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Why is Your Bank or Bank Holding Company Still a Public Company?
November 09, 2012
Is your community bank or holding company still a public company? Are you making periodic filings — 10-K's, 10-Q's, 8-K's, Proxy Statements — to the SEC or your primary federal bank regulator? Are you still subject to Sarbannes-Oxley (SOX)? Why? A large number of community bank holding companies have filed to deregister from reporting to the Securities and Exchange Commission (SEC). Similarly, many “public” community banks also have filed to deregister from reporting those forms to their primary federal regulator. It often is not that difficult. You might qualify even if you think you don’t. Even if you don't qualify to deregister right now, you may be able to take actions to help you qualify soon.

The JOBS Act, signed into law April 5, 2012, made a lot of good changes to current U.S. securities law. Perhaps the best change for community banks is that it specifically allows bank holding companies with fewer than 1,200 shareholders of record to deregister from SEC reporting. In the past, every company with more than 500 shareholders of record had to file as a reporting company with the SEC, and that company continued to file SEC reports until the company had fewer than 300 shareholders of record. Similarly, every bank holding company that had a public offering became an SEC reporting company through the following year and could only escape reporting if it had fewer than 300 shareholders. Many very small community banks had more than 300 shareholders, often many more, either due to time and inheritance or due to the fact that local shareholders often become local customers (and vice versa), so state banking commissions often encourage broad ownership. Having more than 300 shareholders does not change the character of a community bank or its financial metrics. It is expensive to file periodic reports with the SEC, go through the annual audit and battle known as the Form 10-K Annual Report, and more recently comply with the new XBRL filing and tagging requirements. SOX has added additional compliance burdens. We did a small survey a few years ago, and local community banks averaged over $250,000 in annual costs due solely to being a public company. That is a fortune for many community banks.

The JOBS Act provides a great chance to change that. Now a community bank or holding company must exceed 2,000 shareholders of record before it crosses the threshold of becoming a public company under SEC filing rules.* This provides a lot more room for a bank to bolster capital by selling equity. Perhaps more important, when a community bank or holding company has fewer than 1,200 shareholders of record, it probably qualifies to cease filing periodic reports with the SEC (or federal bank regulator). Of course, Call Reports and other pure bank regulatory filings still are required, but Forms 10-K, 10-Q, and 8-K may be required no longer. Often, a relatively simple Form 15 filing plus a 90-day wait accomplishes this.

Unfortunately, when the bank or holding company has a Form S-4 (often an employee stock option plan) or a Form S-3 (often a dividend reinvestment plan) active, this is an impediment to deregistration. Those forms automatically update when the Form 10-K Annual Report is filed. In other words, they constitute an open offering that will delay qualification to deregister as a public company. We have advised clients in dealing with this problem, but the appropriate strategy depends on the specific facts. This will become clearer when regulations are published, probably early next year, but in the meantime you may need to file a no-action letter request with the SEC or your federal bank regulator. We have experience with that process.

Even if you do not qualify, there are tactics you can use to reduce your record shareholders below the 1,200 threshold. Some of these are simple to do yourself. For example, you can cull your shareholder records to eliminate duplicate entries or negotiate with shareholders to combine related holders. Others methods may require board actions and sometimes shareholder approval. However, considering the cost savings and the reduction of unnecessary and complicated filings, many banks find the advantages of deregistration well worth the effort.

* The exception is a company that was a public company and has deregistered. It now can deregister when it has fewer than 1,200 shareholders of record, but if it later exceeds 1,200 shareholders of record, not 2,000, it becomes a reporting company again.
Community Banking Hugh B. Wellons