|Background. An article (“A Freer Hand for Small Banks”) published in the Wall Street Journal on April 23 by Robin Sidel points to changes in the securities laws that, I believe, may have a major impact on community banks, and indirectly on their executive compensation practices. Quoted below are excerpts from the article.Raising the Cap on Shareholders. “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.
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.
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 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.”
Conclusion. With many community banks still struggling to work their way through problem loans in a slowly recovering economic climate, reducing or eliminating costly SEC compliance burdens will be a welcome opportunity. Although many executive compensation rules now are issued by other regulators, the SEC clearly is the elephant in the room. What will happen in compensation committees when the elephant leaves the room?
Robert L. Musick, Jr. Richard Deutsch
(804) 249-6027 (804) 249-6026