Banks & Bank Holding Companies / Capitalization & Employee Benefits

Unlike other businesses, banks face unique regulatory and financial challenges. Privately held community banks will continue to have difficulty raising capital over the next several years. Investors continue to be cautious and community banks will be especially challenged in attracting investors due to their desire for both higher rates of return and liquidity. One option for those banks is an Employee Stock Ownership Plan, or ESOP.

An ESOP can use tax deductible contributions made by a bank or Bank Holding Company to purchase newly issued stock, thereby returning the cash to the balance sheet of the Bank or Holding Company. These funds improve capital strength and could also be used to repay funds to the federal government’s Troubled Asset Relief Program (TARP). Due to the higher share values often available to ESOP stock purchases, at times the ESOP can also serve as a market maker to third party shareholders, thereby increasing overall stock sale value.

The ESOP can also provide an employee benefit where shares purchased by the ESOP and held in a retirement trust are allocated to all employees including management. This may be an attractive option in an otherwise highly regulated environment limiting management’s ability to hold bank stock or participate in an equity equivalent benefit program.

Corporate Capital Resources consults with closely held and thinly traded banks on the best uses of this tool for favorable outcomes as outlined below:

  • ESOP to augment capital
    • Tax advantages of deductible contributions
    • Sale of newly issued shares to add to Tier I Capital
    • Possible use of proceeds to buy out TARP
  • Internal stock market
    • Can buy existing shares
      • Purchased at appraised value which can close bid/ask gap
    • ESOP owns “friendly” shares as Trustee votes
    • Control issues
  • Providing an employee benefit
    • Eligible employees participate
    • Reward employees to add long term value