Are the Ducks Quacking?

IPO-5-17-18.pngAn initial public offering isn’t the only path to listing your bank’s shares on the Nasdaq or New York Stock Exchange, and gaining greater liquidity and more efficient access to capital via the public markets.

Business First Bancshares, based in Baton Rouge, Louisiana, opted for a direct listing on the Nasdaq exchange on April 9, over the more traditional IPO. Coincidentally, this was the same route taken a few days prior—with greater fanfare and media attention—by Swedish entertainment company Spotify. A direct listing forgoes the selling of shares, and provides an instant and public price for potential buyers and sellers of a company’s stock.

Business First’s direct listing could be seen as an IPO in slow motion. The $1.2 billion asset company registered with the Securities and Exchange Commission in late 2014, ahead of its April 2015 acquisition of American Gateway Bank. Business First then completed a $66 million private capital raise in October—$60 million of which was raised from institutional investors—before acquiring MBL Bank in January. The institutional investors that invested in Business First last fall did so with the understanding that the bank would be listing soon. “We actually raised money from the same people as we would have in an IPO process,” says Chief Executive Officer Jude Melville.

Melville says his bank took this slow route so it could be flexible and take advantage of opportunities to acquire other banks, which is a part of the its long-term strategy. Also, bank stocks in 2015 and 2016 had not yet hit the peak levels the industry began to see in 2017. The number of banks that completed an IPO in 2017 more than doubled from the prior year, from eight to 19, according to data obtained from S&P Global Market Intelligence.

“The stars aligned in 2017” for bank stocks, says Jeff Davis, a managing director at Mercer Capital. The Federal Reserve continued increasing interest rates, which had a positive impact on margins for most banks. Bank M&A activity was expected to pick up, and the Trump administration has appointed regulators who are viewed as being friendlier to the industry. “There’s a saying on Wall Street: When the ducks are quacking, feed them, and institutional investors wanted bank stocks. One way to feed the ducks is to undergo an IPO,” Davis says. Bank stock valuations are still high, and so far, 2018 looks to be on track for another good year for new bank offerings, with four completed as of mid-April.

The more recent wave of bank IPOs, which had trailed off in 2015 and 2016, was largely a result of post-crisis private equity investors looking for an exit. As those investors sought liquidity, several banks opted for life as a public company rather than sell the bank. That backlog has cleared, says Davis. “It’s still a great environment for a bank to undergo an IPO,” he says. “Particularly for a bank with a good story as it relates to growth.”

The goals for Business First’s public listing are tied to the bank’s goals for growth via acquisition. Private banks can be at a disadvantage in M&A, having to rely on all-cash deals. A more liquid currency, in the form of an actively-traded stock, is attractive to potential sellers, and the markets offer better access to capital to fuel growth. Melville also believes that most potential employees would prefer to work for a public versus a private company. “Being publicly traded gives you a certain stability and credibility that I think the best employees find attractive,” he says.

Business First’s delayed listing was a result of leadership’s understanding of the seriousness of being a public bank, and the management team focused on integrating its acquisitions first to be better prepared for the listing.

“You really have to want to be a public company and make the sacrifices necessary to make that possible,” says Scott Studwell, managing director at the investment bank Stephens, who worked with Business First on its pre-public capital raise but not its direct listing. “There has to be a lot of support for doing so in the boardroom.” The direct preparation for an IPO takes four to six months, according to Studwell, but the typical bank will spend years getting its infrastructure, personnel, policies and procedures up to speed, says Lowell Harrison, a partner at Fenimore, Kay, Harrison & Ford. The law firm serves as legal counsel for Business First. Roadshows to talk up the IPO and tell the company’s story can have executives traveling across the country and even internationally.

And the bank will be subject to Wall Street’s more frequent assessment of its performance. If a bank hits a road bump, “it can be a rough go for management in terms of looking at the stock being graded by the Street every day, not to mention all the compliance costs that go with being an SEC registrant,” says Davis. All of this adds more to the management team’s plate.

