Pub. 9 2014-2015 Issue 4

November | December 2014 13 Extraordinary Service for Extraordinary Members. For more information, contact John Schembari at Kutak Rock LLP at (402) 346-6000 or john.schembari@kutakrock. com. Schembari is chairman of the Employee Benefits and Executive Compensation practice at Kutak Rock, a national law firm headquartered in Omaha, Neb., with offices in 17 other cities. Schembari has been working with ESOPs for more than 20 years. He has worked on hundreds of ESOP transactions during this time. Schembari would like to thank Michelle Ueding, his partner and an officer in the Iowa-Nebraska Chapter of The ESOP Association for her assistance in the preparation of this article. (like 401(k) plans) may be converted to ESOPs as a means of accessing capital. Bank contributions to the ESOP can be made in shares of the bank, thus increasing capital. ESOPs can also improve capital while allowing management tomaintain control of the bank. ESOPs create a market for shareholders of a closely held bank. The ESOP becomes a ready, and friendly, buyer of stock when existing shareholders are looking for liquidity. As shareholders age and seek liquidity, the need to create a market for the bank’s stock becomes more urgent. ESOPs can play an important role. Finally, studies show that ESOP companies generate higher profitability because the employees act more like owners. Employees whomight not otherwise have the means of acquiring the bank’s stock now share in the financial per- formance of the bank. After considering the possible advantages and disad- vantages to establishing an ESOP, a bank should follow a systematic approach in confirming the viability of an ESOP and putting the proper safeguards in place. This process typically includes: • Feasibility Study. An ESOP transaction can be complicated. One of the first steps to a successful ESOP transaction is a feasibility study to explore the specific advantages and disadvantages of an ESOP for the bank. Considerations include cash flow, debt service, bank holding company and bank regulatory issues, and IRS limitations. One size definitely does not fit all. • Develop ESOP Team. Implementing a successful ESOP doesn’t require a village, but it does require a team of ex- perts. These experts include legal, accounting, valuation, administration, lending, and (possibly) a trustee. • Adequate Consideration. An ESOP cannot pay more than “adequate consideration” for a bank’s stock. To meet this requirement, the fair market value of the stock must be determined in good faith by an ESOP fiduciary. The valu- ation of the stock is often done by a qualified independent appraiser. It is important to engage a qualified independent appraiser early in the process to ensure the valuationmeets everyone’s expectations. • Independent Trustee. A trustee acts on behalf of an ESOP and is the actual owner of the ESOP’s stock. The use of an independent trustee will materially reduce the potential liability on a bank official serving in that capacity due to the inherent conflict of interest. Once a transaction is completed, the independent trustee can be retained on an ongoing basis, or can serve as trustee solely in respect to the transaction. • Plan Governance. Properly drafted ESOPs will identify the “plan administrator” and the other ERISA fiduciaries. A committee is usually named to serve as the plan adminis- trator. The committee is often comprised of representatives from human resources, finance, and senior management. It is important that the committee meets regularly to con- sider plan operations and investments, including stock administration. • Repurchase Liability. When employees retire or otherwise leave the bank, they are entitled to “put” or sell their stock held through the ESOP back to the bank. The cash payments needed from an exercise of a put will require the bank to maintain adequate cash to handle this liability. A bank’s repurchase liability should be addressed as soon as possible in the life of an ESOP to plan for future liquidity demands. An ESOP can serve as a very advantageous finance, capi- tal, and employee benefits tool for banks. As thousands of banks across the country have learned, a well-structured ESOP benefits the bank, selling shareholders, and the bank’s employees. The key to a successful ESOP is forethought and careful analysis from the onset. 