In recent years, some community banks have made the decision to go public as part of their strategy for growth. In 2020, however, COVID-19 cast uncertainty over the market. But experts, including community bankers who recently made the decision to go public, say community banks should chart their own path for growth.
By Don Sadler
There are several different paths community banks can take to growth. There’s the path of growing organically by gaining more depositors and assets, and there’s a mergers and acquisitions (M&A) scenario.
Another path is to raise capital for growth by going public. Over the past few years, some community banks have taken this option because of its potential benefits, such as access to capital, liquidity and market exposure, not to mention added long-term value for shareholders. Going public also gives a community bank’s employees and customers the ability to invest in the bank.
With these benefits come potential drawbacks for community banks, however. Chief among these are the additional reporting requirements, complexity and costs involved with being a public entity. These include not only costs incurred for the initial offering, but also ongoing expenses.
Last year brought an additional consideration to the decision of whether to go public. The pandemic has had a major impact on the initial public offering (IPO) market by casting a cloud of uncertainty not only over the economy, but also community bank loan portfolios. This is forcing some community banks to re-examine their plans for growth.
Where should you list? Exchanges vs. OTC
One of the most important decisions community banks must make when going public is where they will be listed. The main options include major exchanges like the New York Stock Exchange and Nasdaq Composite Index, and over-the-counter (OTC) markets like the OTCQX Market.
The OTC Markets Group launched the latter in 2015 to provide community banks with an alternative to the high cost and complexity of listing on an exchange. It claims to offer a less complex and more cost-efficient path to going public for community banks that’s referred to as a “Slow PO.” Using this process, community banks can enter the public markets by making previously restricted shares available for public trading by brokers on the OTCQX, OTCQB and Pink markets.
According to Laura Hamilton, vice president of OTC Markets Group, the Slow PO is akin to a direct listing on an exchange where a company goes public without raising money and without underwriting as in a traditional IPO. “The longer on-ramp allows seasoned companies with an established investor base to avoid the high costs and time pressures of a traditional IPO while growing their liquidity organically over time,” she adds.
To date, Hamilton says, 150-plus community banks with assets ranging from $100 million to more than $4 billion have joined the OTCQX Market.
Recent IPO trends
Until last year, there was a small but steady market for community banks going public, according to Jason L. Rader, national industry partner of financial services for BKD CPAs and Advisors in Springfield, Mo. “I would say we saw 10 to 15 community bank IPOs a year the past few years before ,” he says.
That said, he adds, the current market is not very conducive to banks listing on the stock exchange, primarily due to the unpredictability of COVID-19 and its economic impacts. “Investors don’t like uncertainty,” Rader says, “and the uncertainty right now makes it harder for investors to gauge things like a bank’s loan portfolio credit quality in the near and immediate term.”
The interest rate environment is also making it hard to project earnings. “We’re aware of more than one situation where a community bank was seriously considering going public [in 2020 or in early 2021] but was told by investment bankers to wait due to concerns about the ability to efficiently raise capital because of all of the uncertainty in the marketplace,” Rader says.
Laura Hamilton, vice president of OTC Markets Group, agrees that today’s market has delayed many banks’ decisions to access the public markets. “Community banks have put capital raising and their respective plans to go public on the backburner as the focus has shifted to responding to the current macroeconomic environment,” she says. “Most of them are looking toward 2021 and 2022 to re-evaluate timing to execute on this portion of their growth trajectory plan.”
The figures bear this out. As of December 2020, seven community banks had joined the OTCQX Market, the premium market tier operated by OTC Markets Group, by way of “Slow PO”—akin to a direct listing, Hamilton says—market upgrades or stock exchange delists. That’s compared with an average of 25 community banks that joined the market annually between 2017 and 2019.
“[Going public] has also been a recruitment tool to help spur organic growth, and it allowed us to provide liquidity for shareholders who had given 10 to 15 years of support to our company.”
—Jude Melville, b1Bank
“While bank stocks have been volatile throughout the pandemic, we have seen recent activity on our market that suggests going public will remain a viable path to continued growth for private community banks once economic uncertainties stabilize,” Hamilton says. “Moving into 2021, management teams are thinking about making strategic moves to capitalize on the expected increase in M&A activity.”
Phil Buffington, a partner with Adams and Reese LLP based in New Orleans, is someone else who believes community banks are cautious about going public at this time. “They don’t want to move forward in a market where their stock value could be undervalued,” he says, “but it appears that some banks are uniquely situated to continue pursuing going public because of their strategic planning prior to the pandemic or a need for additional capital for strategic reasons.”
Buffington expects that a “bumpy road” to full recovery could have a direct impact on banks going public because of the uncertainty around stock pricing and possible success of any offering. He believes, however, that there will be more consolidation in the industry during the current downturn and after the economy recovers from the pandemic. “The need for capital to accomplish these transactions could certainly cause some community banks to continue their strategy of going public during the downturn so they’re well-positioned to pursue mergers and acquisitions,” he says.
Red River Bank: Supporting growth
Blake Chatelain is president and CEO of $2.5 billion-asset Red River Bank in Alexandria, La., which went public in 2019. “We had grown to $2 billion [in assets] organically and thankfully produced a lot of value,” he says. “After 20 years of operation, we felt like registering the shares would create liquidity for our shareholders and provide our company with a currency to take advantage of M&A opportunities.”