Considering a public path is an important discussion for boards and management teams, and is ultimately a strategic decision that should be driven by the bank’s goals, says Harrison. “What is the problem you’re trying to solve? Do you need the capital? Are you trying to become a player in the acquisition market? Are you just simply trying to create some liquidity for your shares?” Filing an IPO, or opting for a direct listing, should check at least two of these boxes. If the bank just wants to provide liquidity to its shareholders, a listing on an over-the-counter market such as the OTCQX may achieve that goal without the additional burden on the institution.

In considering the bank’s capital needs, a private equity investor—which would allow the bank to remain private, at least in the near term—may suit the bank. Institutional investors favor short-term liquidity through the public markets, which is why Business First was able to obtain capital in that manner, given its near-term direct listing. Private equity investors are willing to invest for a longer period of time, though they will eventually seek liquidity. These investors are also more actively engaged, and may seek a board seat or rights to observe board meetings, says Studwell. But they can be a good option for a private bank that’s not ready for a public listing, or doesn’t see strategic value in it.

Though Business First’s less-common path to its public listing is one that could be replicated under the right circumstances, the majority of institutions that choose to go public are more likely to opt for a traditional IPO. “The reality is that direct listings are very rare, and it takes a unique set of circumstances for it to make sense for a company,” says Harrison. While a direct listing provides more liquidity than private ownership, be advised that the liquidity may not be as robust as seen in an IPO, which tends to capture the attention of institutional shareholders. “Usually, it’s the actual function of the IPO that helps kickstart your public market activity,” he adds. And if the bank needs an injection of capital—and determines that a public listing is the way to do it—then an IPO is the best strategic choice.

A Path to Transparency for Alternative Investments

investments-3-7-18.pngCapital has been flowing into the alternative investment industry over the past few years, with some experts predicting that money invested in private funds will reach as much as $20 trillion by 2020. Preqin, which collects data on the alternative investment industry, recently published a study stating that there are as many as 17,000 private funds open for investment.

Strong returns and opportunities for diversification have attracted high net worth and institutional investors, who can invest in exponentially larger quantities than the average investor. Though these investors come with a greater ability to deploy capital, their size and influence translate into greater expectations and hurdles to meet in order to invest.

The word that best sums-up these growing expectations and hurdles is “transparency,” and this word has become a lightning rod when it comes to alternative investments like hedge, private equity and venture funds, along with special purpose vehicles and real estate.

As alternative assets have become a more common avenue for investment, transparency has grown in importance for investors. A 2017 study titled “Alts Transparency: Finding the Right Balance” by the Economist Intelligence Unit highlights this growth. Sixty-three percent of respondents listed “degree of transparency” as “very important” for alternative investments, which was ahead of all other considerations. Another statistic showed that the importance of transparency as a key issue for private fund managers has increased almost six-fold since the 2008 financial crisis.

Breaking this down further, the issue of transparency can be separated into two different types: (1) information about the fund, and (2) information about investors’ holdings within that fund. The first type deals with greater transparency of the overall performance of the fund, which includes the underlying assets in which that fund is invested and how risk is assessed and managed. The second type deals with greater transparency relating to investor-level performance. This includes metrics like investors’ allocation and return, and how fees are calculated.

There are a few reasons why the industry has struggled to deliver this type of information:

Complexity of Private Funds
There are key differences in reporting metrics between the various types of private funds. Performance metrics shown to an investor in a more liquid fund, such as a hedge fund, should be different than those reported for less liquid vehicles, such as private equity funds. Adding to the complexity, investments in alternatives can come in the form of limited partnerships, co-investments and direct holdings.

Outdated Technologies That Trap Data
Many of the widely used technologies for portfolio and investor-level accounting were created several years ago and because they lack Application Programming Interfaces, or APIs, they cannot integrate with each other or with other systems. This effectively traps the data contained within these systems, thereby restricting its usefulness and portability. This in turn has curtailed the ability to provide transparency to investors, as it restricts or prevents the necessary type of analysis, aggregation and modern presentation of data.

Lack of Leadership and Reporting Standardization
There is a lack of uniform reporting standards within the alternative investment industry. Although an increase in regulation along with the presence of organizations like the Institutional Limited Partners Assn. have helped advance standards in private equity, there is no current reporting standard across all types of private funds. Additionally, the party that should be responsible for delivering on transparency is unclear.

