By Greyson Tuck, Attorney and Consultant, Gerrish Smith Tuck

The fundamental duty of community bank directors and executive officers is to enhance shareholder value. One of the key tenets of enhancing shareholder value is providing actual common stock liquidity. In this regard, liquidity is defined as the ability of a shareholder to convert their shares to cash at a fair price in a timely manner. Unfortunately, many community bank stocks do not enjoy market liquidity. A community bank shareholder’s inability to convert their shares to cash at a fair price in a timely manner represents one of the biggest threats to the ability to maintain long-term community bank and holding company independence. If your community bank has adopted a strategy of long-term independence and your stock does not enjoy market liquidity, the following should be considered to provide for liquidity in the common stock:

  1. Walk-In Stock Repurchase Program – A Walk-In Stock Repurchase Program offers share liquidity by authorizing a representative of the holding company, typically the President or Chief Executive Officer, to repurchase on behalf of the holding company shares of holding company common stock within certain board-established parameters. To implement a Walk-In Stock Repurchase Program, the board passes a resolution that (i) allocates a specific amount of corporate cash to the program; (ii) establishes the per share price at which the authorized representative may repurchase shares; and (iii) establishes any other terms or conditions appropriate for the program, such as a maximum number of shares to be repurchased from a selling shareholder. Following approval of the board resolution, the authorized company representative is free to act upon any shareholder request for liquidity that fits within the established program terms. This provides the shareholders a ready, willing and able purchaser that can quickly react to shareholder liquidity needs.


  1. Voluntary Stock Repurchase Program – A Voluntary Stock Repurchase Program is a formal program memorialized in a written document distributed to the shareholders that describes the terms and conditions of an offered share repurchase as approved by the board. In this type of program, the board allocates a specific amount of corporate cash to the purchase of holding company common stock at a specified price per share. Similar to a Walk-In Stock Repurchase Program, the board is free to incorporate any other program terms determined appropriate, such as minimum share repurchase requirements, or a requirement that a shareholder owning less than a specified number of shares sell all of their shares to participate in the program. Once the voluntary stock repurchase program document is drafted and approved by the board, the documentation is distributed to shareholders for their consideration. Any shareholders wishing to sell shares back to the holding company may then respond in accordance with the terms of the program.

A Walk-In Repurchase Program is a reactive solution to shareholder liquidity, whereas a Voluntary Stock Repurchase Program is a proactive solution to shareholder liquidity. The general concepts relative to the programs are the same. The primary difference is in a Voluntary Stock Repurchase Program the shareholders are provided specific program documentation that actively solicits the repurchase of shares, should the shareholder wish to sell.

A bank holding company’s repurchase of its own stock provides a number of corporate benefits. The selling shareholder receives cash for the purchase of their shares at a fair price in a timely manner. The corporation and the remaining shareholders realize a number of benefits from the repurchase of shares, such as:

  • An increase in share ownership percentage for the remaining shareholders without individually coming out of pocket with cash
  • Increase in return on equity
  • Increase in earnings per share
  • Increase in dividends or distributions per share, assuming the aggregate payment remains the same

There are several issues bank holding companies that are considering a Walk-In or Voluntary Stock Repurchase Program must think through. Of primary importance is how the program will be funded. One option is to allocate the organization’s “excess capital” to the program through payment of a special dividend from the bank to the holding company to provide the holding company cash to repurchase the shares.  Another option is the use of bank holding company debt, either by drawing down on a line of credit, taking out a term loan or issuing subordinated debentures.

Another consideration is the price per share to be paid for the stock that is repurchased. The repurchase price is set by the board of directors and should balance the competing interests of the selling and remaining shareholders. In other words, the repurchase price should fairly compensate the selling shareholders for the value of the stock while also serving the interest of the remaining shareholders by not overpaying to complete the repurchase. To achieve this balance, the board of directors should always conduct a financial analysis of the potential stock repurchase before finalizing the terms of the program.

Additionally, bank holding companies should keep regulatory considerations in mind when assessing a potential share repurchase program.  The applicable regulations generally provide that a bank holding company may not engage in a repurchase of more than 10% of the company’s equity within any 12-month period without first receiving regulatory approval. However, there are specific exceptions to the prior approval requirement, which generally provide prior approval is not required when the holding company and lead bank are in good regulatory standing and will remain well capitalized and well managed after the share repurchase. Notwithstanding these specific regulations and exceptions, the Federal Reserve has issued guidance that indicates bank holding companies that are going to engage in a material share repurchase should at least consult with the Federal Reserve prior to completing the purchase. Our recommendation is to provide advance notice of a material share repurchase to the Federal Reserve prior to its commencement even if formal approval is not otherwise required.


  1. Employee Stock Ownership Plan (or KSOP) – A third liquidity alternative is the development and utilization of an Employee Stock Ownership Plan (“ESOP”). This may also include an ESOP with a 401(k) feature, commonly referred to as a KSOP.

An ESOP is a trust established for the benefit of the bank employees, the purpose of which is to purchase holding company stock for the benefit of the employees. The ESOP receives cash to purchase shares for the benefit of the employees through the receipt of tax deductible contributions from the bank.  However, employer contributions are not the only source of cash for an ESOP. It is possible to leverage the ESOP, which allows the ESOP to borrow from a third-party lender (not the underlying bank) and use the proceeds from the debt to purchase shares. This provides an additional source of cash for the ESOP, which may be used to repurchase shares from a shareholder looking for liquidity.

A KSOP is similar to an ESOP, except a KSOP has an additional source of cash. In a KSOP, employees are provided the opportunity to direct a portion of their 401(k) funds (typically not more than 50%) to the KSOP for the repurchase of shares. This can be either existing 401(k) balances, future 401(k) deferrals, or both. Essentially, a KSOP adds holding company common stock to the menu of available investment alternatives for the bank employees.

As a qualified retirement plan, there are a number of rules and regulations applicable to an ESOP or KSOP.  Two of these are of primary importance. First, an ESOP or KSOP is prohibited from purchasing shares at a price that exceeds the fair market value of the shares as determined by an annual, independent appraisal (unless the stock is traded on an active market). For this reason, an ESOP or KSOP must have an annual valuation of the holding company common stock, and the price to be paid for the purchase of shares cannot exceed the determined amount. The purchase may be less than the appraised value. Second, an ESOP or KSOP must be “primarily invested” in employer stock. Although there are not specific regulations, this is generally thought to require at least a majority of the employer contributions to be used for the purchase of employer stock, which can come from either selling shareholders or the holding company through the issuance of additional shares.

Most community bank holding companies do not have market liquidity. For these holding companies, it is important they take a proactive approach to offering share liquidity. A Walk-In or Voluntary Stock Repurchase Program, or the establishment of an ESOP or KSOP, provides opportunity for the shareholders to enjoy true liquidity in the investment. This is an important component to enhancing shareholder value, and is vital to achieve a long-term strategy of independence.