Orange County community banks might be well positioned to benefit from the Jumpstart Our Business Startups Act, which includes provisions aimed at easing regulatory burdens for small businesses.
The act was passed last month and raises the maximum number of shareholders a privately held entity can have—to 2,000 from 500—before becoming subject to compliance obligations of the Securities and Exchange Commission. That ultimately could help banks such as Garden Grove-based U.S. Metro Bank, which may seek investors and outside capital to strengthen its books. Chief Executive William Im said recently the bank is considering looking outside for money to help pay off a loan it received in 2009 as part of the Troubled Asset Relief Program.
“U.S. Metro Bank has fewer than 300 registered shareholders, so the increase of the threshold number would not affect the bank’s (immediate) situation,” Im said. “Of course, it will provide a wide horizon for the future IPO, which the bank plans will take place within a couple of years.”
OC Banks
Many Orange County banks have fewer than 500 shareholders, hovering between 300 to 400 shareholders.
“We were probably getting close to the threshold,” said Scott Kavanaugh, chief executive of Irvine-based First Foundation Bank. “For us, it’s the benefit of knowing that if we wanted additional shareholders, we wouldn’t have the disclosure and registration burdens. We didn’t want to have ourselves squeezed up against the time frame of having to go public. This definitely gives us the option of being able to stay private for longer if we need to, especially when the market is this volatile.”
The Securities Exchange Act of 1934 had generally required privately held banks with 500 or more shareholders to register their stock with the Security and Exchange Commission and provide periodic reports.
“Time Consuming”
“That’s incredibly time-consuming and expensive,” said Dan Chambers, a partner in the Irvine office of Atlanta-based law firm Troutman Sanders LLP. “The increase [to 2,000] is significant, because it will give banks a lot more flexibility to raise capital and get it from new shareholders without having to register.”
That represents a particular boon to community banks, which tend to seek a broad base of shareholders in the community, according to Ed Carpenter, chief executive at Irvine-based advisory firm Carpenter & Co.
He has advised hundreds of startup banks, and his firm has developed a private equity division that invests in community banks. The fund, Carpenter Community BancFund, has controlling stakes in five banks throughout California, including two in Orange County.
“Historically those shareholders have become depositors and borrowers,” Carpenter said. “There’s a symbiotic relationship between the bank and community.”
The Jumpstart Act makes it easier for a company to deregister itself. A company had not been able to do that unless it had fewer than 300 shareholders; the new law raises the number to 1,200.
“Deregistration is appealing, because it relieves community banks from costly compliance costs,” said Gale Moore, a partner in the assurance and advisory practice at the Irvine office of Los Angeles-based certified public accounting firm SingerLewak.
“There are a number of banks in California that are looking at deregistering, with the idea of saving significant expenses and significant management time,” Carpenter said. “The action today is largely in the existing banks considering whether or not to deregister.”
Pulled Plug
Tustin-based Sunwest Bank pulled the plug early.
“Sunwest already started the process of delisting back in 2007,” said Chief Financial Officer Jason Raefski, who joined the bank shortly after the deregistering process began. “There’s definitely the cost-saving, no doubt about it. It could save a bank a tremendous amount of annual expenses. It’s a couple of hundred thousand dollars a year.”
The Securities and Exchange Commission still has room to tweak things, cautioned Troutman’s Chambers.
“The SEC has up until next April” to make modifications and final regulations, he said. “Sometimes when the SEC goes through the rule-making process, it ends up cutting into what appeared to be a benefit. The SEC process is kind of like a mystery. We’ll have to see how that plays out.”