Despite these hurdles, the alternative investment industry must evolve and adapt. I would argue there are two key steps the industry must take to be able to deliver on investor demands for transparency and keep new capital flowing into private funds:

Move Towards True Digital Reporting
As it stands today, much of the industry reports performance information via static documents like PDFs, but this method traps data and inhibits interaction. By embracing new technology, the industry can move toward the type of dynamic, digital presentation of data that is experienced in brokerage and personal banking accounts. For example, cloud-based technology offerings can be integrated with accounting systems to liberate the data contained within for purposes of data mining, analysis and presentation.

Fund Administrators Must Take a Stronger Leadership Role
Fund administrators are best positioned to deliver on transparency needs given their role as independent third parties. They typically subscribe to the accounting systems that house this data and therefore have access to or create much of the analysis and reporting that is needed to deliver on transparency demands.

Helping their fund manager clients with transparency is good business for fund administrators, as it improves their overall quality of service to clients. All indications point to another banner year for alternative investments in 2018. However, investor demand for transparency will only continue to grow as alternative assets become more commonplace. The industry must modernize and adapt in order to stay ahead of the curve in the race for assets.

Fintech Intelligence Report: Marketplace Lending

	intelligence-report-cover.PNGAs noted throughout our 2017 Acquire or Be Acquired Conference, partnerships between a bank and a tech company can take on many forms — largely based on an institution’s available capital, risk appetite and lending goals. With fintech solutions gaining momentum, many advisors at this year’s event encouraged banks to look at viable alternatives to meet consumer demands, maintain and expand their lending revenue and give formidable competition to those looking to take that market share.

Fintech lending has grown from $12 billion in 2014 to $23.2 billion in 2015 and is expected to reach $36.7 billion in 2016, a year-over-year growth of 93 percent and 58 percent in 2015 and 2016. This market, according to Morgan Stanley Research, is expected to grow further and reach $122 billion by 2020.

With this in mind, we invite you to take a look at our new Fintech Intelligence Report on Marketplace Lending. The research paper, developed by FinXTech, a division of Bank Director, and MEDICI, a subscription-based offering from, explores current market dynamics along with technology and partnership models. As noted in this report, the gains of new fintech companies were widely thought to be at the expense of banks; however, many banks recognize the potential value from collaboration and have built relationships with fintechs.

Tell us what you think! As we work to provide you the latest information and research as it pertains to the financial services industry, we would appreciate your feedback on the Fintech Intelligence Report. Please email us your comments and/or suggestions at [email protected].

Fintech Intelligence Report: Marketplace Lending


As noted throughout our 2017 Acquire or Be Acquired Conference, partnerships between a bank and a tech company can take on many forms — largely based on an institution’s available capital, risk appetite and lending goals. With fintech solutions gaining momentum, many advisors at this year’s event encouraged banks to look at viable alternatives to meet consumer demands, maintain and expand their lending revenue, and give formidable competition to those looking to take that market share.

Fintech lending has grown from $12 billion in 2014 to $23.2 billion in 2015 and is expected to reach $36.7 billion in 2016, a year-over-year growth of 93 percent and 58 percent in 2015 and 2016. This market, according to Morgan Stanley Research, is expected to grow further and reach $122 billion by 2020.

With this in mind, we invite you to take a look at our new Fintech Intelligence Report on Marketplace Lending. The research paper, developed by FinXTech, a division of Bank Director, and MEDICI, a subscription-based offering from, explores current market dynamics along with technology and partnership models. As noted in this report, the gains of new fintech companies were widely thought to be at the expense of banks; however, many banks recognize the potential value from collaboration and have built relationships with fintechs.

Tell us what you think! As we work to provide you the latest information and research as it pertains to the financial services industry, we would appreciate your feedback on the Fintech Intelligence Report. Please email us your comments and/or suggestions at [email protected].

The Perfect Complement: Community Banks and Alternative Lenders

lenders-2-8-17.pngArmed with cost and process efficiency, greater transparency, and innovative underwriting processes, alternative lenders are determined to take the lending space by storm. Alternative small business lenders only originated $5 billion and had a 4.3 percent share of the small business lending market in the U.S. in 2015. By 2020, the market share of alternative lenders in small business lending in the U.S. is expected to reach 20.7 percent, according to Business Insider Intelligence, a research arm of the business publication.

