large amount of tax-deferred assets on their books. If Congress follows through on the plan to drop the tax rate from 34 percent to 20 percent, those assets will need to be revalued. "That will be a good thing in the long run, but it may have a negative impact in year one because the offset goes into expense, which ultimately flows into capital," Christensen explained.

Another factor to consider is Basel III's phase-in. In mid-October, the Basel Committee on Banking Supervision announced a plan to break the year-long deadlock that has delayed the capital standards' implementation: setting capital floors at 72.5 percent. The measure has yet to be approved by the central bank governors and supervisors on the Basel Committee's oversight body. 

Finally, the regulatory factor looming largest over the industry: CECL. "In the year of adoption, banks will be allowed to look at their allowance as it's calculated under the old and new methods and the difference will be a one-time charge to equity," said Christensen. "We'd recommend banks preserve capital for that hit, rather than maintaining excessive allowance." However, there is still some uncertainty, as banks seem to be waiting for guidance from regulators on how to build their new models, but the regulators seem to be waiting to offer guidance until they see the models. 

5: Economic Cycle
Banks should review their capital plan more frequently during times of economic turbulence or market instability, and the next period of such agitation is on the horizon. "We're likely closer to the next recession than we are to the last one," Hahn declared. "Many institutions are making the loans that will be their next losses right now." One sector in particular where the coming downturn is apparent is in the highly cyclical agri-business arena; while not yet as severe as some previous dips, ag credits are becoming more stressed. "If and when charge-offs become necessary, the banks need to have the capital available," said Christensen. "We've gone five or six years with very minimal charge-offs. The economy has been on a relatively long upturn during that period, but it doesn't feel like it because we haven't seen the sharp incline that we had in the early 2000s."

Take Action

With these factors in mind, bank management and directors should consider the following action steps (all suggested by one or more of the experts interviewed for this article) to ensure a comprehensive, effective review of their capital plan:

  • Refer back to your original capital plan and your projections. Compare that data with what your current reports tell you.
  • Closely evaluate the 30- and 60-day reports to see if there is potential for those to extend into the 90-day past due report.
  • Adjust your approach to stress testing. Relying on probability of default—looking at what causes borrowers to default—isn't as valuable from a capital planning perspective as using loss-given testing to anticipate the bank's exposure if certain loans go bad. 
  • Understand the capital sources available to your bank in its current state and also in anticipated future states. In other words, verify that your capital plan is realistic. If your institution isn't attractive to capital markets at the time when you need capital the most, know what your alternative source of funding will be. Leveraging your third-party relationships is an important component in maintaining an accurate understanding of today's capital markets.
  • Avoid a siloed approach to reviewing capital. Other risk management exercises and models, including interest rate risk and liquidity, should all impact your capital planning process.
  • Adhere to your loan policies. Amid fierce competition and an economic expansion, it is essential for bank leadership to enforce loyalty to the bank's policies in order to prevent taking on excessive risk.

Capital planning is one of the executive team and board's most important duties, so frequent assessment and adjustment of the plan is not only a good practice from a risk management perspective, but also from a strategic perspective. 

Fortress Partners Capital Management is a WBA Associate Member. 
RSM US LLP is a WBA Gold Associate Member.
Wipfli is a WBA Silver Associate Member. 

By, Amber Seitz

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Channel Surfing: Banks Adapt to Shifting Customer Preferences with Multiple Delivery Channels

When it comes to delivery channels, the quantity over quality strategy is ineffective, Gallup research shows. In studies and surveys conducted from 2013-2016, Gallup has found that some banks have focused on aggressively expanding the number of channels they offer their customers without first researching how to choose the channels that best fit their customers and their overall strategic goals. Channel satisfaction is the key to increasing engagement and deepening the bank's relationship with its customers, and the key to channel satisfaction is identifying how and where your customers want to interact with you. 

The list of channel options for product delivery and marketing seems endless—but rather than having 500 channels and nothing good on, a strategic channel approach can effectively engage your audience. When the focus shifts from individual channels to the overall customer experience, it can be easier to identify where to focus. In general, channels can be classified as either traditional or digital and used for product delivery or marketing. Wisconsin Banker interviewed four experts to highlight current popular channels for banks to consider. 

