Early last year, we examined many of the factors that caused the public markets to no longer support community banks. Since that time, President Obama signed into law the JOBS Act, which enables community banks to remain private longer or more easily delist from the public stock markets. While this legislation is an important step in the right direction, community banks still confront significant liquidity needs.
Liquidity Runs Dry
In 2012, we spoke with dozens of community bankers around the country, and also conducted a survey alongside the Independent Community Bankers of America (ICBA) to better understand the capital and liquidity needs of private community banks. After all, more than 75 percent of the nearly 7,000 community banks and thrifts in the United States are privately held. The ICBA’s findings indicated that many community banks do not have a platform to provide liquidity for their shareholders. This means that thousands of community bank shareholders do not have access to liquidity on a regular basis. Our conversations with management teams across the country made it clear that a new, stronger market needed to emerge for community banks across the country.
So why do banks want a secondary market for their shares in the first place? We posed the question to a number of private banks, who shared their top reasons. A secondary market:
- Makes it easier to raise capital by providing new investors with a viable future exit option
- Makes it easier to find new investors
- Provides shareholders with liquidity while remaining private
The SecondMarket Approach
In February 2012, we launched a pilot program in select U.S. states to create customized, private liquidity programs for community banks. The SecondMarket pilot program allowed banks to control all aspects of their secondary market, including who can buy and sell stock, and the frequency with which shares were sold. This model emulates the successful approach we pioneered for private technology companies during the past several years.
One year later, we reflect on the pilot by sharing some of the characteristics of the bank-approved buyers and sellers who worked with us, as well as the features of the banks themselves.
Characteristics of SecondMarket Banks
We often are asked about the makeup of SecondMarket community banks. We initially decided to focus on banks in three different states, but did not restrict the types of banks that could participate in the pilot programs.
- We conducted seven trading windows in three different states: Texas, Pennsylvania and New Jersey. The pilot program included Team Capital Bank of Lehigh Valley, Pennsylvania.
- The asset size of the banks ranged significantly, from $300 million to $1 billion.
- The size and diversity of the shareholder bases also fluctuated, as participating banks ranged from 125 to more than 500 shareholders.
- Banks were founded as far back as 1917 to as recent as 2005.
- The banks’ shareholdings were both physical certificates as well as street name shares.
Characteristics of Buyers and Sellers of SecondMarket Bank Shares
Another frequent inquiry from bank executives across the country is the types of buyers that participated in the pilot program. Interestingly, the majority of bank-approved buyers consisted of individuals (70 percent) and trusts (21 percent). Institutional investors comprised the remaining 9 percent of buyers. Likewise, the sellers approved by the banks primarily comprised of individuals (79 percent) and trusts. The composition of buyers and sellers did not vary between region and/or state, as most banks preferred individual investors.
Limited access to capital is making it more difficult for private community banks to grow and remain independent. The success of SecondMarket’s pilot program supported our initial theory that institutions facing difficulty providing secondary liquidity to their shareholders can benefit from liquidity programs facilitated by SecondMarket. Thus, we will be expanding the program this year beyond the initial pilot states to help community banks more effectively respond to shareholder liquidity needs.
While we have only just begun to understand the nature of community bank liquidity needs, the early feedback from our clients has been positive. An executive from a community bank in Texas stated, “A service like the one from SecondMarket could ease pressure while still providing a vehicle for raising capital. For small banks, this could be revolutionary.” We couldn’t have said it better ourselves.