Being able to understand customer-associated risk by relying on alternative data and sophisticated algorithms allowed alternative lenders to expand the borders of eligibility, whether for private clients or small businesses. In fact, a Federal Reserve survey of banks in 2015 suggests that online lenders approved a little over 70 percent of loan applications they received from small-business borrowers—the second-highest rate after small banks, which approved 76 percent, and much higher than the 58 percent approved by big banks.

Coming so close in approval rates to banks and having lent billions employing a different, more efficient business model inevitably created an interest from banks. Some of the largest institutions have been taking advantage of the online lenders’ technology, but community and regional banks are still in the early stages of exploring partnership opportunities. While concerns over those types of partnerships are understandable, there are also important positive implications, which we will explore further.

Cost-Efficient Capital Distribution Channel
Online marketplaces represent an additional, cost-efficient channel for capital distribution, expanding the potential customer base. An opportunity to grow loan portfolios with minimal overhead and without the need for adoption or development of resource-consuming technology, led to a partnership between Lending Club and BancAlliance, a nationwide network of about 200 community banks. The partnership allowed banks to have a chance at purchasing the loans originated by Lending Club, and, in case those loans did not meet the requirements, they were offered to a larger pool of investors. Banks also have an opportunity to finance loans from a wider Lending Club portfolio.

Examples of partnerships also include Prosper and the Western Independent Bankers. These partnerships give more banks an opportunity to offer credit to their customers, and more consumers access to affordable loans.

Portfolio Diversification and Customer Base Expansion
Alternatives lenders can offer an easy application process, a quick decision and rapid availability of funds due to an alternative approach to the underwriting process. Use of alternative data to assess creditworthiness is an inclusive approach to loan distribution. In 2015, in the U.S., there were 26 million credit invisible consumers. Moreover, the Consumer Financial Protection Bureau suggests that 8 percent of the adult population has credit records that you can’t score using a widely-used credit scoring model. Those records are almost evenly split between the 9.9 million that have an insufficient credit history and the 9.6 million that lack a recent credit history.

Paul Christensen, a clinical professor of finance at Northwestern University’s Kellogg School of Management, believes there are positive implications for companies leveraging alternative data to make a credit decision.

“For companies, alternative credit rating is about reducing transaction costs. It’s about figuring out how to make profitable loans that are also affordable for most people—not just business owners,” he said in a September 2015 article.

For community banks, as regulated institutions, partnerships with alternative lenders that extend credit to parts of the population perceived as not creditworthy is an opportunity to reach new consumer segments and contribute to inclusive growth and resilience of disadvantaged households.

Customer Loyalty
Two Federal Reserve researchers noted in a 2015 paper that community banks can increase customer loyalty by referring customers to alternative lenders when banks cannot offer a product that meets the customer’s needs. “By providing customers with viable alternatives? it is more likely that these customers will maintain deposit and other banking relationships with the bank and return to the bank for future lending needs,” the researchers emphasized.

Access to Knowledge, Expertise and Technology
While the extent of integration may vary, one of the most important elements of partnerships that carry long-term organizational and industry benefits is mutual access to knowledge, expertise and technology. The combination of banks’ and alternative lenders’ different business models with an understanding of mutual strengths allows the whole industry to transform and provide the most efficient, consumer-facing model.

Five Ways to Improve Your Bank’s Commercial Lending Department

commercial-lending-5-27-16.pngWhen running a business, one of the most important things an owner needs is access to capital. Unfortunately, getting their hands on that much needed capital is never easy, quick or painless. In fact, it’s quite the opposite. But the experience doesn’t have to be all bad. If you are a lender, consider these five steps to stand out from your competitors.

Be Convenient
For people who own or run a business, many times it is their passion (or their obsession) and most spend 60 plus hours a week tirelessly working on making that business a success. The last thing they have time for in the middle of the day is to run to the bank to talk about their borrowing needs. Provide your business customers with a way to explore and even apply for a loan outside of the scope of normal bank hours and in a way that leverages technology as a productivity enabler. In this instant online access world, banks need to provide their customers convenience, and technology is essential to that.

