Taking Stock

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Commonwealth Business Bank has been reporting financial results comparable with its bigger Koreatown competitors. But those banks’ stocks are still valued about two times as much. Why?

Kaye Kim, Commonwealth’s chief financial officer, said that’s partly because her stock trades over the counter while her bigger rivals are on Nasdaq.

“Because of where we’re listed, people don’t know who we are,” Kim said.

So New York’s OTC Markets Group Inc., which runs the over-the-counter exchanges, is trying to convince small banks, including Commonwealth and others in Los Angeles, to pay to have their stocks listed on a new market exclusively for banks.

Timothy Ryan, a managing director at OTC Markets, said such a development would introduce small banks to more investors, make the stocks easier to buy and sell as well as help banks raise capital.

The biggest benefit? It would segregate over-the-counter banks, which are supervised by federal regulators and file detailed financial reports with the Federal Deposit Insurance Corp., from the thousands of over-the-counter companies that don’t report anything to anyone. By listing banks separately, Ryan said investors will be able to compare banks with their peers, not to unregulated and often financially troubled companies.

“These banks (now) trade on the OTC QB marketplace, which is really for small developing companies,” Ryan said. “Many are penny stocks, some are shell companies. That isn’t a great marketplace for banks.”

Kim and other bankers agree that trading over the counter isn’t ideal, but right now they don’t have a better option. Listing on a major exchange is pricey and it comes with big regulatory costs that don’t make sense for small banks.

OTC Markets said some banks nationally are in the application process; none is yet trading on the new market. Locally, no banks have committed to join the new market as they wait to see if others do – and if those banks that do make the switch get the promised advantages. But if early adopters find some big-exchange benefits without all the costs, Kim said other banks will likely follow.

“We’re not ready to step up to a full market listing, but we want more market exposure,” Kim said. “If they can do it, and make an intermediate solution, we’d certainly be interested.”


Cost a factor

OTC Markets operates three market tiers – the OTC Pink, or Pink Sheets, for companies that don’t file regular reports with the Securities and Exchange Commission; the OTC QB, mostly for companies that file with the commission; and the OTC QX, for larger SEC-reporting companies.

The new market, called OTC QX Banks, is an add-on to the QX tier, though it would not require banks to report to the SEC. The bank market has been in the works for more than a year, but OTC Markets started marketing it this month.

To be part of the new market, banks would have to pay $15,000 annually, though OTC Markets is trying to entice banks with a discount for early adopters – $10,000 a year for the first five years.

Most over-the-counter banks are now listed for free on the OTC QB. For the added expense, Ryan said OTC Markets will provide banks with custom services. Those include helping banks translate their financial reports, which are written in the language of regulators, into reports and press releases comprehensible to the average investor. OTC Markets will distribute reports through its site, Yahoo Finance and other channels.

Quarterly reports filed with the FDIC include hundreds of statistics, but an investor unfamiliar with the reports would have to dig to find a bank’s quarterly net income, for instance. John Black, chief executive of downtown L.A. lender 1st Enterprise Bank, said making that information easier to find and understand could help attract new investors for his over-the-counter institution.

“There’s a lot of retail investors who wouldn’t know how to find our data through the FDIC,” he said. “If it were more readily available to people, I think that would be good. It’s an interesting idea.”

OTC Markets will also pair banks with a stock broker who will act as kind of a market maker, helping banks connect with institutional investors and investment banks.

Worth it?

Bankers say $15,000 a year isn’t a bad deal. It annually costs a minimum of $100,000 to be listed on the New York Stock Exchange and $32,000 on Nasdaq.

What’s more, to be listed on those markets most banks would have to start filing regular reports with the Securities and Exchange Commission, something none of the 10 over-the-counter banks in Los Angeles County does today.

Terry Robinson, chief executive of El Segundo bank holding company Manhattan Bancorp, which trades on the OTC QB, said SEC filing requirements used to cost his bank $250,000 annually, mostly in fees paid to auditors and attorneys who review filings. That represents more than 10 percent of the $2.3 million annual profit the bank reported last year.

To cut those costs, Manhattan Bancorp last year deregistered its stock with the SEC, meaning that while the stock still trades, the company is no longer required to file regular reports with the commission. (It qualified for deregistration because it has fewer than 300 shareholders.)

Commonwealth’s Kim said those compliance costs are keeping her bank from listing on a major exchange for now. But she wants the exposure and investor interest that could come with a major exchange. As an over-the-counter bank, she believes that Commonwealth is undervalued compared with bigger rivals such as BBCN Bancorp and Hanmi Financial Corp. Those banks’ stocks trade at about 18 times earnings and Commonwealth is valued at half that amount.

“When you look at our stock compared to the bigger public Korean-American banks, we’re traded at a much lower multiple based on earnings,” Kim said. “Having liquidity and market coverage could have an upside in getting that deserved multiple.”

A bank’s stock price and trading volume doesn’t change the day-to-day business of banking, but Black at 1st Enterprise said having a thinly traded stock can make it difficult to raise new capital. That’s why he’s at least interested in hearing more about a QX Banks listing.

“If there’s more volume, the price is more reflective of what buyers and sellers are willing to pay,” he said. “The extent to which you can create a more efficient market and have a more meaningful price, it could impact your ability to raise capital in a positive way.”

Still, he and other local bankers aren’t rushing to join the QX Banks market, and bank analysts say that’s a smart move.

Banks might benefit from the new listing, but it’s not clear how much, said Rick Levenson, president of San Diego stock brokerage and investment banking firm Western Financial Corp., which works with community banks. After all, the new market doesn’t require greater compliance or reporting standards, it just puts banks in their own market, creating the perception of a difference.

“The question is: Will this create a different perception among investors?” he asked. “Will this increase the liquidity in the stock? I don’t think it would. I don’t know what it will ultimately do.”