Six months after the JOBS (Jumpstart our Business Startups) Act went into effect, making it easier for banks to remain private, we asked lawyers their opinion on the advantages and downsides of public ownership. Although all raise good points, many believe the expense is just not worth it for that size bank. But if the bank is looking at acquisitions and access to capital that the public markets provide, public ownership is a good idea.
Does it make sense for banks with less than $500 million in assets to be public companies?
With increasing needs for capital and a desire to grow, some smaller banks may want to become or remain public companies, in spite of the significant burdens imposed on smaller public company issuers. Access to the public markets and shareholder liquidity, in the right situation, are worth the price of admission. Without a growth agenda, however, small, publicly held banks would be well-advised to privatize.
—Mark Nuccio, Ropes & Gray LLP
It is hard to see many benefits for companies with less than $500 million in total assets to have their shares registered with the Securities and Exchange Commission (SEC) under the Exchange Act. The accounting costs associated with public company status continue to increase, as do legal and regulatory check-the-box exercises. Perhaps it is worthwhile for boards to consider the issue again at $1 billion in assets, which is when the requirements for Federal Deposit Insurance Corp. Improvement Act certifications and the Federal Reserve’s enterprise risk assessments kick in. It is clear how smaller, publicly traded banking organizations view this issue. After the JOBS Act, the pace of such companies going dark has resembled Pamplona’s Running of the Bulls.
—Peter Weinstock, Hunton & Williams LLP
For many banks with less than $500 million of assets, the burdens of operating as a public company likely outweigh the benefits. The reporting obligations themselves are substantial. Moreover, particularly as many community banks continue to feel the burdens of the financial crisis, the need to satisfy the short-term view of many investors can impede the pursuit of the long-term objective for a return to health. And the public markets often place a discount on the stock price of banks this size, thereby limiting the upside potential of an offering. Despite having said that, if a bank of this size is in comparatively good health, there are many opportunities for acquisitions in the marketplace now. For these banks, the publicly traded stock can still be a useful currency in a growth strategy.
—Greg Lyons, Debevoise & Plimpton LLP
After the JOBS Act increased thresholds for registration from 500 shareholders to 2,000 and deregistration from 300 shareholders to 1,200, many banks have been closely examining the practicality of being a public company, especially considering the tremendous expense and additional regulation. However, the sensibility of that decision truly rests in the bank’s strategic plans for its future. How does the bank want to position itself? If a bank wants to expand its market or services, or if it wants (or needs) to raise capital, its prospects for doing so are much brighter as a public company. Some banks also enjoy the prestige and attention that they receive as a public company. Being a public reporting company may add significant expense, but the visibility and flexibility for raising capital is certainly enhanced for a public company, which may turn those expenses into a valuable investment for future growth.
—Kim Schaefer, Vorys, Sater, Seymour and Pease LLP
There is no one-size-fits all response to this question. For the institution that sees itself generating enough capital to pay dividends and sustain growth and does not see itself expanding its footprint, then it should seriously consider deregistering with the SEC. There is a unique ability for a bank or bank holding company (and a savings bank and savings and loan holding company) to continue to trade on the bulletin board without having to be registered with the SEC. This is not available for non-financial institutions.
For many small-cap banks, bulletin board trading may provide as much liquidity as NASDAQ OMX, and provides insiders with an outlet for their shares, which is one of the major downsides of deregistering (i.e., it is difficult for insiders to sell their shares). For an institution that sees itself accessing the public markets for additional capital or expanding through mergers and acquisitions, continuing with an SEC registration could prove critical, despite the costs and burdens. And as the market cap of a bank/holding company increases, the need to maintain a trading alternative is also important for shareholders.
—John Gorman, Luse Gorman Pomerenk & Schick PC