Be Fast
When the need for capital arises, most business owners needed it “yesterday” rather that “six to eight weeks from now.” Let’s face it, in the world of banking, we’re always thorough, but we’re not always quick. The time to process most loans, from application to funding, can take a very long time. One of the biggest negative influencers on the customer experience is the frustration borrowers have to deal with as the lending process drags on. Through automation, banks can streamline lending processes without compromising their credit requirements. Leverage technology by integrating resources for data collection, underwriting, collection of the required documentation as well as closing and funding.

Be Easy to Work With
It takes a lot of time and energy just to complete a loan application. And it’s by no means over once the business owner gets approved. Streamline and automate your application loan processing workflows as much as possible to eliminate tedious re-keying of the same data over and over again, or requiring applicants to fill out or review elements of the application that don’t apply to them. Provide a way for clients to get the bank what it needs, including bank statements, tax returns, financials etc., in a simple, automated and timely way by integrating technology where possible.

Be Aware of the Big Picture
Business owners are coming to you for more than just a loan. They want help running their business and welcome any advice or value-added information the bank provides. Know that the loan is only one part of the picture. Understand what the capital means to the business. What does the new piece of machinery mean for the long and short term of the company’s performance? How will the extra employees impact the growth of the company? How does what you are doing for the business enhance both the business and personal side of the relationship? To really be a trusted advisor, ask questions that focus on the benefits the business will realize from engaging with the bank. Create a loan process that allows bankers to focus their time on helping customers. Bankers should be building relationships, cross-solving, and maximizing the bank’s share of wallet instead of spending their time spreading numbers and chasing down documents.

Be Prepared
Study after study has proven the the main difference between a top performing sales person and an average producer is the amount of time they spend “preparing” for a conversation with a business owner. The more prepared a banker is, the better the customer experience. Being prepared means doing your homework and understanding the business, the industry, the business owner, and the local economy, for starters. The more prepared a banker is, the more help they can provide and the more value they will bring to the relationship.

With every bank knocking at the doors of the same businesses, competition for quality customers has never been more intense. Follow these five simple steps to set the customer experience your bank delivers above all the rest.

Using Reg A+ to Raise Capital and Grow Your Bank

OTC-Markets-11-23-15.pngA recent Securities and Exchange Commission amendment to Regulation A of the Securities Act allows small private companies and non-reporting public companies to raise up to $50 million in capital from regular investors without registering with the SEC. The new rule, mandated under Title IV of the JOBS Act of 2012, has the potential to dramatically expand access to capital for small companies, including banks.

Reg A is a longstanding exemption from SEC registration that allowed companies to raise up to $5 million in any 12-month period from an unlimited number of accredited and unaccredited investors. Under old Reg A, companies were required to submit an offering statement to the SEC for review and to comply with individual state Blue Sky laws, which are intended to protect the public from fraud, before the offering could be recommended or sold to investors in each state.

While Reg A was initially popular with companies–including banks–it’s popularity has since waned due in part to the high cost and complexity of federal and individual state filing requirements and the low offering limit.

Then Congress passed the JOBS Act which among several provisions proposed expanding Reg A to make it work better for small companies. Colloquially referred to as Reg A+, the amended version has done just that by giving companies a choice of two tiers of offerings:

  • Tier 1, which allows for offerings of up to $20 million in any 12-month period, with not more than $6 million in offers by selling securities holders that are affiliates of the issuer.
  • Tier 2, which allows for offerings of up to $50 million in any 12-month period, with not more than $15 million in offers by selling securities holders that are affiliates of the issuer.

Both tiers are subject to basic requirements as to issuer eligibility, disclosure and other matters, while companies conducting Tier 2 offerings are subject to additional disclosure and ongoing reporting requirements. Companies are also allowed to make confidential filings with the SEC as well as “test the waters” with investors prior to an offering.

Most importantly, companies conducting a Tier 2 offering are exempt from state Blue Sky laws, lifting a significant barrier under old Reg A.

In addition, Reg A+ securities purchased by non-affiliated investors are unrestricted and are freely transferable on day one, a notable difference from exempt offerings more commonly done under Regulation D. This allows companies to obtain a stock symbol and create a public market for its securities almost immediately, providing shareholders access to liquidity.

In anticipation that many Reg A+ companies will go public on the OTC Market Group’s OTCQX Best or OTCQB Venture Markets, we have introduced specific in-boarding requirements for companies wishing to take that route.

