Why Are So Many Community Banks Going Public?

Though the government shutdown threatened to stall the 2019 major IPO market before it even had a chance to get off the ground, there is one sector that is hoping to keep its IPO momentum going in 2019: community banks.

Eleven community banks held initial public offerings in 2018 according to data from IPOScoop.com. Although that number is in line with 2017’s pace, American Banker noted that it’s still more than double the amount from 2016.

The trend is even more compelling on OTC Markets. Twenty-seven community banks joined the OTCQX Best Market in 2018, tripling 2017’s amount according to OTC Markets Group. Five of those banks have assets of over $1 billion, and nearly a third—such as Delmarva Bancshares, Inc. DLMV, Revere Bank REVB, and Carter Bank & Trust CARE—hail from the Mid-Atlantic region.

Fifteen of these banks chose to upgrade to OTCQX from the Pink Market by providing the required investor data and transparency to qualify.

"Community banks are the lifeblood of local and regional economies,” said Jason Paltrowitz, Executive Vice President of Corporate Services at OTC Markets Group. “Many of these banks have reassessed the landscape since the Jobs Act, seizing new opportunities such as deregistration and raising capital through Regulation A+, and have blazed a new trail into the public markets with strong financials and demonstrated growth. We continue to see traction in the number of community banks that have de-listed from an exchange as well as those that have opted to go from private to public.”

The JOBS Act Has Helped

2018 was not an anomaly as Paltrowitz noted that since launching in 2014, over 125 banks have joined OTCQX for Banks. This isn’t by accident. Of the twenty-seven banks that joined OTCQX in 2018, seven were previously privately-held.

The enaction of the JOBS Act in 2015 created an alternative to a traditional IPO known as Reg A+, which has made it easier for smaller firms to raise capital by entering the public markets. This has ripple effects down the food chain, as community banks make over half of all U.S. small business loans, providing capital to entrepreneurs seeking to start businesses, and the financing needed for local businesses to grow.

Banks Are Seeking A Low-Cost Alternative

In a year that saw unemployment hit a 30-year low and the Federal Reserve end its 9-year quantitative easing cycle, many banks have used the improved economy as an opportunity to improve their standing in the capital markets— or gain access altogether—under a lower-cost option.

“One of the biggest reasons for an IPO is because the banks are experiencing lending growth that’s outpacing deposit growth, said Nate Tobik, founder of CompleteBankData.com. “Banks that are IPO-ing need capital to keep up with growth and don’t want to resort to high-cost deposits. Conducting an IPO on OTC Markets is dramatically less expensive than listing on the NASDAQ or NYSE. As long as the economy stays strong it’s likely this trend will continue.”

Take Century Next Financial Corp. CTUY, for example. After trading on the Pink market for five years, the bank began trading on the OTCQX market in August 2018.

“In our search for a better alternative we were introduced to OTCQX Market for U.S. Banks,” said CFO Mark Taylor. “OTCQX provides many of the benefits of NASDAQ without the costs associated with SEC registration. The standards for eligibility, disclosure, and corporate governance help assure investors of the quality of members and provide current information for informed investment decisions.”

And the performance speaks for itself. The 65-member OTCQX Banks Index has risen 89 percent since inception on January 26, 2015. For context, the Nasdaq Community Banks Index (ABAQ) is up 41 percent.

“Community banks serve a unique purpose—these institutions make over half of all U.S. small business loans, providing capital to entrepreneurs seeking to start businesses, and the financing needed for local businesses to grow, Paltrowitz added. “Helping these banks grow and thrive is a priority that we can all agree upon.”

OTC Markets is a content partner of Benzinga