There’s been a noticeable shift in the behavior of community and local banks in the United States: More and more banks are choosing to voluntarily delist from major exchanges like Nasdaq and the New York Stock Exchange, and deregister with the Securities and Exchange Commission (SEC).
Delisting is typically considered a cost-reduction measure or way for banks to reduce the complexity that comes with SEC registration. It’s clear that this trend is being driven by the economic environment: Higher interest rates, lower loan demand and slowed growth are driving community and regional banks to reconsider their exchange listings. Banks are looking at ways to maximize shareholder value, and are seeking alternatives to the traditional exchange model.
The pursuit of shareholder value and the impact of the 2023 Russell of its index have emerged as the primary drivers of banks switching trading venues. Community banks are scrutinizing the complexity, risk and the costs and benefits of being listed on major exchanges. Additionally, the June 2023 Russell Reconstitution set the entry point for inclusion in the index at a market capitalization of $160 million. As a result, many regional banks now fall just within the threshold for inclusion. Issuers that compose a relatively small share of the index and those that are not eligible face a real challenge in building visibility through their exchange listing. The banks that changed trading venues were all eligible to deregister from the SEC, as they were under the 2012 JOBS Act threshold of 1,200 shareholders of record. As profit margins continue to compress, banks are questioning the time and cost of being listed on an exchange.
Benefits of Voluntary Delisting
Voluntarily delisting allows community banks to transition their listing while maintaining their SEC registration and the accessibility of their financial statements and disclosures. Others choose to deregister and delist simultaneously. The transition to the OTCQX Market offers banks a more streamlined trading experience akin to that of an exchange, with the same strategies aimed at maximizing shareholder value. Further, a broker-driven market provides community banks with an improved trading experience, offering more time to react to orders and better price execution.
The trajectory of voluntary delisting and deregistration in the banking sector is poised to undergo even further evolution.
- We anticipate the stability of trading volumes to persist, particularly for banks under $1 billion in assets. Competitive bid/ask spreads are also likely to endure, maintaining a favorable trading environment that caters to the interests of investors.
- Community banks with a market capitalization under $500 million can expect to attract a similar pool of institutional investors, regardless of what market their shares trade. This consistency in investor interest contributes to the overall stability and appeal of the market.
- Banks can streamline the format of their quarterly and annual reports while maintaining a commitment to transparency and disclosures to institutional investors. This can significantly reduce the administrative burden of reporting but maintains investor confidence with regulatory standards.
- We expect that increasing shareholder value to remain a compelling factor for banks contemplating a transition. This approach can significantly bolster a bank’s financial position and enhance its strategic flexibility.
Banks choose to trade on the OTCQX Market, a viable alternative to Nasdaq, which enables them to maintain their public market status without the burden of SEC registration. The OTCQX Banks Index, which tracks the performance of U.S. banks traded on OTCQX, increased 34% between June 2020 and June 2023. compared with a 10% increase in the ABA Nasdaq Community Bank Index (ABAQ) over the same period. Banks have options to choose where they trade that best serves their shareholders while raising capital in their community, building their business and diversifing their investor base.