Just when some small banking companies have begun to recover, they have been hit with another headache: removal from the Nasdaq stock market, which could reduce the visibility and liquidity of their shares.
In recent weeks some bank stocks have been delisted for failing to meet the market's $1 minimum bid price requirement, and as Nasdaq cracks down, other banks are choosing to delist voluntarily before they get kicked out.
"The reason why you want to be listed on an exchange is so that you have liquidity for investors in the company, and it makes it easier to raise capital," said Terry Keating, a managing director with Amherst Partners in Chicago. "Well, if your institution is struggling and you don't think you're going to be raising tons of capital and you have a smaller base of shareholders, then why would you want to put up with all the reporting requirements? It's not worth it."
After more companies' share prices dipped below $1, Nasdaq put a moratorium on delistings tied to the $1 requirement in October 2008. That expired last August, but Nasdaq gave companies six months to get back into compliance. That deadline expired for most companies this month.
While companies in a range of industries saw a loss of investor confidence, analysts said financial institutions — the majority of which are listed on Nasdaq — were particularly vulnerable.
When the moratorium was lifted in August, the clock started ticking for companies that were still struggling. As of March 12, 19 companies had not complied with Nasdaq's listing rules. A Nasdaq spokesman said the market does not provide data on the number of securities currently trading below $1 or the number of financial institutions that have delisted.
In the past few months, several bank companies notified Nasdaq of their intention to delist, including Liberty Bancorp of Liberty, Mo.; Citizens First Bancorp of Port Huron, Mich.; 1st Pacific Bancorp of San Diego; and Osage Bancshares Inc. of Pawusha, Okla. Other institutions were either acquired or failed.
Most of the companies that voluntarily delisted said the benefit of being listed no longer outweighed the difficulties they faced in trying to meet the rules.
AmericanWest Bancorp in Spokane said it considered several strategies to correct its bid-price deficiency — including a reverse stock split — before deciding to delist. Kelley McPhee, a spokeswoman for the $1.6 billion-asset company, said listing on a national market is only one way to pursue capital. "We don't view it as a loss," she said.
Securities must meet two types of requirements to be listed on the Nasdaq: qualitative and quantitative requirements. Qualitative requirements include following Securities and Exchange Commission disclosure rules and corporate governance standards.
Most small-bank stocks are listed on Nasdaq's Capital Market, whose quantitative rules include having a $1 minimum trading price, at least 500,000 publicly held shares and a minimum market value of $1 million.
Stephen Moss, an analyst with Janney Montgomery Scott LLC, said companies that delist save on direct and indirect listing costs, "which if you're desperate and scraping by, every last penny counts." But they give up important visibility, he said.
Most of the companies will continue to be listed on the OTC Bulletin Board, an electronic quotation service for unlisted public securities. Yet Michael Reed, a partner at DLA Piper in Washington, said moving to the bulletin board or the pink sheets can significantly reduce the liquidity of a company's stock.
"That makes it harder to raise equity capital, and more expensive if you do," Reed said. "Investors will want a liquidity discount for any investment."
Companies facing delisting for failing to meet the minimum price could pursue a reverse stock split, which would allow them to raise the price of the stock by reducing the number of shares outstanding, said Brett Rabatin, a senior analyst with Sterne Agee. Others have simply chosen to take themselves out of the game.
"I think there are other institutions that don't mind it, because they're probably thinking about private equity being a potential," Rabatin said.
Bank of Granite in North Carolina was notified of potential delisting in November, when its shares hovered around 50 cents. But CEO Scott Anderson said interest in the company picked up in January, and its stock price rose.
"I can explain it no more than the sun, the moon and the stars," Anderson said. "It's one of the mysteries of the markets."
Reed said he expects that fewer bank companies will make the decision to delist, now that capital markets are reopening for banks.
"The really small ones are still going to have a hard time, but that should help some of these companies raise some capital so they can stay above the quantitative standards for delisting," he said.