tag:blogger.com,1999:blog-235433516644980443.post7517563733441435513..comments2024-03-27T05:08:10.195-04:00Comments on Jeff For Banks: The Real Reason for Bank Scale: Trading MultiplesJeff Marsicohttp://www.blogger.com/profile/12153599647481141591noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-235433516644980443.post-27643152745837813272018-08-28T16:56:12.803-04:002018-08-28T16:56:12.803-04:00Agreed - I don't think instinctively of the mu...Agreed - I don't think instinctively of the mutuals, but special dividends to the core depositors (or massive community investments or "tithing" like structures like Eastern Bank) makes sense.Patricknoreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-18149807621507799022018-08-28T10:54:26.389-04:002018-08-28T10:54:26.389-04:00Patrick,
"How do I deploy the capital that s...Patrick,<br /><br />"How do I deploy the capital that shareholders entrusted to me?" is an excellent question Boards and Management Teams should ask themselves every year at strategic planning. If profitable growth isn't in the offing (long-term), then returning it is the right thing to do.<br /><br />For mutuals, that would be in the form of a special dividend to core depositors, in my opinion.<br /><br />Thank you for the comment!<br /><br />~ Jeff<br />Jeff Marsicohttps://www.blogger.com/profile/12153599647481141591noreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-626837358868431102018-08-28T10:50:36.621-04:002018-08-28T10:50:36.621-04:00Anonymous,
There is an article in today's Am...Anonymous, <br /><br />There is an article in today's American Banker (see link, may require subscription) that the biggest banks dumped muni's YTD by $16 billion. I checked the AOCI (accumulated other comp income) line in the equity accounts of a $1.5 billion Pa bank and AOCI increased by $2 million 12/31 to 6/30. Haven't looked at banks in the aggregate, but it would be interesting.<br /><br />On the lower trading multiples for smaller banks, if the smaller banks are meeting shareholder total return expectations, then multiple expansion may not be necessary. Strong financial performers continue to comply with rules and regs, so compliance is already baked into their performance.<br /><br />Thank you for the comment!<br /><br />~ Jeff<br /><br />https://www.americanbanker.com/articles/biggest-us-banks-slash-muni-bond-holdings-after-tax-cut<br />Jeff Marsicohttps://www.blogger.com/profile/12153599647481141591noreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-43516280847314472932018-08-27T20:16:00.966-04:002018-08-27T20:16:00.966-04:00I'm interested in the framing of the question,...I'm interested in the framing of the question, as the real question, if you are producing high returns on invested capital sub-$500MM in balance sheet size, isn't "do I HAVE to get big?" The more important question is "can I continue to acheive high returns on incremental invested capital given my market and business model and if not, can I and do I want to adjust my model or find a new/better market, or do I have to return capital via dividends or share repurchase?" Balance sheet size is basically second order and derivative of how you answer those two questions. If you have high ROE or ROIC and good reinvestment opportunities inside your model, it is a real mistake not to avoid growing as you are leaving those opportunities on the table. On the other hand, if you have low ROE or ROIC, it may come as a disappointment, but getting big or smushing together two balance sheets to achieve "scale" isn't going to solve your problem. You'll just be destroying value as you deploy more and more capital at lower and lower ROIC. I'm always impressed by small banks that show capital discipline by recognizing that the 14-16% they are doing in market X cannot be done on an incremental basis in market x (often rural banks) so they return capital. Patricknoreply@blogger.comtag:blogger.com,1999:blog-235433516644980443.post-86251254933858018792018-08-27T16:40:27.953-04:002018-08-27T16:40:27.953-04:00I think you have a very valid point about not nece...I think you have a very valid point about not necessarily needing to get big, at least if they can cover compliance costs (including any potential listing expenses, which I've been told are significant). But like you point out, a higher multiple can definitely help if you are using it as currency, especially as bank M&A continues to be one the strong side. <br /><br />As a sidebar, I'm really curious, as to the continued impact of the new tax law on ALM. As I really don't follow the bond markets, but would have expected that between the decline in tax rate (in turn, making munis marginally less attractive, as it seems like a number of banks used them to manage their tax rates and potentially get a few more basis points out of their portfolio) and the increases in the fed rate, that there would have been a significant amount of portfolio turn over at a number of institutions. I'm also really curious as to how a number of institutions are handling the unrealized losses on investments into gov and muni bonds (though I'm not sure how it impacts the various capital ratios; as I'm aware of one local bank where their unrealized losses had grown to be about 10% of total equity within the past 12 months).Anonymousnoreply@blogger.com