Solutions for Community Banks in the Public Markets: Q&A with Broker-Dealers

Small banks that have a tough time generating interest from shareholders have numerous tools at their disposal. OTC Markets Group talked recently to two broker-dealers who specialize in community bank stocks about their advice to small, publicly-traded banks and their outlook for the community bank market this year. Joey Warmenhoven of McAdams Wright Ragen has more than 16 years of experience in community bank stocks. Nick DeMaria and Tim Padala of StockCross Financial Services have more than 24 years and 23 years of experience, respectively, in the public markets.

OTC Markets Group has approved both of the FINRA-member* broker-dealers as “corporate brokers” for OTC Markets Group’s new public market for community and regional banks, called OTCQX Banks. The new market will provide banks the opportunity to have their stocks trade on a trusted and shareholder-friendly marketplace with dedicated capital market support and increased visibility with investors. For more information on the new marketplace, click here.

What is the most common question you receive from bank officers and directors about their publicly trading securities and what is your advice?

Warmenhoven: The most common question I receive is, “What can we do to get our stock price up?” My answer is promote your company the best you can and maximize your return on equity. Those two things will ultimately get your shares trading at a higher valuation.

Padala: The most frequent question we hear from the issuers is, “How do we increase liquidity and reduce volatility in our stock?” First of all, if you increase liquidity, the volatility will reduce along with the added liquidity. The next question is usually, “How do we accomplish the goal of adding liquidity?” The answer is to increase awareness in both the local community and investor community in order to widen the investor base. The best way is to get to know the local brokers in your community that are holding your stock in street name for customers. These brokers can be your lifeline to the investors that you are seeking.

Also, get to know your “market makers.” Small, regional and local bank stocks are never going to trade like a high flying tech stock in that millions of shares can be paired off within seconds. The market maker and the local stock broker are the ones that can identify a previous buyer or seller and reach out to them.

What clients do you represent and what value will you bring to your role as a “corporate broker?”

Warmenhoven: [We] represent institutional and individual bank investors from all over the country. [We] have 20 years of experience trading and researching small banks. [We] know the players that are interested in this space and can bring [our] network of investors to the table. In my opinion, this is the strongest asset a corporate broker can provide.

DeMaria: StockCross Financial is a full service and discount brokerage, wealth management and trading firm that is privately owned and operated and has offices around the country. Our bank trading division specializes as a “market maker” in local community banks stocks. In doing so, we are in extremely close contact with the local bank stock investing community, be it institutional investors, other brokerage firms, along with individual bank stock investors. As a wholesale market maker, we tend to be a destination where customer orders end up after being entered at other brokerage firms, be it online, regional or national wirehouses.

What is your outlook for the U.S. community and regional bank market this year?

Warmenhoven: I am optimistic that banks will continue to perform favorably. We will likely see continued consolidation and improved earnings which bode well for bank stock prices.

DeMaria: Most likely, more of the same. The larger banks have returned to a more normalized environment in terms of multiples and predictability of earnings as the panic of the last several years continues to move farther into the rear view mirror. The smaller regionals and super community banks seem to be firing close to all cylinders now, and things will improve as they continue to move closer to the historical norm in terms of both profitability and trading multiples. The more difficult question would be: What happens with the smaller community banks? While most of the issuers have taken their medicine and returned to form, there are still some laggards that are struggling either with capital issues or the prospect of severe dilution to rectify legacy capital issues.

*FINRA stands for Financial Industry Regulatory Authority.