In a rarity, community banks are taking advantage of a law that should drastically lower certain regulatory expenses.
Since the Jumpstart Our Business Startups, or JOBS, Act was signed into law in early April, nearly 65 banks have filed to deregister with the Securities and Exchange Commission. That number exceeded the total number of deregistrations for the previous 16 quarters, according to SNL Financial. While those companies still report to a bank regulator, deregistering securities could save many of them at least six figures in filing costs each year.
"The savings will be approximately $100,000" annually, says Scott Sitter, the president and chief executive at Choice Bancorp in Oshkosh, Wis., "Then there's the time savings, which can be another $50,000."
Choice announced plans to deregister last month. Sitter says the $181 million-asset company can focus more of its efforts on growing its balance sheet.
"That savings will flow right to the bottom line to expand our capital," he says. "With that additional capital, we can grow our balance sheet and be more involved in lending."
Banks are eligible to deregister if they have fewer than 1,200 shareholders, compared to 300 before the law was signed. Also, any privately held bank looking to raise more capital would only have to register if they have 2,000 or more shareholders. That threshold was 500 shareholders before the law was passed.
The change mostly benefits small banks that unintentionally fell under SEC oversight after raising capital as a startup, pulling in more than 300 shareholders.
"For the last two years, we've been working on different ideas to reduce the number of shareholders ... but we just could never move the needle," says Greg Spear, the chief financial officer at Pacific Valley Bank, which opened in Salinas, Calif., in 2004. "We really didn't want to go out and do a [stock] buyback, especially in this regulatory environment where capital is so precious," he says.
Pacific Valley filed to deregister in April. Spear says it will save the $166 million-asset company more than $40,000 a year and take pressure off its 37 employees.
Choice, which opened nearly six years ago with 1,100 shareholders, has waited years for this change. "We knew that if this would ever pass, we would deregister our stock," Sitter says. "It took longer than we anticipated, but we are finally able to recognize some savings."
Deregistering has risks, industry observers say. For starters, the company could face challenges raising capital because many investors prefer the same audited, public disclosures that the SEC requires. That may not matter to some bankers, many of which have been wary to test the public markets since the 2008 financial crisis.
"For many banks, they want to have a publicly traded stock," says Tim Ryan, a managing director at the OTC Markets Group. "But when they weigh the cost of SEC reporting and if they're not out raising a lot of money, it doesn't justify a lot of the costs."
Of the 413 banks that trade on the Nasdaq, 189 have less than 1,200 shareholders and are eligible to deregister, according to the OTC Markets. SNL estimates that up to 336 banks and thrifts are eligible to deregister.
Deregistering could limit merger opportunities by reducing the allure of a company's stock as buyer or seller, says Kip Weissman, a partner at Luse Gorman Pomerenk & Schick.
Deregistering could make it difficult for a company to know if an activist investor is building up an ownership stake. "If the company is deregistered the only way to stop" an activist from publicly humiliating a bank "is to go to court, and that's more expensive than being public," Weissman says.
Deregistering mostly benefits the smaller banks with stocks that are thinly traded or closely held. The savings are real but moving off of the SEC's grid could complicate investor relations.
"What investors are concerned about is [whether] they are still going to get ongoing information, or is the company going to go completely dark," Ryan says. "It's not like you go from SEC reporting to nothing, but [companies] have to find a way to disseminate that information out to the shareholders."
Most banks that have announced plans to deregister have said that they would continue to send quarterly financial press releases and annual reports, posting those materials on their websites or by using another form of communication.
Small community banks, particularly those where most investors are local, say it is of little concern since most of their shareholders know the institution well.
"We know a majority of our shareholders," Sitter says. "They live right down the street. If they have any question, they're going to come in and talk to us. I don't think we need to file a 70-page 10K for them to get the information."