Branches
"Branches are not dead, they're just changing from transaction centers to sales centers," said Mark Arnold, president of On the Mark Strategies. The bank branch is still a key channel because customers still want to know their banker and value the experience they have with the bank—regardless of whether that experience is online or in person, according to Sara Baker, vice president, Ladysmith Federal Savings & Loan. "Customers still demand that high-touch personal service from their community bank," said Baker. "Balancing the digital versus human touch relationships with our customers is key to the future of community banking."

Interactive Teller Machines
"Interactive teller—or video teller—machines are something every bank should study," said Jay Coakley, president of Coakley Strategic Solutions, LLC. "You can reduce delivery cost and provide great customer service, especially in a small community, by utilizing employees in one location to service customers in another location. It's great technology." These machines can help banks maintain strong service relationships even in locations where a full-scale branch is inefficient or prohibitively expensive to operate. 

Core Processors
Banks should consider the delivery channels offered through their core vendor, according to Jim Pannos, president and principal of the Pannos Marketing Agency. "Many of our clients are getting involved with their core processors to get their most recent release because there are so many more capabilities within the newer core processing platforms," he explained. 

Email 
"Don't forget the power of email," said Arnold. "Email is still a great channel to use to deliver products and services. Think about how scalable they are and how they look on mobile." For example, with the growing number of emails viewed on mobile phones, the format needs to be designed to allow readers to scroll through content easily.

Content marketing
In all digital marketing, but email especially, good content is a critical component. "Consumers today really want content and not sales pitches," said Arnold. "It's what you're saying as opposed to how you're saying it." Banks can position themselves as expert advisors by offering useful information to their customers through blogs, their website and emailed newsletters. However, Arnold cautions against too much verbosity: "People are consuming more information than they ever have before, but in smaller bites. Information you send out needs to be digestible," he said. 

Online
Technology that allows customers to access answers when the bank's doors aren't open will become increasingly important, according to Pannos. "Your bank doesn't have to be open 24 hours, but people are focused on accessing at their leisure versus when the bank is open," he said. The convenience of online banking appeals to many customers who previously performed transactions in the branch. "Consumers are not increasing the number of transactions each month," Coakley said of the growth in online and mobile transactions. "They're just interacting with the bank in a way that's more convenient for them."

Mobile
"Mobile has the strongest trend line," said Coakley. "From the studies we've done, mobile banking's trend line is going up at a steep increase while online, in-branch and phone systems are declining." However, it is important that the bank dedicate enough resources to their mobile app to make it both functional and intuitive or many customers will not adopt it as a preferred channel. "Customers expect a bank's mobile app to be vibrant, easy-to-use, and fast," Pannos explained. 

P2P Payments
Person-to-person payment applications like Vimeo are becoming the preferred tool for younger consumers, which makes these types of delivery channels a potential market for banks that choose to target younger customers. "Usage of [these apps] isn't going to shrink," said Pannos. "Banks should be aware of that as they're looking at their technology and how they're going to serve the millennial generation and Gen Z. They're looking to those types of platforms as currency."

Remote Deposit Capture
This service allows customers to deposit checks via their mobile phones by simply snapping a picture of it, and while it's becoming very popular, banks should be cautious. "It's a great service, but it can be costly, especially for smaller banks," said Pannos. Due to the diminishing number of checks being written across the industry, he advises banks to assess the overall market demand and competition for the product, as well as examine their own customer base demographics to ensure the product will assist in the bank's overall customer satisfaction and retention. 

Before Diving In…

So which channel(s) should your bank invest in? There are four main areas to consider when investigating a channel strategy upgrade: your customer base, cost, marketing and training. "It's important for banks to understand their market and their customer base," said Baker, pointing out that customer demands for a bank in metropolitan Milwaukee will be very different from those at a bank in rural northern Wisconsin. "Just because the bank down the street offers a certain product doesn't mean your bank needs to offer that same product. Ask your customers what they want before diving in." Coakley recommends defining not only what the bank's current customers want for delivery channels, but also the preferences of the bank's targeted future customers. "It's about what your current customers want and what your future customers want, and those can be two vastly different answers," he said.

While upgrading or purchasing new delivery channels can be costly, banks need to consider their options from all angles. For example, purchasing new video tellers may reduce branch overhead expenses enough to offset the initial cost. "Investing in new technology and solutions can overall reduce the cost of operations, so this is important to look at too," said Baker. Intentionally migrating your customers to digital channels can also lead to staffing changes. "Long-term reduction in FTEs pays for the new technology," Coakley explained.