Current Status and What It Means for Banks
Since Reg A+ became effective, approximately 35 companies have publicly filed a Form 1-A offering statement with the SEC. That includes at least one bank–First Light Bancorp, the holding company for Commerce Bank in Evansville, Indiana–which has filed to raise up to $10 million in a Tier 1 offering. Additionally, a dozen or more companies are believed to have filed confidentially with the SEC.

Reg A+ expands the opportunities available to small banks looking to raise capital and go public without the burden of SEC registration and Sarbanes-Oxley Act compliance. As a capital raising mechanism, Reg A+ is also uniquely suited to small community and regional banks for several reasons:

  • Securities sold under Reg A+ can be offered to unaccredited investors, allowing community banks to leverage their existing relationships with their depositors and community members.
  • Banks receive Blue Sky preemption in the states within which they operate, making the Blue Sky requirement in Tier 1 offerings less burdensome.
  • Banks are already required to have annual audited financial statements and file quarterly reports with their banking regulator, making it relatively easy for them to comply with the disclosure and audit requirements of a Tier 2 offering.
  • Raising capital and going public under Reg A+ does not require companies to immediately register with and report to the SEC, a key concern for small banks that are unwilling to shoulder the costly–and often duplicative–requirements of being an SEC reporting company.

Four Steps to Going Public on the OTCQX Marketplace

5-27-15-OTC.pngOn February 23, FirstAtlantic Financial Holdings, Inc., the holding company for FirstAtlantic Bank in Jacksonville, Florida, became the first bank to become publicly traded on OTCQX, the top marketplace for established, investor-friendly U.S. and international companies in the U.S. unlisted market.

Since then, three more private banks have effectively “gone public” on OTCQX, providing liquidity to existing shareholders while leveraging the OTCQX platform to increase their visibility in the public markets: First Priority Financial Corp. of Malvern, Pennsylvania, Paragon Commercial Corp. of Raleigh, North Carolina, and PBB Bancorp of Los Angeles.

As private banks seek the benefits of public trading, more are turning to the OTCQX marketplace which offers most of the benefits of a U.S. stock exchange listing without the high cost and additional disclosure obligations.

In this article, I’ll discuss the step-by-step process for getting traded on OTCQX and what banks can do to help maximize their trading in the public markets.

First, get your financial statements in order. One of the major positive features of OTCQX for Banks is that it allows banks to use their existing regulatory reporting standards to qualify. Securities and Exchange Commission (SEC) reporting banks must simply be current in their reporting to the SEC while banks with SEC registered securities that report to a bank regulator can make the past two years of reports available to investors through OTC Markets Group’s OTC Disclosure & News Service.

Non-SEC reporting banks must provide the past two years of annual audited consolidated financial statements in accordance with U.S. GAAP, interim financial statements and any press releases or other material news announcements they have made.

To continue trading on OTCQX, banks are required to remain compliant and current in their financial and regulatory reporting to their bank regulator or the SEC and to make timely disclosures about material news events such as dividend announcements, mergers, acquisitions, tender offers, stock splits and management changes.

Next, distribute shares to investors. Nowadays, banks can go public on the OTCQX marketplace one of two ways: either via a traditional SEC registered offering, also known as an Initial Public Offering (IPO), or what is called a “Slow PO,” in which previously restricted shares are made available for public trading after SEC registration or a certain seasoning period.

With the passage of Regulation A+ by the SEC on March 25, private banks will soon be able to raise up to $50 million in an SEC exempt offering in any 12-month period. Those securities will be free trading on day one. Certain restrictions will apply.

Banks should keep in mind that OTCQX requires companies have a minimum of 50 beneficial shareholders, each owning at least 100 shares of the company’s stock.

Third, make your shares tradable. To qualify for trading on OTCQX, banks must appoint a “corporate broker,” a Financial Industry Regulatory Authority (FINRA) member broker-dealer approved by OTC Markets Group, to serve as their market maker and advisor. The corporate broker or another market maker will file what is called a Form 211 with FINRA to allow the bank’s securities to be publicly quoted on OTCQX.

