A rundown of banks that have earned holiday greetings

2020 has been a tricky year for bank managements. Managers are supposed to look out for owners, customers and employees, and while the best ones strike a balance, most can’t quite get there, and it’s the markets job to call them out of that. Today’s message helps us determine who gets the gift of cheap capital.

First, a reminder – we invest to get a return, but investors also make capital expensive for bad managements & businesses but cheap for those that are good. For example it took 5+ years since the first oil crash, but eventually the investment community has driven frackers out of business. In Europe, policymakers have ruined the banking sector and taxpayers in Spain and Italy may soon be forced to buy equity to keep this critical sector alive. This process of shunning bad concepts is great for prosperity long-term and differentiates us from China, Cuba etc.

In this vein, let’s look at a few bank management teams who respect investor capital and deserve thanks this holiday season, vs. a few burning the turkey.

Giving thanks for some banks that gift shareholders this holiday season:

Wayne Savings (WAYN): In recent years Wayne withstood not one but two proxy fights with Stilwell Value, known as a tough but fair bank activist firm. After the second, management proposed a deal – make peace by ramping ROE higher. Stilwell has relented and subsequently received a cornucopia of shareholder goodness:

For those new to bank language, ROTCE is return on tangible equity excluding preferred, and efficiency ratio is like the opposite of the operating margin. In other words, the lower the efficiency, the less fat on the bone. Some banks run efficiency as low as 30%. Below-average performers consistently run over 60%

Wayne CEO VanSickle, who joined in 2017, has created a sustainable high performing bank – controlling expenses, repurchasing shares, and growing loans. His competence has allowed the bank to maintain its independence, beaten his index by 40% since arrival, and saved numerous jobs. Spiked egg nog party – Everybody Wins.

Pacific Financial (PFLC): Common Sense Pudding from CEO Portmann. If you trade 75% of tangible, credit is under control and you are posting 10-15% ROTCEs, consider a share repurchase. It’s likely a better use of capital than supporting that 3.75% fixed shared credit in the latest me-too multi-family project. Her actions will be remembered in 2021.

Centric Financial (CFCX): Same as above. To be clear, there are 50+ other banks in this category but CFCX and PFLC come to mind as banks with a growth plan also competing for capital.

All the share tender banks: HTH, AMTB, MVLF

Special recognition for the public banks running sub 35% efficiency: Servisfirst (SFBS, has outperformed its benchmark by 34% the past year), Merchants (MBIN, outperformed by 70%) Parke (PKBK, underperformed by 8% – it’s in New Jersey), and the popular Hingham (HIFS), which has outperformed the banks by 37% the past year and by 320% the past decade. You can’t reach 35% without a cultural recognition for owners.

Southfirst (SZBI) finally recognized they were too small to scale, so sold for a 100% premium. Merry Christmas!

Banks where we wonder if shareholders are the turkeys:

First, the names below are not necessarily “uninvestable” – in fact one of them may soon be an excellent investment and has rallied 40% in the last 2 months. However, recent performance or actions raises the question, “are employees ahead of shareholders?”

We have to start with the “100% efficiency club”, where more than 100% of revenue leaves via expenses. 14 of 770 public banks claim membership. Most are stuck due to small size but two are not – $670 million Carver (CARV) and $430 million Golden State (GSBX). Digging into the issues at Carver, a “special situation,” is itself a poor risk/reward in this forum and we will leave it that it is part of the 100% efficiency club.

Golden State has issues with its regulators and it’s not clear how quickly they can address them and certainly not clear one should pay 79% of tangible to see where things go.

BOL Bancshares (BOLB), Peoples of Biloxi (PFBX) and Glen Burnie (GLBZ) have an assigned seat on this list if judging by ROE or shareholder return over time. With that said, let’s see what unfolds at Peoples in the weeks ahead.

First United (FUNC): This is well documented by Driver Management, which is suing directors under the premise of rigging their own election. First United has not grown assets in a decade, in part due to restricted access to capital markets.

Republic Bank of Arizona (RBAZ) is using a lawyer to send letters to a major shareholder. Whenever a bank trades under tangible book, as Republic does, the market is judging the bank guilty of being worth less than going concern value until proven innocent. The shareholder-friendly solution is to fix quickly or merge.

Customers (CUBI) claims it is looking at launching a “massive” buyback soon, because it trades at 67% of tangible. I’m listening, however part of the discount may stem from a senior manager taking home ~$20 million in compensation per S&P over the past 5 years despite the bank not breaking 1% ROA.

Investors (ISBC): Another sub 1% ROA bank where the risk officer, as one example, receives $2mm in total annual compensation. The dollar doesn’t seem to go as far in the senior management labor pool as it used to. Investors runs a 53% efficiency over the past year. One wonders if it could have been closer to 40%.

Have a Happy Thanksgiving, and take care of your giving!