OTC Markets Blog

Latest commentary on Market Structure, Compliance, Small Cap and Reg A+ issues, including insights on the news and trends that affect the public markets.

Q2 Community Bank Data: A Closer Look at What You’ll Find Outside of the Balance Sheet

As Q2 call report data becomes available, analysts are looking for indications of how the pandemic may be impacting allowances and delinquencies in community bank balance sheets.  However, considering COVID-19’s severe economic impacts didn’t begin until mid-March, what may be more telling at this juncture may be what is occurring off balance sheet.

Community Banking Q2 Data: A Closer Look at What You’ll Find Outside of the Balance Sheet


While it’s true that some banks have dramatically increased their allowances for credit losses, when the sector is split into “big banks” (assets > $3 Billion) and “community banks (assets < $3B), there is a marked difference in the change in allowances:

It’s hard to tell from these aggregated numbers, but there are likely several contributing factors at work here including:

  • the relatively conservative nature of community bank underwriting
  • a more personalized approach to community loan workouts
  • differences in loss accounting methodologies

The last point can’t be underestimated, as larger banks are more likely to have adopted CECL’s “expected loss” approach to allowances in lieu of most community banks’ “incurred loss” models.

Regardless of the driving factors related to the above chart, what is clear at this point is that allowances are not yet an indicator of COVID-19- related troubles at community banks.

Off-Balance Sheet Commitments

One area that may be more of a leading indicator for smaller banks is changes in “Unused Commitments,” which typically reside off the balance sheet.  These represent portions of credit lines that banks have previously committed to lending, but borrowers have not yet drawn. 

Consider, for example, a home equity line of credit (HELOC) with a $100,000 limit.  If the borrower has borrowed $25,000, the remaining $75,000 remains available to the borrower on demand and is accounted for off the balance sheet as an “unused” commitment.  Note, this is a particularly simple example, as HELOCs have some of the most straightforward mechanics pertaining to credit lines.  However, the analysis concept remains compelling:  when the economy is awash in trillions of dollars of fiscal and economic stimulus, signs of a credit crunch may be seen in the way borrowers tap into established credit lines at community banks.

In looking at the chart above, there is a marked downward trend in Total Unused Commitments.  While it’s difficult to draw a definitive conclusion about the underlying causes, it is reasonable to determine that several factors are driving this.  Chief among them, the data indicates that borrowers are using credit cards and HELOCs at increasing rates—to such as degree that some banks have temporarily stopped underwriting new HELOC accounts.

Given the significant amount of stimulus aid and other forms of relief currently being provided (e.g. loan deferrals and modifications), we are not yet likely to see “past dues” and” write-offs” reflected in bank data.  However, if unused commitments continue to ramp down and stimulus dries up, community banks could rapidly find themselves with a portfolio of troubled credit. Only time will tell, but given the fact that layoffs continue, and that the passage of further stimulus relief has stalled, Q3 and Q4 data may start to show more explicitly where borrowers are slipping through the cracks.

Reassessing Market Options During Uncertain Times

During times of uncertainty, many company executives find themselves evaluating their initiatives, priorities and expenses through a new lens.  In recent months, we’ve spoken with management teams as they wrestle with whether it makes sense to maintain their exchange listing on NASDAQ or NYSE, given the cost and complexity it creates for their teams. Continue reading “Reassessing Market Options During Uncertain Times”

Quantifying Listed Low Price Security Risk – Small Cap Compliance Risk Scoring

The events of 2020 have raised plenty of compliance issues within the equity markets including the explosion of retail activity, day-to-day event driven volatility and the influx of COVID-19/health care sector securities.  They have also highlighted an issue that has often been overlooked during more sanguine markets – the large number of ‘Low Priced Securities’ (LPS) on U.S. exchanges. Continue reading “Quantifying Listed Low Price Security Risk – Small Cap Compliance Risk Scoring”

Today’s State of the Community Banking Market: Five Topics Being Discussed Among Bankers

Wall Street vs. Main Street – the discussion of the differences between the two is age-old.  Throughout this COVID-19 Pandemic, OTC Markets Group has seen America’s community banks step up to support the small businesses in their local communities by providing loans and other much needed financial support. Continue reading “Today’s State of the Community Banking Market: Five Topics Being Discussed Among Bankers”

Before You Go Public on Pink

It is a common misconception that going public on the Pink market is a low cost, efficient way to gain visibility for your company, and in turn, establish liquidity. However, when you dig a little deeper, you find that cheaper is not always better and that it can add substantially more cost in the long run.  Regardless of your goals in the public markets, there are key factors including transparency, public perception and tradability that should be considered when evaluating your options. Continue reading “Before You Go Public on Pink”

“What Attracts a Family Office to Your Offering?”

Over the last ten years, private investors with significant personal wealth have grown in their prominence as a bona fide investor class. Unburdened by the mandates and time constraints of a typical private equity fund, these investors have also become a highly coveted resource for growing companies. Regardless of their AUM, location, generational heritage or industry focus, you can rest assured that these investors want to invest not only from their pocketbooks but also from their experience. Our firm works with a large and growing number of family offices interested in high-quality, curated deal flow and is frequently counseling issuers on how to present themselves to family offices. In this post we will cover the basics of a family office, their motivations for investing and how they write checks in cash and experience. Continue reading ““What Attracts a Family Office to Your Offering?””

Investors Be Alert—“Penny Stocks” Can also Trade on Exchanges

In my most recent blog post, Capital Raising During Times of Uncertainty—Issuers Beware!, I discussed the issues facing small and micro-cap companies as they confront critical funding issues and the heightened need to secure growth capital. The companies that do all the right things and provide quality disclosure deserve a public market that provides a mechanism for investment funding to keep their businesses going.  However, some may still fall victim to bad actors. We cautioned issuers to beware of “too good to be true” financings with terms that dump shares, dilute shareholder value and destroy companies. Continue reading “Investors Be Alert—“Penny Stocks” Can also Trade on Exchanges”

Exploring the Investor Impact of an SEC Rule Proposal

The SEC’s proposed amendments to Rule 15c2-11 focus on ways to incentivize additional company disclosure in the public markets.  While we strongly support the overall goals of the proposed amendments to increase information availability for investors, we are mindful that this rule has far reaching implications that will reduce market efficiency in certain areas.  Continue reading “Exploring the Investor Impact of an SEC Rule Proposal”

Capital Raising During Times of Uncertainty — Issuers Beware!

As the public market for thousands of early stage and growth companies, OTC Markets Group has seen the good, the hard and the plain ugly when it comes to what happens after a capital raising.  Even in the best of economic times, issuers often fall prey to bad advisors offering “too good to be true” financings with terms that dump shares, dilute shareholder value and destroy companies. Continue reading “Capital Raising During Times of Uncertainty — Issuers Beware!”

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