• "This will create opportunities for us that didn't exist before," said Mr. Stein. The 7-year-old bank, which has six branches, wants to expand in the Houston area and potentially find a merger partner.
Small Banks Get a Freer Hand
The Wall Street Journal
April 23, 2012
Jim Stein no longer has to worry when one of his shareholders dies or gets divorced.
As chief executive of Bank of Houston, Mr. Stein used to fret about tripping a regulation that required the community bank to register with the Securities and Exchange Commission if it has more than 500 shareholders. The bank, a unit of BOH Holdings Inc., carefully maintained its shareholder count at 350 because it wanted to avoid the cost and hassle of registering. But the level was always at risk of rising.
"One shareholder could turn into four through unexpected consequences," Mr. Stein said.
Bank of Houston CEO Jim Stein, right, said the new rule to reduce the regulatory burden on small banks 'will create opportunities for us that didn't exist before.' Pictured, he chats with a customer at a branch this month.
Now, Mr. Stein and other small-bank CEOs can stop counting shareholders as closely and turning potential investors away at the door. The JOBS Act signed into law this month includes a provision that raises the number of shareholders at which small banks must register with the SEC to 2,000. The JOBS Act aims to increase jobs by reducing regulations on companies.
The change means that small banks are free to raise capital by attracting new investors without taking on regulatory burdens that are associated with the SEC filings. It also could breathe some new life into bank mergers and acquisitions, which last year stood at the second-lowest level since 1980.
"This will create opportunities for us that didn't exist before," said Mr. Stein. The 7-year-old bank, which has six branches, wants to expand in the Houston area and potentially find a merger partner.
The new rule comes at a time when community institutions are struggling to stay profitable in a period of low interest rates, stagnant lending and rising compliance costs from other new regulations. Returns on assets at institutions with $1 billion or less in assets was a third less than the industry average in 2011, according to the Federal Deposit Insurance Corp.
The move potentially could affect hundreds of community banks around the country. Just 16% of the nation's roughly 7,400 banks and thrifts are publicly traded, according to research firm SNL Financial. Many of those are thinly traded, but most are required to file quarterly and annual financial reports with the securities agency.
The JOBS Act also makes it easier for small banks to deregister with the SEC, permitting them to do so with 1,200 shareholders, compared with the current threshold of 300.
Many banks aren't likely to raise their shareholder base; community banks are often closely held among a small group, especially those that are family-run institutions. Some, however, are eager to attract more capital and investors, especially if they can now avoid the expense, which could be as much as $200,000 a year, of filing quarterly and annual financial reports with the SEC.
Maintaining the shareholder numbers game has been tough for Roland Williams, who monitors the 492 holders at Post Oak Bank in Houston. As chief executive of the seven-branch bank, a unit of Post Oak Bancshares Inc., he already had resigned himself to breaking through 500 shareholders this year because the bank is planning to raise up to $20 million of capital.
"You just can't have enough capital," he said.
The new rule isn't expected to threaten the safety and soundness of the community-bank industry; banks of all sizes must regularly file financial data with the FDIC and submit to examinations from national and state regulators.
Industry consultants say the raising of the 500-shareholder rule could fuel new life in the strapped sector by giving banks flexibility to build new branches or pursue growth through mergers and acquisitions. Some industry observers have long said that the U.S. banking system would be more efficient with fewer institutions even though the number of commercial banks and thrifts already has dropped 60% since 1985.
Several bank executives said the 500-shareholder barrier prevented them from pursuing mergers because they didn't want to issue new shares.
The 500-shareholder bar "has been something on the mind of every board in every merger discussion," said Curtis Carpenter, managing director at Sheshunoff & Co., an Austin, Texas, investment firm that focuses on the banking industry.
The new threshold also is likely to trigger a wave of community-bank stock offerings, according to Mindi McClure, managing principal at Bear Cos., an investment firm in Arlington, Va., that specializes in community banks.
"Having an additional way for banks to get more shareholders is a real positive," she said.
Jack Hartings, chief executive at Peoples Bank Co. in Coldwater, Ohio, already had warned his 465 shareholders that the bank might have to pursue a reverse stock split in order to avoid tripping the 500-shareholder barrier. Mr. Hartings, whose bank is a unit of Peoples Holding Co., also dissuaded potential investors from buying stock, telling them, "We appreciate your confidence in the bank, but right now we are not seeking new shareholders."
Mr. Hartings said the bank has no immediate plans to expand its shareholder base as a result of the law even though "everyone likes to own a piece of a company that they see in town."
"We have willing buyers, but not many willing sellers," he said.