Equity analysts are torn on whether U.S. community bank additions will outpace deletions during the Russell 2000 index reconstitution process in June.
With the rise of passive investing, inclusion in the index can be a boon for the liquidity of a company's stock, and the Russell 2000 index is popular with investors seeking exposure to small cap stocks. Last year, there were 76 net bank deletions from the index, but Stephens analysts believe 2022 will be "a year of net bank additions" following recent outperformance of U.S. bank stocks, they wrote in a Jan. 19 note. The analysts estimate that 10 U.S. banks will be added to the index while only seven will be deleted. On the other hand, Boenning & Scattergood analysts estimated in a Jan. 7 note that 11 U.S. community banks are at risk for deletion and only one could be added to the index.
Based on data as of Jan. 14, Stephens analysts estimate the market capitalization cutoff for the Russell 2000 index will be $298.7 million, 15% higher than 2021's cutoff of $257.1 million.
As a result, the analysts expect 10 banks to be added to the index during the reconstitution process in June: Los Angeles-based Dave Inc., Easton, Md.-based Shore Bancshares Inc., Los Angeles-based PCB Bancorp, Archbold, Ohio-based Farmers & Merchants Bancorp Inc., Farmington Hills, Mich.-based Level One Bancorp Inc., Portland, Maine-based Northeast Bank, Catskill, N.Y.-based Greene County Bancorp Inc., Denver-based First Western Financial Inc., Clinton, N.J.-based Unity Bancorp Inc. and Gettysburg, Pa.-based ACNB Corp.
The Boenning & Scattergood analysts, using a current market estimate that the cutoff will be around $350 million, estimated that only one bank, Farmers & Merchants Bancorp, will be added to the index.
For potential deletions, the Stephens analysts currently expect seven U.S. banks to be knocked from the index: Yorktown Heights, N.Y.-based PCSB Financial Corp., Albany, N.Y.-based Pioneer Bancorp Inc., Shippensburg, Pa.-based Orrstown Financial Services Inc., Hamilton, N.J.-based First Bank, Anchorage, Alaska-based Northrim BanCorp, Inc., Mountlake Terrace, Wash.-based FS Bancorp Inc. and Philadelphia-based Republic First Bancorp Inc.
The Boenning & Scattergood analysts identified 11 U.S. community banks that may be cut from the index based on a $350 million market capitalization cutoff: Charlottesville, Va.-based Blue Ridge Bankshares Inc., Amesbury, Mass.-based Provident Bancorp Inc., Holland, Mich.-based Macatawa Bank Corp., Dunmore, Pa.-based Fidelity D & D Bancorp Inc., and the same seven banks the Stephens analysts identified.
The most significant share price outperformance or underperformance typically occurs in the months leading up to the reconstitution process, according to the Stephens analysts.
Russell 2000 additions between 2016 and 2021 outperformed the index by about 35% in the nine months leading up to the rank date in May, while deletions underperformed by about 54%, according to the Stephens report. The analysts did not find meaningful performance trends after the additions and deletions take hold in June each year.
The Boenning & Scattergood analysts wrote that last year's deletions underperformed from the start of the year through the rank date in May and then outperformed their banking peers the rest of the year.
