Choosing Liquidity Channels
Sammon, Bill, Independent Banker
Weighing the pros and cons of various stock exchange options
Liquidity is an important part of shareholder value. It allows banks flexibility when dealing with their current shareholders, when trying to attract new investors, and when attempting to use their stock as a currency to help grow the organization through acquisitions. Consequently more than 1,400 bank and thrift holding companies trade on a public market and report to the Securities and Exchange Commission (SEC).
Reporting to the SEC adds transparency to core fundamentals and helps the investing public better understand a potential investment. Having a liquid stock can be beneficial to current shareholders as evidenced by a review of where bank stocks are trading today versus historical price-to-book and price-toearnings multiples (see Table 1).
While these are all benefits of being publicly traded, there are associated costs. Public banks not only have to worry about the fundamentals of their organization, they must concern themselves with investor relations on a day-to-day basis as well. Management teams at SEC reporting companies must also deal with Sarbanes-Oxley Act requirements, at significant time and expense. Management is also tasked with protecting the company's stock price, which often translates into countless hours on the road talking to institutional investors, making presentations at investor forums and cultivating relationships with broker/ dealers who will tell their story and potentially write research.
Choosing a Market
Most community banks that report to the SEC list their shares on either the American Stock Exchange or the NASDAQ as few have a large enough market capitalization to qualify for the New York Stock Exchange. The American Stock Exchange, which employs a specialist to keep orderly and efficient markets, currently has 31 community banks and thrifts that list their shares on the exchange. The specialist has the ability to act as both broker and dealer. This means he can match public orders or use his own account to ensure best execution.
The NASDAQ is the largest electronic exchange in the United States. Here, broker/dealers can meet to execute trades for their clients. On the NASDAQ, a market maker is the key player for ensuring liquidity. Market makers can use their own capital to keep orderly and efficient markets. It is that capital that allows a community bank's stock to trade without wild swings in price. The key for a community bank that has its shares traded on the NASDAQ is to find a market maker that will use its capital to keep these fair markets. In today's marketplace that may be easier said than done.
"I see less capital being committed to this sector today than even five years ago," says Greg Gersack, head of sales and trading for Howe Barnes Investments who makes market in more than 300 community bank stocks. "Changes in the trading rules and consolidation of regional brokers have led to shallower markets for these stocks." With this in mind, finding a market maker that will take a risk and make sure a community bank's story is being told is crucial in creating real liquidity for shareholders. …