In concluding last week's column, we asked community banks whether they would be better off de-registering and going private.
The current merger and acquisition climate has created a buyer's market for community banks. Many banks aren't getting offers at all, and those that are often find that multiples are far lower than they were 18 to 24 months ago.
This may seem odd to those whose banks and thrifts have gone public and have given up their mutual status. Going public, they felt, would provide more capital, give the bank a chance to issue options to employees, and generate profits for those connected with the bank as market prices rose.
The last few months have shown this is not always the case. Bringing in institutional investors has forced the banks to concentrate on generating profits to influence share price, even if they must increase their risk. There is also the concern that unhappy institutional investors might shake up the bank's hierarchy.
A small private bank has no such worries; it can devote its earnings to salaries and to benefiting its community, instead of trying to boost share price.
Equally important, a privately held bank can become a subchapter S corporation. This means the bank does not have to pay taxes on earnings before distributing them to shareholders.
The question is: How do you go private?
The law says you can have no more than 75 shareholders to become an S corporation. An attempt to have this raised to 150 was defeated in last year's congressional session.
The most basic tool for reducing the number of shareholders is a tender offer. The offer must be above the market price of the bank and must have a solid investment banker's approval.
A tender offer also requires salesmanship. Persuading institutional holders to tender won't be too difficult, because they will see that the bank's stock is going nowhere and decide their capital is better used elsewhere.
Individuals, however, must be shown that their bank stock would lose liquidity and that it would be difficult to retrieve their investments.
Sometimes a reverse split is necessary. If the bank does not have enough capital to finance a tender, it may have to sell bonds.
The bank can improve its position in the community by lessening shareholders. It may, of course, want to keep certain shareholders because of the business they generate. The 75 remaining shareholders can be valuable assets instead of just recipients of the bank's profits.
A great many mutuals have listened to the siren song of the investment bankers: "If you go public you will become rich."
Many bankers who did go public learned you can become poor, too; their stocks dropped below the initial offering price or, as happened in a number of cases, down to zero.
Now the banks that go private can concentrate on their other two publics: their employees and their community. This is where community banks' strength has been and where it may reemerge. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.