Additionally, the bank must plan to market any new channels in order to optimize usage rates. "You may have great products and technology, but if you don't communicate that to your customers and your community, they won't adopt it," said Coakley. A review of the bank's current marketing channel strategies is also essential. "The very first thing every bank needs to do is conduct a marketing audit," said Arnold. "You need to look at each of your channels and how successful they are, then come back with strategic and tactical recommendations for changes." Finally, as with any major operational or product changes, the bank must offer training to its staff. "Banks need to invest in their staff, training them on ways to provide quality customer experiences at all touchpoints," Baker advised. 

Whether your bank has three delivery channels or 30, it's important that your customer experience is consistent across them. "Rather than thinking about just one channel, think about the experience," Arnold advised. So, when a customer visits a branch they experience the same level of service and style of messaging as when they visit your mobile app or website. "That's the challenge that banks face today," said Pannos. "You have to be old-fashioned in some aspects and cutting-edge in others." Because consumer preferences are so capricious, it's essential for banks to constantly reevaluate their channel strategy and adapt to what they learn. "Customers will continue to crave whatever technology is available which offers them convenience and a personal experience," said Baker. "As the technology evolves, banks too need to evolve."

By, Amber Seitz

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Innovation and Identity: How to Embrace Change Without Changing Who You Are

Hint: It's not all about technology

Sometimes change is driven by a fundamental shift in the industry (think ATMs, internet banking, or today's pairing of cloud storage and mobile devices). Other times it is born from necessity, as banks fight to stay profitable in a persistent low-rate, high-regulation environment. The one certainty is change itself. The challenge for banks is to transform in a way that fits their identity rather than jump to extremes – so pump the brakes on buying that fintech startup. The best way to innovate without losing your identity is to foster a culture of innovation grounded in the bank's strategic goals, both with regard to internal processes and customer-facing technology.

Hone Internal Processes

Innovation, to have the greatest positive impact, must permeate the institution. That requires support from the top: the board of directors and CEO. "It starts with the CEO and the board including innovation discussions in their strategic planning," said David Peterson, CSO and Founder of i7Strategies. "Then, they can form a cross-functional group in the bank to work on specific innovative ideas." That cross-functional group should involve representatives from all areas of the bank. "Innovation, like serving customers, is really the job of all areas of the bank," explained Bob Giltner, Chairman, RCGILTNER Services, Inc. "Some banks establish committees or define a specific person to spearhead the effort as a way to build buy-in for the organization across functions." It's also a good strategy to look outside the bank for ideas. Jack Vonder Heide, president of Technology Briefing Centers, Inc. recommends designating a high-level bank employee as the primary researcher, and when they find an article about a bank in another state doing something innovative, to call that bank up. "They're happy to share that information as long as you're not a direct competitor," he pointed out. 

Whether an individual or a team is in charge of innovation at the institution, the first step is evaluating and updating the bank's processes. "Innovation should be directed to both customer-facing and internal operations," Peterson explained. This kind of procedural innovation involves identifying processes and procedures that occur simply because they've always occurred and streamlining them as much as possible. Giltner recommends constructing a process map for each of the bank's service processes for products and deliver channels. That typically involves placing the delivery of the product on one end of a whiteboard and the need for the product on the other end, and then filling in all of the execution steps in the middle. For example, on one side you have a customer using their checking account, and on the other a customer requesting information about the types of checking accounts the bank offers. "Innovation looks at the entire process and asks where improvements can happen," Giltner said. "Look for areas of greatest friction." Procedural innovation should be an enterprise-wide effort, too. "Banks should start encouraging innovation internally," Peterson advised. "Ask your employees to be innovative, no matter what their role is."

"Innovation does not have to use new technology," Giltner said. "Innovation can be accomplished simply by defining new processes or organizational structure." For example, before the mid-1980s, the idea of "giving away" checking accounts was anathema in banking. Later, free checking became one of the most popular methods banks use to begin relationships with new customers. "That was a huge delivery and customer service innovation that was not technologically driven at all," Giltner explained.

