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Banking

Community banks: Privately owned US banks stock up for sale

SecondMarket launches US bank platform; SEC accuses firms of unlawful conduct

Private-company trading platform SecondMarket, which hosts shares of technology companies such as Facebook, will launch its offering for US banks later this year, enabling their community members who hold shares to trade, as well as encouraging new investors. More investors are looking to buy into smaller US banks because of their positive economic outlook.

At present, buying and selling of shares in community banks is rudimentary. Shareholders rely on calling banks’ CEOs to request an introduction to prospective buyers and vice versa, but while CEOs can introduce buyers and sellers, they are not allowed to act as a broker or advise on pricing.

SecondMarket is now launching a platform so banks’ shareholders can buy and sell their shares without involving the CEO.

Caryn Feinberg, senior vice-president at SecondMarket
Caryn Feinberg, senior vice-president at SecondMarket

Caryn Feinberg, senior vice-president at SecondMarket, says: "We work with the issuing community bank to put together a programme of when they would like to have a window of trading shares open and the frequency of trading." Banks can also select parameters for who buys their stock, so interests are aligned. Feinberg says that private trading is preferable to going public for many US banks. "For banks with less than $1 billion in assets, it is very hard to go public," she says. "Broker-dealers no longer offer research on these smaller banks, brokers are not interested in trading them and the liquidity is very limited still even if public, because they are on the pink sheets and ignored by high-frequency traders.

"You could have a buyer one week and wait six weeks to find a seller, so trading is very bumpy and sells are often desperate. And even if public, banks are concerned about the volatility of the markets."

Chris Cole, senior vice-president and senior regulation counsel at the trade body Independent Community Bankers of America (ICBA), says the opportunity to have more liquidity without going public is a relief to community banks. "Banks are in greater need of capital," he says. "Since the credit crisis, bank examiners have been requiring banks to raise their capital – even beyond minimum levels – and we’re now in the third year of those pressures.

"Add to that the fact that Basle III is coming with common equity requirements, and many community banks know that they have to raise more capital."

While typically if a non-public bank needed capital it would approach its shareholders, Cole says the weak economy has meant shareholders do not always have the means to invest more money.

"Around 85% of community banks [some 6,000] are privately owned – some have turned to private equity investors to raise capital but that can come with some strings attached," he says. "There is not really the public market for those banks that are smaller, and also going public costs money."

Cole estimates it costs around $150,000 a year for a small bank to register with the SEC just to cover auditing and legal fees. Banks are required to register with the SEC if they have more than 500 shareholders, although a bill provision has been passed to increase that number to 2,000, which would allow US banks greater liquidity at lower cost.

For investors, US banks are a potentially good investment, as the US economy shows signs of growth.

"They are cheap right now for what you get," says Cole. "If they are well run and are making solid returns, particularly in areas which you know will come back, such as Florida and California, then the growth opportunities are vast. This new platform could offer the chance for investors to come in and buy shares at a good price."

One analyst adds that it provides a good opportunity to make regional bets in the US: "Community banks are a good way to get exposure to local real estate, businesses and financial markets. They are a unique asset class."

The programme is in its pilot phase in certain states, such as New Jersey, New York, Pennsylvania and Texas, and up to six banks are being analyzed before the programme is formally launched later in the year.

Banks are required to have more than $250 million in assets and have to meet due diligence requirements to be accepted by SecondMarket. "We want this programme to be as aspirational as our venture-backed programme for technology companies; we want to ensure that the banks we accept to our programme are high quality," says Feinberg.

The growing trend of trading private companies’ shares on platforms such as SecondMarket is raising concerns at the SEC. The commission launched an investigation last year, and last month accused three firms of unlawful conduct, including SecondMarket’s biggest rival, SharesPost.

SharesPost settled with the SEC, which accused it of operating as a broker-dealer without a licence. SecondMarket does have a licence.

Despite the SEC’s attention, market participants say they expect the trading platforms to continue to grow as companies seek alternative means to raise capital.

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