One of the biggest benefits of going public for Red River Bank has been the additional opportunities to access the capital markets to support ongoing growth. “It also positions the bank as a potential acquirer,” Chatelain says. “While most of our growth has been organic, we believe we’ll have acquisition opportunities in the future and feel we would be disadvantaged as a private company.”
Chatelain stresses the importance of making sure your community bank’s infrastructure is capable of handling the increased reporting and workload required of a public company. For Red River Bank, Chatelain says the bank has operated like a public entity since its founding in 1999. “If we ever went public,
we didn’t want this to change the culture of our bank,” he says. “We wanted to be public, but we also wanted to keep our customer-focused, employee-friendly, community-minded culture alive and healthy.”
Why make the leap?
While the economy will certainly give some banks pause, there are other things to consider as community banks plot their growth journey. Rader says he usually sees two main situations where community banks decide to go public. The first is a traditional mutual savings and loan, which is owned by members of the institution or depositors. “Some of these mutuals have decided that the benefits of having stock ownership outweigh the benefits of being a mutual,” Rader says. “In order to convert to stock ownership, they must go through the process of registering their stock.”
The second situation is a community bank that has experienced a lot of growth in recent years and plans to continue that growth. “They see going public as a way to fund their future plans,” Rader says. “Going public also provides more liquidity for shareholders who want to sell their stock than a privately held bank can offer.”
Hamilton says most community banks go public to address at least one of three main challenges: to strengthen their buy-side position for future acquisitions, to allow long-term shareholders to access liquidity, or to increase transparency.
In another common scenario, Hamilton says, a bank’s loan growth may be outpacing its funding ability. “Oftentimes, banks simply realize that public trading of their stock and obtaining a public valuation is the next logical step in their growth,” she adds.
“There are great companies that are private, just like there are great companies that are public. You have to evaluate what your goals are and what your long-term vision is for your company.”
—Drake Mills, Origin Bank
The community bank experience
Origin Bancorp Inc., the holding company of Origin Bank in Choudrant, La., went public in 2018. Drake Mills, chairman, president and CEO of the $7 billion-asset community bank, says its IPO was its next stage of evolution. “Certainly, there are great companies that are private, just like there are great companies that are public,” he says. “You have to evaluate what your goals are and what your long-term vision is for your company.”
Mills says the move afforded Origin Bank the freedom to grow the way it wanted to. “For us, it came down to wanting to be able to raise capital to fund our desired growth by accessing the public markets,” he says. “We believe this allows us to continue to chart our own path and expand our brand and our way of doing business in a more dynamic way. The long-term value that can be provided as a public company is very beneficial to Origin Bank and our shareholders.”
Not far away, in Baton Rouge, La., $3.9 billion-asset b1Bank did a direct listing in 2018, followed by a follow-on offering a few months later. “First, going public gave us access to public markets for acquisition purposes,” says president and CEO Jude Melville. “It has also been a recruitment tool to help spur organic growth, and it allowed us to provide liquidity for shareholders who had given 10 to 15 years of support to our company.”
Melville acknowledges that while the timing for a community bank IPO might not be ideal right now, a bank’s path forward should be determined by its own long-term opportunities and context, not by trying to time the market. “The decision to go public should not be an ‘end of the journey’ kind of decision,” he says, “no matter what the market or current economic scenario.”
The keys to IPO success
- Take your time. According to Phil Buffington, a partner with Adams and Reese LLP based in New Orleans, most banks spend at least one year planning a public offering.
“This can even stretch to two years or longer in some situations,” he says. “Making sure that your bank has experienced personnel to help navigate the process and oversee the public company upon completion is imperative.”
- Assemble the right team. At Origin Bank in Choudrant, La., the right people and right partners made a big difference to its 2018 IPO.
“We’ve been very strategic and purposeful when it comes to having talented people who make up our team,” says chairman, president and CEO Drake Mills. “It’s also critical to surround yourself with the right external partners because there’s a great deal of work that goes into going public.”
Jason L. Rader, national industry partner of financial services for BKD CPAs and Advisors in Springfield, Mo., stresses the importance of investment bankers, legal counsel and an audit firm on your team who have gone through this before. “Going public is a very time-consuming process and you still have to manage the bank while you’re going through the IPO,” he says. “So, it’s important to be well-staffed because the IPO will be a real strain on the management team.”
- Prep early. While dealing with additional reporting and registration requirements is often cited as a big drawback to going public, Buffington says the 2012 Jumpstart Our Business Startups (JOBS) Act and amendments to existing rules and regulations have helped streamline the process for community banks. “Even the reporting burden is reduced for community banks with fewer than 1,200 shareholders,” he adds.
Jude Melville, president and CEO of b1Bank in Baton Rouge, La., says his bank began publicly reporting almost three years before going public. “I’m not saying that’s the right path for every bank,” he adds, “but I do think that preparing for the accounting and SEC side of the house and getting ready for the reporting challenge is critical.”
- Get used to being transparent. Laura Hamilton, vice president of OTC Markets Group, suggests that banks build a track record of experience in issuing press releases for material events like earnings releases, changes in the management structure and contributions to the community, such as donations to charity or volume of Paycheck Protection Program (PPP) loans.
“This helps demonstrate transparency,” Hamilton says. “You also need to be able to tell the bank’s story to potential shareholders and customers in real time and at a moment’s notice.”
- Lower your expectations. “Don’t worry if the bank’s stock doesn’t trade millions of shares on the first day of trading,” Hamilton says. “It takes time to build liquidity. Remember that being a public company is a marathon—not a sprint—and that the real work starts after going public.”
Don Sadler is a writer in Georgia.