It is now possible for small banks to raise additional capital without having to register with the Securities and Exchange Commission, a requirement that on average can result in tens of thousands of dollars a year in compliance costs.
A provision in the JOBS Act, signed into law last week, raises the threshold that requires banks to register with the SEC from 500 stockholders to 2,000. It also ups the “de-registration” threshold from 300 shareholders to 1,200, making it easier for registered banks to opt out following a stock buyback or consolidation of shareholders.
“To raise capital, small banks have to, in many cases, issue more shares and bring in more shareholders. But if you have to register and pay hundreds of thousands of dollars, it’s counterproductive because your capital is taken away by those costs,” said Paul Merski, chief economist at the Independent Community Bankers of America, a trade group.
Had the new threshold been in place four years ago it would have saved John Marshall Bank some $150,000 a year in legal and accounting costs, President Bill Ridenour said. The Reston-based institution had 300 shareholders in early 2008, but the number jumped to 700 following a private placement offering that raised $27 million that spring.
Soon after, John Marshall had to start filing quarterly and annual reports, proxy solicitations and trading notifications with the SEC — plus certify internal controls as as required by Sarbanes-Oxley. The bank, with $436.9 million in assets, currently has about 834 shareholders.
“For a larger corporation, financial reporting is important for shareholders to get a feel for what’s happening,” Ridenour said. “But frankly, we know most of our shareholders. If they have any questions, they can call us directly.”
John Marshall’s stock is registered, but not publicly traded because its shareholder group is small, he said. Most trades are done privately between sellers and buyers.
Ridenour said bank officials want to thoroughly weigh the pros and cons of opting out of registration before making any decision. As a growing community bank, John Marshall may run up against the 2,000 cap in a matter of years. Registering all over again may be a costly endeavor.
At Access National Bank in Reston, chief executive Michael Clarke said has no intention of de-registering, though he supports the spirit of the legislation.
“All of our stakeholders have gotten accustomed to being public,” he said. “To a common shareholder it isn’t so much about SEC registration, but what you can get along with — being listed on a public exchange, being able to look up the value of shares, being able to freely trade them and have some liquidity.”
Just to be listed on the Nasdaq, he noted, costs $100,000 a year. Add to that the $80,000 to $100,000 in fees related to SEC registration, and expenses start mounting for the $809 million-asset bank with 425 shareholders.
But Clarke said, “For a company that’s growing and has ambitious plans, it’s definitely worth it.” However, for a bank with“no need to really raise capital, that’s not growing rapidly, just running a good business and supporting the community,” registration is simply a regulatory burden.
Merski of the ICBA estimates that the registration threshold should help some 300 banks teetering on the edge of having 500 shareholders or already in the danger zone. He said the trade group has been lobbying Congress for the past eight years to raise the threshold, established in 1964, but made little headway.
“Support grew because of tougher capital requirements from bank regulators, and just the economic environment where banks need to raise more capital to shore up their viability,” Merski said.