• Home
  • Education
  • News and Resources
  • Advocacy
  • Associate Members
  • Contact
  • Search
  • Menu Menu
News
News

What if Your Employees Owned The Bank?

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: 

  • National Center for Employee Ownership (NCEO) – www.nceo.org
  • ESOP Association – www.esopassociation.org
  • Wisconsin ESOP Association – www.wiesop.org
  • Subchapter S Bank Association – www.subsbanks.org 
  • Other banks with ESOPs
  • Third-party consultants, including tax advisors, legal counsel and specialty advisors

By, Amber Seitz

Print 🖨
August 23, 2016/by Jose De La Rosa
Tags: ESOPs, Succession Planning, Wisconsin Banker
Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on WhatsApp
  • Share on Pinterest
  • Share on LinkedIn
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail
https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg 0 0 Jose De La Rosa https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Jose De La Rosa2016-08-23 09:53:252021-10-13 13:43:22What if Your Employees Owned The Bank?
You might also like
Responsive by Design: Strategic Plans Must Allow for Detours on the Road to Success
Innovation and Identity: How to Embrace Change Without Changing Who You Are
WBA Celebrates 130 Years of Service
August 2022 Wisconsin Banker
October 2022 Wisconsin Banker
Staying on Track: 5 Key Factors to Consider When Calibrating Your Capital Plan
Legal Q&A: POD Beneficiaries for Deposit Accounts
Building a Better Budget

Categories

  • Advocacy
  • Community
  • Compliance
  • Credit Unions
  • Education
  • Member News
  • News
  • Products
  • Resources
  • Uncategorized

Recent Posts

  • Nelson Celebrates 30 Years at National Exchange Bank & Trust
  • Bakalars to Retire
  • PWSB Mortgage Lenders Receive the Five Star Mortgage Professional Award
  • Executive Letter: Wisconsin Supreme Court Upholds Priority of Secured Creditor Under Receivership Rules
  • Peshtigo National Bank Announces Promotions

Archives

  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • December 2020
  • November 2020
  • October 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • May 2019
  • April 2019
  • March 2019
  • November 2018
  • September 2018
  • August 2018
  • June 2018
  • April 2018
  • March 2018
  • January 2018
  • November 2017
  • October 2017
  • September 2017
  • May 2017
  • April 2017
  • December 2016
  • November 2016
  • August 2016
WBA logo
  • About
  • Community
  • Subsidiaries
  • Staff

questions@wisbank.com

608-441-1200

4721 S Biltmore Ln.
Madison, WI 53718

Get our Newsletter!
Subscribe

© 2023 Wisconsin Bankers Association. All rights reserved. | Website Design by Bizzy Bizzy
Three Tips to Raise Your Credit Score and Keep it HighStructural Integrity: Make compliance part of your institution’s DNA
Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

OKLearn more×

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Terms of Use
Accept settingsHide notification only

Subscribe

* indicates required








Membership