The Form 211 will include information about the bank and its securities, as well as current financial statements, the name of the bank’s SEC registered transfer agent and a CUSIP number from Standard & Poor’s, Upon approval of the Form 211, FINRA will assign the bank a trading symbol.

The bank will also want to apply for “DTC eligibility” through a Depository Trust & Clearing Corporation (DTCC) participant that will allow its shares to be electronically transferred between brokerage accounts and, hence, more easily tradable.

At the same time, the bank should submit an application to trade on OTCQX and make sure their financial statements are posted and publicly available for investors on OTC Markets Group’s website.

And lastly, begin trading! The entire process from appointing a corporate broker and submitting an OTCQX application to receiving an approval and trading symbol from FINRA typically takes two to four months.

Once the process is complete and FINRA approval has been obtained, a market maker—often the bank’s corporate broker—will enter a quotation on its securities on OTCQX. For the first 30 days, the market maker that filed the Form 211 has an exclusive market in the bank’s securities. After that time, the stock is “piggyback qualified,” meaning other market makers can enter proprietary quotes for the bank’s securities.

But the process doesn’t end there! Once a bank is publicly traded, it should remain current in its disclosure requirements on OTCQX.

Banks may also wish to create a separate investor relations section on their website or a separate portal for investors with information about their shares, the latest press releases, financial filings and an investor contact. Always remember to include your stock symbol and OTCQX marketplace designation so investors know where your securities are traded.

Is Your Bank Ready for Basel III Compliance?

10-13-14-fiserv.pngBoard members have an important role to play in implementing the latest directives from the Basel Committee on Banking Supervision.

The first implementation deadlines are looming for the standards in the Third Basel Accord, commonly known as Basel III. It’s time for bank directors to make sure they’re up to speed.

Basel III comes into play at a time of worldwide economic uncertainty. Promulgated by the Basel Committee on Banking Supervision, the international forum for supervisory matters based in Basel, Switzerland, this comprehensive set of regulations seeks to instill greater stability and confidence in the banking system by dealing with deficiencies exposed by the financial crisis of the late 2000s.

The Basel III framework includes six key requirements for banks:

  • Hold more and better-quality liquidity
  • Maintain more and better-quality capital
  • Achieve enterprise risk management maturity
  • Ensure robust, comprehensive stress testing
  • Enhance capital adequacy assessments
  • Integrate comprehensive and actionable capital and strategic planning

A new risk-weighted capital framework to determine regulatory capital adequacy based on Basel III becomes effective for community banking organizations (non-complex, with assets between $500 million and $10 billion) on January 1, 2015.

Community Bank Readiness
Many managers and officers of community banks and small regional banks have told me they believe Basel III is really not an issue for them because they’re extremely well-capitalized. However, if these bankers haven’t run the Basel III calculator provided on each banking regulator’s website, their confidence may not be warranted. The risk ratings under Basel III are radically different from anything we’ve seen in the past. And you can’t determine true capital adequacy simply and solely on the basis of the new regulatory capital ratios. Those ratios are merely the ante into the game, the minimum requirement.

In today’s banking environment, the only true measure of capital adequacy is economic capital measured in a customized way for each financial institution, stress-tested to consider all risk elements across the full probability spectrum. A fresh assessment and approach are needed before you can say you’re well-capitalized in a Basel III world.

A Board Responsibility
Basel III should be a top-of-mind concern with every member of the board. Directors have a critical fiduciary role in ensuring Basel III compliance, and in capital and strategic planning in general. The board should be front and center in these areas:

  • Defining risk appetite. First and foremost, boards of directors must define the level of risk that is acceptable for their organizations. Within acceptance of that risk, they must determine what commensurate returns they expect the financial institution to earn.
  • Scenario planning. Through stress testing and scenario planning, boards of directors should look at all potential outcomes and their impact on capital, from low- to high-probability events. Directors should help frame some of these scenarios and stress tests, and thoroughly understand the results. The board must also have a firm grasp on how integrated strategic and capital plans are driving decision making—including risk assumption, resource allocation and the tactical actions of the organization.
  • Right-sizing capital. The board of directors must be instrumental in making sure that the bank’s capitalization properly aligns with the risks assumed by its banking business model. I am an advocate for the “Goldilocks School of Banking.” Like the porridge sampled by the little blonde-haired girl, capital needs to be “just right”—neither too much nor too little, and customized for the financial institution.

