By CALLIE DANIELS BRYANT
As the Great Depression loomed upon United States in 1932, a handful of citizens came together despite certain risk of failure to create Merchants & Marine Bank, a community bank in Pascagoula. In 80 years, the bank grew from $25,000 in two offices to over $600 million in 12 offices.
When Merchants & Marine Bancorp, Inc. decided to begin trading in the public market, it chose OTC Markets Group (OTCQX) instead of NYSE or NASDAQ. The decision seems risky at first glance but unsurprising given the bank’s history and community-driven mission toward its clients and shareholders.
The OTCQX is the top tier of the three marketplaces for over-the-counter trading of stocks. The OTCQX is operated by the OTC Markets Group. Stocks that trade on this forum must meet more-stringent qualification criteria compared with the other tiers. Penny stocks, shell companies and companies in bankruptcy cannot qualify for listing on the OTCQX.
“We felt like that our performance over the past several decades and the growing list of our shareholders here deserved better liquidity for their stock in the market and ultimately the ease of transaction that FIG Partners and OTCQX provide will be a real value to our shareholders,” said Royce Cumbest, president and CEO of Merchants & Marine Bank.
The community bank has never had a reduced dividend, has consistently grown in the last 68 years without fail, and even doubled in size the past 13 years.
“We think that kind of success … is a very compelling story and not only makes us excited but also makes a lot of interest in other investors so now we have a way to tell that story on a broader basis,” said Clayton Leager, COO of Merchants & Marine Bank.
“The way we explain investing is that it’s like purchasing real estate,” Legear said. “That’s the best analogy we’ve come across. Our stock has a tremendous value and a tremendous amount of upside but up to this part it’s been very hard to make the general public aware of that value and secondarily it’s been challenging to connect buyers and sellers. We’ve had people who have been interested in buying and selling stock and it’s challenging to connect those folks and keep it in the forefront of investors’ minds. OTCQX allows us to get the visibility and exposure to investors and investment professionals and even personal investors across the nation.”
Before making the decision to enter public trading, Merchants & Marine Bank’s leadership spent a couple years researching and reaching out to legal counsel who have led community banks through the process as well as other community banks and consultants who garnered experience from listing publicly.
“It was not a fast process (but) it was one though we felt like our shareholders deserved,” said Legear.
The bank worked with FIG Partnership, an employee-owned broker/dealer based in Atlanta that works with community banks and investors. This partnership led them to OTCQX which the bank felt was a good fit for both its mission and shareholders’ investments.
80 community banks trade on the OTCQX premium market, with 21 regional and community banks included in this year’s OTCQX’s Best 50 List. OTCQX reports that four banks have transferred over from NASDAQ too. The draw of OTCQX is its affordability in listing fees compared to SEC registration costs. IndependentBanker.org reported that OTCQX estimated that a bank can save $160,000 to $920,000 over five years in listing fees; during the same five years it can cut down from $1.25 million to $3 million in regulatory expenses.
Executive vice president of OTC Markets Group Jason Paltrowitz added that the affordability of its listing fees and regulatory fees is one of the main draws of OTCQX on top of having a public listing to which shareholders can compare market values on their investments.
Paltrowitz said, “A lot of the banks in U.S. are either public or private. They’re very closely held, not a lot of liquidity or volume or turnover in the stock. A lot of these banks are helped by depositors in their local areas so being listed on a national exchange requires the banks to be first of all full SEC reporting companies. There is a lot of regulatory burden and cost associated with being on an exchange when you’re a small community bank that doesn’t have thousands of shareholders and thousands of shares trading every day. It is an expensive endeavor to service a small shareholder base.”
OTCQX offers a trading market which enables banks to utilize disclosures as a means to go public. Traditionally on an exchange the bank has to disclose to their bank regulator – whether it’s the OCC or FDIC or state regulator, as long as they are a full SEC reporting company.
Paltrowitz explains that a community bank can take those OCC or FDIC reports and use those disclosure requirements to trade on OTCQX to save a significant amount of money while gaining the same benefit as having a public market except designed for smaller companies or securities that don’t trade as much as, for example, JP Morgan or CitiBank.
He said, “What (Merchants & Marine Bank likes) about the partnership with us specifically is we designed the program to meet the needs of community banks. They’re already reporting to their bank regulators that are doing the disclosures required of a bank but are also able to be public without doing the additional burdensome requirements of being on NYSE or NASDAQ.”
Legear affirmed that the bank does enjoy having publicity, awareness and visibility that comes with public listing on NASDAQ and NYSE without SEC registration, without completing labor intensive and time consuming regulatory reporting required of SEC registration.
“I think you get all the benefits without the drawbacks,” he said.
The bank began trading in the public market in January.
Legear said, “We’ve seen some moderation in our share price since listing in January and see the stock being picked up by companies like Moody’s with automated rating services so we can get better awareness of our stock and reputable analysis of our stock on a day to day basis. We’re encouraged since our stock was typically trading at $40 level. We see appreciation from that level and recent Moody analysis projects our stocks have room to grow so we’re really excited about that.”
Paltrowitz confirms the bank has done well and he believes it will continue to do well on the public listing.
The advantage of publicly listing, especially in a market tailored to be affordable for community banks, is that the shareholders will be able to freely access market values while the bank itself has more opportunities to diversify its shareholder base.
“Before joining our market,” Paltrowitz said, “if they wanted to sell their stock, it was kind of out of the desk of CFO or the treasurer. You didn’t have any transparency as to the amount of valuation. By joining our market they’ve given their shareholders that (access) and I think that’s the first step of being a much more open and transparent public company and towards eventually diversifying their shareholder base. Like we see with a lot of community banks their shareholders are older people who have been in the community awhile. This sounds morbid but when they die off and their children or children’s children inherit these assets, they want to be able to sell them and the bank in turn wants to offer that market so they can grow their shareholder base broadly.”
A possible downside to the shareholders seeing the market values is that they may realize their shares aren’t as valuable as they might have believed if they instead traded privately depending on a treasurer’s ledger.
“I wouldn’t call it a risk,” Paltrowitz said, “but the public now values what your security is worth. You can’t value it yourself when you make those private transactions. So the extent that the market doesn’t value your equity you might value – that’s not a risk. It’s just how the market works and you live with it.”
With all said OTCQX exists to help community banks enter the public sector in investment.
“Community banks have been the backbone of our country and have been underserved by equity markets. We are filing that niche now. We have probably over 80 community banks already quoted on our market and we have banks listed on NASDAQ that are coming off because of its costs. We are helping serve those banks around the country,” Paltrowitz said.
Merchants & Marine Bank has fared well since listing, and its leadership is ready to charge into new opportunities to continue serving its community well.
“We’re happy and excited about this opportunity,” Royce said. “We think this is going to be a great value to our shareholders. This is something we’ve wanted to do for a long time and with the growth we’ve seen, the future looks good. With our past track record and our current management team and the composition of our board of directors, there are so many strong components to our organization moving forward and performing well so we felt it was a right time to do it.”
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