New ways for community banks to fundraise

The JOBS Act made it easier for community banks to raise capital.
Now, with more fundraising choices, community bankers find themselves carefully weighing their options.

By Elizabeth Judd

When it comes to raising capital, a community bank often finds itself facing something of a role reversal. Instead of lending money to small businesses, it is now trying to find additional capital to support its own growth strategy. Among common fundraising methods are launching an IPO and having the bank’s shares listed on a national exchange or on the over-the-counter (OTC) market, or approaching private investors and issuing shares under a JOBS Act of 2012 exemption. “When the JOBS Act made capital-raising easier without full registration, some companies, including community banks, determined that was a better way to go and deregistered from being fully reporting companies,” explains Peter Duggan, senior vice president at Computershare Private Markets.

“To be a fully reporting company and to fulfill all of the accounting and reporting requirements to keep your registration active, that was fairly onerous for a small community bank,” Duggan says. “But for banks that wanted to raise capital, that was what they needed to do in the past, unless they wanted to significantly restrict those that could invest.”

Joshua Mitts, securities law professor at Columbia University, explains that the JOBS Act allows community banks that had become SEC registered—by virtue of having 500 or more shareholders—to deregister so long as they have fewer than 1,200 shareholders (the new threshold for mandatory SEC registration is 2,000).

$1.25 million–
$3 million

Estimated savings in regulatory
expenses over five years for banks
that deregister from the SEC

The steady decline in the number of public companies has attracted attention. A Nov. 16, 2017 Wall Street Journal article points out that there were 7,322 domestic companies listed on U.S. stock exchanges in 1996, while today there are only 3,671.

Community banks are among the throngs of U.S. companies that are rethinking the value of listing on the New York Stock Exchange (NYSE) or Nasdaq. When the rules first changed five years ago, dozens of community banks deregistered.

And while the incidence of deregistration has slowed, banks continue to make changes. In October 2017, $790 million-asset Westbury Bancorp in

West Bend, Wis., which previously traded on Nasdaq, listed on OTCQX. That same month, $860 million-asset California First National Bancorp in Irvine, Calif., announced a voluntary SEC deregistration and plans to list on OTCQX in the future. And on Oct. 3, 2017, $514 million-asset SBT Bancorp, based in Simsbury, Conn., announced plans to deregister its common stock.

Meanwhile, Jay VanSickle, president and CEO at $446 million-asset Wayne Savings Bancshares in Wooster, Ohio, which deregistered from the SEC in November, says, “When the JOBS Act came along, it was a major opportunity for small banks that weren’t really receiving the cost benefits of being a registrant.”

Deregistering reaps savings
Duggan points out that community banks are unusually well positioned when it comes to remaining private and yet still being able to raise capital from “a built-in friends and family community who may want to buy shares.” That’s because community banks are well known within their local communities and typically have large depositors who might also be interested in investing in a bank’s equity. VanSickle suggests that the annual savings a community bank can reap by deregistering falls into the “six-figure range.”

Jason Paltrowitz, executive vice president, corporate services at OTC Markets Group, says that banks listed on OTCQX have experienced impressive savings. Using SEC and publicly available exchange data, OTC estimates that a bank can save $160,000 to $920,000 in listing fees over a five-year period. During the same five years, it can shave anywhere from $1.25 million to $3 million off regulatory expenses.

Most community banks that deregister still pay close attention to compliance and controls. “Community banks have a really strong appreciation for the regulatory environment,” Duggan says. “They’re audited by banking regulators, and they want to make sure they’re doing everything by the letter of the law.”

A choice of exemptions
One of the most striking changes to come out of the JOBS Act is that private companies can raise higher levels of capital than ever before through Regulation A+, which allows a company that meets certain criteria to raise up to $50 million in a given year. Paltrowitz notes that community banks often turn to Reg A+ when facing a merger or acquisition.

Greyson E. Tuck, attorney and consultant for Gerrish Smith Tuck, PC in Memphis, Tenn., says that while most community banks rely on Reg D, “under the right set of circumstances, Reg A+ works and makes sense for community banks.”

Tuck explains that Reg D predates the JOBS Act and is typically the best choice for community banks as long as they can raise the needed capital within its parameters.

“The path of least resistance for community banks is almost always a Reg D 506 offering,” he says.

Regulation Crowdfunding (Reg CF) is perhaps the JOBS Act development that has received the most media attention, but it has not proven particularly popular with community bankers.

“Crowdfunding [under Reg CF] is rare for community banks, because you can only raise $1 million in any 12-month period,” Duggan explains. “So, by the time you pay your lawyers and whoever you need to run your crowdfunding portal, there’s not much left.

“Reg CF is more for small startups [that are] getting their first round of seed money [and] need to prove their concept.”

While deregistering is right for some community banks, others are bucking the trend and launching IPOs. Cadence Bancorporation, a $10.5 billion-asset financial institution in Houston, Texas, went public in April 2017, and $1.7 billion-asset Metropolitan Commercial Bank in New York filed for an IPO in October 2017.

Positive signs
Mitts points out that a community bank filing for an IPO is typically not doing so because that’s the only way to raise capital but instead is enthusiastic about its financial future. He describes community banks going public as “very bullish on their company’s prospects—they believe the economy is humming along and there’s a positive wave.

“This is an exciting time, because we’re seeing a resurgence in small- and medium-sized companies in the U.S.,” Mitts adds. “And community banks are no exception. They’re part of this trend, too.”

Choosing OTCQX: Wayne Savings

When $446 million-asset Wayne Savings Bancshares in Wooster, Ohio, decided to embark upon an SEC deregistration, president and CEO Jay VanSickle knew it meant the bank’s days as a Nasdaq-listed company were numbered. Any company that trades on Nasdaq must be registered with the SEC, and so the bank decided to pursue an OTCQX listing.

VanSickle, who had experienced an SEC deregistration five years earlier when he was CFO at National Bancshares, which is now the $2.2 billion-asset Farmer’s National Bank in Canfield, Ohio, says many community banks are significantly sensitive to the disclosure requirements and compliance burdens that accompany signing on more shareholders. At National Bancshares, he remembers, the bank wanted to attract as many shareholders as possible “because a shareholder then becomes a customer, too, and an advocate.”

However, more shareholders means more reporting requirements, and as a public company with more than 500 shareholders, National Bancshares bore the burden of hefty disclosure necessities. “The last straw for us was XBRL [the global standard for exchanging business information], which had a cost of $20,000 to $30,000 a year,” says VanSickle.

“We just stuck up our hands and said, ‘Come on, let’s do something different here.’”
When National Bancshares deregistered, the bank didn’t touch its key controls. VanSickle also points out that deregistration in and of itself can be considered as a way to enhance capital, because it boosts profitability.

This argument is borne out by statistics. Jason Paltrowitz of OTC Markets Group points out that for banks, OTCQX, which lists approximately 80 community banks, has outperformed the SNL Bank Stock Index by roughly 21 percent since OTCQX for banks’ inception on May 21, 2014. “A lot of that outperformance,” he says, “is because banks are saving significant amounts of cost that they’re able to return right back to their shareholders.” ­

—Elizabeth Judd

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Elizabeth Judd is a freelance writer in Maryland.