RAROC: The One True Metric
Risk-adjusted return on capital (RAROC) is the most all-encompassing performance indicator your organization can employ in assessing your capital position. It is the only metric that considers both full risk and potential return in a strategic business equation.

RAROC is suitable for assessing your total organization, individual business units, products, customers and customer segments. It enables you to determine your economic capital and capital adequacy, while helping optimize how you allocate capital and resources. Risk-adjusted analysis helps your organization intelligently price customer transactions, evaluate profitability, incentivize employees and right-size capital to your risk profile.

The benefits of RAROC are substantial and far-reaching. I encourage your board to insist on using this important tool.

Getting Started
Basel III awareness and compliance begin with the board asking two things of management:

  • Education. Whether it’s provided by the executive team or an outside consultant, the board should insist on a one- to two-hour overview of Basel III—not just focusing on what the regulations require, but also the implications for your banking business model and a strategy to respond.
  • Basel III status report. The board must ask if the executive team has run the pro forma calculations for Basel III capital compliance, and where the capital levels stand today in light of Basel III requirements.

This simple, two-step questioning process is absolutely essential. If it isn’t already underway at your financial institution, it should begin at your next board meeting.

For more information on capitalization and regulatory compliance, see Orlando Hanselman’s white paper, Capital Conundrum: A Call for Clarity and Action.

The Hidden Capital of Social Networks

3-15-12_tom_bennett.pngA general truism is that people tend to do business with their friends or even the friends of their friends.  At First Oklahoma Bank in Tulsa, Oklahoma, we are trying to use this to our advantage.

The prospect of Basel III being implemented is getting banking institutions, including ours, focused on increasing equity capital to meet the potential increase in capital requirements. However, there is another “capital” component that is good to think about mobilizing: The social capital among bank investors.

Social capital is essentially the ability of a diverse group of individuals working together to get things done by using their memberships in diverse social networks or other social structures.  At this point, it is essential that banking institutions see the value of social capital as an economic tool to get things done.  Consider the value of the following things getting done via social capital:  

  1. Access to information about what is happening in the community or who is doing what deals
  2. The exertion of influence on potential customers, new employees or new investors
  3. Social connections or introductions to people with money and/or deals 
  4. Endorsements that reinforce the identity, recognition and reputation of your bank
  5. Associating the trust that we have in a friend with an organization in which they are invested.

While most of us regularly seek to nurture and increase the social capital of the bank represented in the bank’s employees, we should also be thinking about how to do this with our investors.  Reflect upon the wide array of memberships in extended families, university alumni associations, professional associations, religious organizations, and civic or social organizations that exist within your investor group.  Imagine the impact their collective social capital might have on the performance of your bank.

One method our bank uses to engage and mobilize our investors’ social capital is sending a quarterly report to each investor called Talking Points.  It’s a practice adopted from the political world that is intended to get our investors on the same page and spreading the good news about their bank.  We include in our Talking Points information for our investors to share with their social networks about how well their bank is doing and why they should move their business to the bank.  Regular elements of Talking Points include charts describing the bank’s growth, comparisons of the bank’s services to competitors, descriptions of any special promotions the bank is offering and a section describing what you can do to help make your bank more successful.  Because of the diversity of social networks among our investors, the Talking Points message reaches groups that our employees alone could never have done.  We believe this has been an important factor in our bank’s $216 million in asset growth in our first three years and two months as a de novo bank.

By engaging the investors of the bank and connecting to their social capital, you build a diverse reservoir of informed and motivated sales people that can be drawn on to both market the bank and potentially to raise additional equity capital in the future.  We believe this is an important reason why we have been able to raise $32 million in equity capital from our investors over the last 42 months in three separate stock offerings.

As you think about how to address your equity capital needs and other performance items in your bank, think of the social capital that exists in your investor group and how it can be utilized as a valuable source of strength. Figuring out how to use the social networks of your investors may be as important as getting their equity capital invested in the bank.  

An important business goal should be figuring out how to gain and engage more friends.  

If you would like a copy of our Talking Points, please let me know at [email protected].  If you have any great ideas on how this works in your investor group, please let me know.  We can all benefit by learning from others.