Community Bank Regulations Should Foster Main Street Growth

Banking regulation tends to be a partisan issue, but there’s one thing lawmakers are certain to agree on: America’s community banks are the backbone of the country’s economy.

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. They provide jobs, help families buy homes and serve as the financial core for communities nationwide. 

Policymakers and regulators should consider a tailored approach to capital requirements, data reporting and other requirements to keep community banks alive and thriving as the economic engines of U.S. communities. More dramatic changes to regulatory structures would fall harder on small banks, as they don’t have the compliance teams that can rapidly implement changes the way large banks can.

According to a recent survey by the Federal Reserve and Conference of State Bank Supervisors, community bank compliance costs have increased by nearly $1 billion in the past two years to roughly $5.4 billion, or 24% of community bank net income. 

The banking industry is thriving and we hope that any regulatory changes considered will take into account a community banks most important customer — Main Street. 

The Growth of Community Banks 

Since their inception, community banks have served a very specific demographic — the members and businesses in the communities in which they reside. Appropriate regulation isn’t the only factor that will impact community banks, but it can become a detrimental one. We’re fostering the growth of U.S. community banks by providing efficient, cost-effective markets for them to raise capital, diversify their shareholder base, drive liquidity for existing shareholders and learn the best practices of good corporate governance.

2018 was a record year for community banks that trade on our markets, which achieved 200% growth over 2017.  The OTCQX Banks Index has returned 90.5% since inception, outpacing the SNL Bank index by 50.4%. The performance of this index clearly demonstrates that investors are buying stock in community banks, which is not only good for these banks, but also beneficial to the communities they serve.

At year end, we saw 27 banks join our market, up from nine banks in 2017. This was an especially healthy year for banks in the Mid-Atlantic region of the U.S.– of the 25 banks that joined, 30% are located in the Mid-Atlantic between Maryland, Pennsylvania, and Virginia. 

In the four-and-a-half years since we started OTCQX, we’ve seen a growing number of private banks looking to access liquidity for their bank’s stock.  Establishing a bona fide market also allows banks to use their stock as a currency in M&A transactions. As of year-end, we saw seven banks become publicly-traded, without SEC registration.


Upgrading to OTCQX

Last year, we saw 15 banks upgrade from the Pink Market, providing the required investor data and transparency to qualify for the OTCQX Market.  Many have made this move to increase their visibility, leading to increased shareholder value.  We see price and volume for OTCQX Bank stocks continue to increase when moving to OTCQX from Pink.  We have seen the average asset size increase year-over-year, with five banks with over $1 billion in assets join the market. Each month we take a closer look at our most active OTCQX Banks.  We have seen the community banks that have joined in 2018 continually top the list in terms of dollar volume. 


The Community Banker’s View   

In October, OTC Markets hosted a CEO Roundtable in Washington, D.C., in which four OTCQX-traded community banks participated.  These four bank CEOs joined American Banker in discussing topics ranging from current regulations, the future of the community banking industry and financial literacy.

I speak with dozens of community bank CEOs each year. Those CEOs who participated agreed that the number one reason why they decide to trade on the OTCQX is the access to an efficient public market without the cost and complexity of SEC filing.

Jeff Dick, CEO of MainStreet Bancshares explained, “Absolutely, there’s appetite to invest in community banks. We just finished a capital raise and were significantly oversubscribed. I think the sign of a well-run community bank is having that solid, diverse investor base who sees value in the industry. We still see interest, even though there are fewer community banks in operation.”

Regulation continues to be on the mind of community banking industry. The four community bank CEOs agreed with Glenn Marshall, CEO of First Resource Bank when he said, “There are regulations that you want to have on a large bank from a ‘too big to fail’ standpoint, to protect the country. But when dealing with a small-town community bank, those regulations shouldn’t be the same, as that’s the heart blood of that community. You don’t want to overburden community banks to the point of pushing them out of business.”

Lawmakers may frequently disagree on the regulation of Wall Street investment banks. But every congressional district in this country is home to community banks that continue to stimulate local economies and provide the working capital required to start and scale businesses. Helping these banks grow and thrive is a priority that legislators on both sides of the aisle should agree upon.

Laura Hamilton is a Vice President, Corporate Services at OTC Markets Group, an operator of financial markets for 10,000 U.S. and global securities, where she focuses on new business development for community banks across the US. Contact her via LinkedIn.

Laura Hamilton is a Vice President at OTC Markets Group, where she focuses on new business development for community banks across the US. In this role, Laura manages the OTCQX Banks market where she advises both private and public community banks on trading and liquidity in the U.S. equity markets. Since 2017, Laura has helped over 30 community banks trade on OTCQX, including many that went public on the market. Prior to joining OTC Markets, Laura specialized in corporate development and worked in Corporate Finance at JP Morgan Chase. Laura received her BS in Finance from the University of Maryland.

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