Team Up for Technology

When it comes to the more visible side of innovation (technology), banks have more of an upper hand in the market than many think. "If you step back for a minute and look at the data banks have, they know where and when people spend their money," said David Furnace, CEO of Haberfeld Associates. "That's an incredibly valuable data asset." That data, combined with the pre-established trusted relationship with customers, means banks are in a good position to partner with technology vendors. "The key thing banks need to see is that they have competitive advantages in fintech with a lower cost of funds and established customer relationships in comparison to non-banks," said Giltner. In other words, banks have already developed the client networks and compliance processes that lie beneath the technology and allow the industry to function.

On the other hand, fintech companies and technology vendors have the expertise and products to unlock bank data and leverage it to deepen customer relationships. "This will be an area where banks can partner with technology vendors in the future in order to leverage all of that data and make it actionable," said Furnace. If management determines that adding or updating technology to the bank's offerings is the right strategic direction to move in, partnering is a viable option. "What fintechs do is create 'shiny objects' for consumers, but because they themselves are not banks, they still have to work with banks in order to facilitate transactions," Peterson explained. "So banks can effectively compete by educating their customers on the types of services they offer, and then partnering to offer customers those shiny bits while still keeping their accounts with the bank." 

There are a wide range of benefits for banks that choose to partner with fintech companies rather than go it alone. "The rewards for community banks to focus on this and partner are very substantial," Vonder Heide explained. "You're making it possible for very small or new businesses to do business with your bank in a profitable way." Furnace says lending is also an area of opportunity for these partnerships. "Scale is difficult to achieve for some community banks, and deploying technology can allow for that scale." 

Of course, banks must weigh the risks with the rewards of all potential partnerships, particularly regulatory risk. "You have to put it together in a way that passes regulatory muster," Vonder Heide cautioned. "You also need to have a process for vetting your partners, especially considering most of them are very new." For most Wisconsin banks, however, the benefits of establishing a partnership with a fintech company outweigh the risks because of the sheer volume of resources required to initiate technological innovation solo. "Many community banks don't have the resources to go out and invent new technologies," said Furnace. "What they have is a trusted relationship with their customers." 

Take a Focused Approach

Those established customer relationships are the bedrock of community banking, and true innovation requires an approach focused on that identity. The first step in determining your bank's unique innovation ID is to define your appetite for change. "The first thing that the board of directors needs to do is decide what kind of a bank they want to be in terms of innovation," Vonder Heide advised. That means identifying where on the spectrum of innovation and implementation the bank should be. Do you want to be the first institution in town with every new product or feature? Do you want to be a fast follower, learning from other institutions' mistakes? Or do you want to hold off on change until your customers demand it? "Once you decide what type of bank you want to be, that will drive everything else," said Vonder Heide.

Next, management must determine which potential innovations to implement, because in today's banking environment no one has a lot of room to experiment. "It's tough for community banks in a time of zero interest rates, always increasing regulatory pressure and expenses," said Furnace. "It's important to choose wisely, but there are absolutely innovations that can make community banks more profitable." Winnowing down the list of possibilities should revolve around the bank's stakeholders. "Innovation should be focused on where it can make the biggest impact on the bank's stakeholders: customers, employees and shareholders," Giltner said. "Ideas should be prioritized based on the ratings of value for these stakeholders." 

To maximize value for shareholders, return on the investment must be part of the decision-making process when selecting ideas to implement. "It's trite but it's true: it has to be ROI," said Furnace. "The world of innovation is so broad, at the end of the day it has to contribute to your bottom line." To incorporate the customer perspective, Vonder Heide recommends forming an advisory group consisting of customers to help vet new ideas. "A lot of community banks make the mistake of introducing technology initiatives based on what they hear or observe from other banks," he said. "Your customer base is where you should go for technology initiatives."

Finally, don't assume cost when you're narrowing down your list of ideas to implement. Many impactful changes are also cost-effective. "The biggest fallacy right now is that innovation is a high-cost effort," said Peterson. "Particularly with branch transformation, innovation doesn't have to be expensive." It can be as simple as redecorating a branch office or removing a duplicative step from a back-office process. The most critical component of identity-centric innovation is to remember you probably won't get it 100 percent right on the first try. "You can't just decide you're going to innovate and suddenly be good at it," said Peterson. "In order to have perfected innovation in the coming years, you need to start now."

By, Amber Seitz

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Personalized Strategic Plans

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

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

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

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