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There’s no doubt it’s challenging to be a publicly held small cap community bank. Despite generally better income performance (markedly better, in many cases), better capitalization ratios, lower relative loan loss reserves and a more stable, loyal customer base than many of the nation’s national, regional and super-regional institutions, community banks’ stock prices have plummeted right along with the entire banking sector.
Common additional challenges are low trading volumes and liquidity issues, creating barriers to certain types of investors. Factors like trading as a Pink Sheet or Bulletin Board company, or being “dark” and not having SEC reporting and filing requirements further complicate matters, especially with respect to investor outreach.
Community bank senior management teams may be frustrated at the situation, but feel they’re without recourse to influence the circumstances. Here are some meaningful ways a modest, sophisticated, investor outreach and communications program can benefit even thinly-traded or “dark” community banks:
Shareholder Communications That Reinforce Long-Term Ownership
1. Silence is the mortal enemy of any publicly held company. In the absence of information, shareholders and investors are more than likely to assume the worst. Although finding new investors can be a challenging task for a small, lightly traded company, keeping the loyal shareholders you have represents an excellent use of time and resources.
2. Committed shareholders can attract new shareholders, telling friends and business associates about the investment opportunities they believe exist in your company.
3. Many community banks have a number of key shareholders who are likely to be long-time backers. They may be influential members of the business community, and are often customers. Even though most know the door to the executive offices are always open for them, these committed shareholders are still reassured by the quality and transparency of a company’s public communications. Strong reporting, strategic and forward-looking discussion of opportunities reinforce their confidence in management and the board of directors, and may play a role in assuring their continuing long-term position as shareholders.
4. If a shareholder’s cost basis is sufficient low, the “sell” decision comes more easily when a shareholder loses confidence in a company’s ability to enunciate its business model and strategy to the general investing community. Don’t give them a reason to reduce their positions or take a tax-loss write-off. Trimming or eliminating communication is a sure way to accomplish that.
5. What works: annual reports that double as leave-behind collateral for business banking personnel; company fact sheets that outline strategy (very helpful for community banks that lack sell-side research coverage), operations and key metrics; web-based, mail and email communications to shareholders; strong, strategic financial and marketing news releases that reach millions at a minimal cost.
Customer Communications that Support A Bank’s Public Status
1. Some of community banks’ best potential shareholders are customers, who feel good about investing in “their” bank and especially if the bank returns support to the community in terms of its lending practices, services, and charitable activities. These potential investors are less concerned about liquidity issues or even valuation issues than many other investors. Targeted outreach to key customers through envelope stuffers, website ads, invitations and links, executive visibility in the form of letters, updates and other communications can all sow the seeds of an investment idea with customers.
2. A solid, well-planned annual report, crisply presented corporate information on the company’s website and key strategic announcements can all serve to reassure customers that their bank is sound, stable and well-run. They know the bank is in business to make a profit, and so long as services, loans and deposits are competitively priced, they can handle a discussion of net interest margins (if that interests them).
Building a Foundation for the Future
1. Regardless of a bank’s current performance or near-term outlook in challenging markets, good investing is about the future. A decision to “lay low” on communications and outreach until the economy improves, all nonperforming loans are off the books, etc., can have a serious negative impact on future valuations. Even in tough times, a company can lay a foundation of disclosure, quality reporting and transparency. Like a farmer buying fertile land, smart investors seek opportunities before the seeds are even planted. Once the harvest is assured, the opportunity may be long past.
2. In doing research, investors pressed for time increasingly look to a company’s reporting history and strategic communications. If there’s a history of skimpy or nil reporting during the tough times, the “early-adopter” investor may not have the time to dig for information, consequently taking a pass rather than seizing the opportunity.
3. With the cost of compliance with Sarbanes-Oxley, overall SEC reporting requirements and bank regulatory requirements, the reality is that for many community banks, mergers may represent an excellent long term solution to create economies of scale and reduce compliance and operating costs. Banks with a track record of clear strategic communications have higher visibility, attract more merger opportunities and garner the attention of investment bankers positioned to facilitate “successful marriages.”
4. Quality reporting and strategic communications can help a bank achieve maximum valuations, which is good for the company and shareholders whether the company is an acquisition candidate, uses its stock as currency to acquire others, or simply wants to maximize value for its shareholders.
A Cost-Effective Proposition
1. If a bank is able to create a higher floor for its share price than it might have without strong investor communications, or can add a 10% premium to its stock based on increased forward valuation, what’s the cost-benefit? Simple math: a company with 10 million shares trading at $10, whose investor outreach program leads to a 50 cent per share preservation of or increase in value, retains or adds $500,000 in shareholder value. The return on a $50,000 annual investor outreach program yields 10x return on investment.
2. Smaller, more illiquid banks feel the impact of trading far more than large companies. A few thousand shares (sometimes less) traded can lead to a significant decline or increase in valuation! Diversifying and increasing a bank’s shareholder base will go a long way towards reducing or eliminating this problem.
For smaller community banks, silence is not golden – but forthright and transparent communication can be.
Contacts:
Jacob Eisen
President
(312) 466-7646
Tad Gage
Executive Vice President
(312) 466-7646
