Indie Banker


Janet Smith is one of many proud owners of Peoples Bank of Alabama

By Michael Blankenheim

Peoples Bank of Alabama

Headquarters: Cullman, Ala.
Assets: $520 million
Retail locations: 24
Full-time employees: 229
Founded: 1977

An Ownership Plan

Peoples Bank of Alabama began its Employee Stock Option Plan during the 1980s. Every year since then the bank has matched a percentage of its employees’ yearly paychecks with equivalent investments into ESOP for its employees’ retirements. The bank also offers a 401(k) retirement plan.

The ESOP gives the bank an extra competitive edge, its executives say. “Our associates take ownership of their delivery of service,” says Michael Babb, the bank’s counsel who administers the plan.

Meet Janet Smith, proud owner of Peoples Bank of Alabama, a $550 million-asset community bank in Cullman, Ala.

But Smith, the bank’s vice president and loan review officer, isn’t the only owner of the bank. She shares her personal investment stake with more than 200 other employees there.

That is because Smith, who joined Peoples Bank of Alabama in 1982 as a part-time teller, belongs to the bank’s Employee Stock Ownership Plan, as do virtually all of the bank’s other associates. The bank’s ESOP was created in 1985, and every year since then it has matched a percentage of Smith’s yearly paycheck with equivalent investments in the bank’s stock.

Today, the ESOP established by Peoples Bank has a total value of about $9 million. The plan is a retirement vehicle that doesn’t require employees to make matching contributions, unlike a 401(k), which the bank also offers its employees. Additionally, there are no taxes paid on an employee’s ESOP earnings until after the employee’s stock is bought out of the plan, either at his or her retirement or when he or she is no longer employed by the bank.

When Smith, 60, retires—hopefully in two years, she says—the bank will purchase her ESOP stock from her, thus providing her an extra retirement package that she has seen grow for more than a quarter of a century. The ESOP, she says, has profoundly influenced the way she and her coworkers view working at Peoples Bank of Alabama.

“It gives you a sense of ownership and pride. You feel like you’re not working for someone else, you feel like you are working for yourself,” Smith says. “You think more about what you can do to have a positive impact on the bottom line, about working more efficiently. Even little things, like not wasting supplies, can be important, because the more the bank profits, the more you have going into your ESOP.”

‘In your interest’

Michael Babb, general counsel for the bank and trustee of the ESOP and the bank’s 401(k) plan, says that kind of profit-minded thinking is infused within the bank’s corporate culture. Twice a year, Peoples Bank has regional meetings with its employees to discuss the mindset of being owners of the company.

“Our associates take ownership of their delivery of service,” Babb says. “There is better cooperation between management and employees. When we need something, we can go to them and say, ‘Look, this in your interest. This will increase the value of the bank’s stock and is going to make your retirement better.’”

Peoples Bank began its ESOP on the recommendation of an outside counsel who worked for the bank during the 1980s. Babb says that Congress authorized the creation of ESOPs in 1974 when it passed the Employee Retirement Income Security Act. The National Center for Employee Ownership reports that there are now about 11,000 businesses with ESOPs covering more than 13 million employees.

“For all the bad things you might want to say about government, ESOPs are one of the great things they did,” Babb says.

While there have been no millionaires created because of Peoples Bank’s ESOP, one employee at the bank—who worked for more than 25 years, first as a teller and then as a branch manager—retired with close to half a million dollars from his share of stock in the plan. “We’ve had several employees who have worked here a very long time, and they will receive that type of payout when they leave,” Babb says.

How ESOPs work

Babb says Peoples Bank makes stock contributions to its ESOP trust fund based upon the bank’s budget and an employee’s previous year’s earnings. Typically, the bank contributes 5 to 10 percent each year. Employees are vested at 20 percent after three months of working for the bank. Vesting continues on a sliding scale, with 100 percent vesting occurring after six years of employment.

“There is better cooperation between management and employees. When we need something, we can go to them and say, ‘Look, this is in your interest.’”
—Michael Babb, Peoples Bank of Alabama

There are several advantages for community banks to use an ESOP, says Babb. Under ESOP rules, a bank can borrow from the plan in pre-tax dollars. “If you want to pick up a couple more branches, this is the way of increasing your capital for the cheapest amount.”

Also, Peoples Bank, like other community banks, has had board members who have left their positions. Under the ESOP rules, they were able to sell their stock shares to the bank’s ESOP trust fund. “It was a way for the bank to buy out those directors, and allow the directors to go off and do what they wanted to do without having to change control, to sell the bank to someone else,” Babb explains. “Instead, the employees ended up owning the bank rather than an outside party.”

A potential downside to an ESOP, Babb says, is that if an organization maintaining an ESOP were to fail, then the plan’s stock would be liquidated and become worthless to its employees. To mitigate that risk, ESOP rules allow employees who are over 55 and have been with the plan for more 10 years to take money out of their ESOP accounts and move it to another investment vehicle.

That is what Smith did during the recession, when she moved funds from her ESOP to her 401(k). “I didn’t want to have all my eggs in one basket,” she offers.

Regarding other community banks, Smith wholeheartedly recommends that they explore ESOP as an option. The loyalty and dedication that such programs create among employees is huge, she says.

“I could have gone and worked somewhere else for more money, for more salary, but I would not have had a retirement benefit as good as this one.”
—Janet Smith, Peoples Bank of Alabama

Michael Blankenheim is a writer in Maryland.