Thursday, April 16, 2020

Banks On Sale

My bank stock portfolio was comfortably in the black, with a solid 2.5% dividend yield at year-end. My have times changed.

Before I begin, I feel compelled to disclose that I am not a registered broker or financial advisor. I am not giving you investment advice.

At December 31, 2019, the SNL Bank & Thrift Index stood at 193% price/tangible book, 13.6x EPS, and a 2.63% dividend yield. Then Covid-19.

At April 14, 2020, I measured all banks and thrifts with total assets between $1 billion and $10 billion. Still community banks, and have decent trading volume for more efficient pricing. At the median, these banks had a market metric slash line (P/E, P/TB, Dividend Yield): 8.8x / 95% / 3.39%. But the differences among banks varied greatly. The greatest drop in market price was Marlin Business Services Corp., at 64%. At the other end of the spectrum, Community Bancshares in McArthur, Ohio GAINED 8%! Do they finance respirator production?

I should point out that Marlin Business Services has many subsidiaries, most of them finance companies, but one is a bank.


On average there was a significant drop in valuations. But "on average" is a pesky phrase. What is the standard deviation? Recall from statistics class, which gave me math stress by the way, the closer the standard deviation is to zero, the lower the data variability and the more reliable the average is. The higher the standard deviation, the more variation there is in the data and the less accurate the average is. The standard deviation of stock price decline between December 31st and April 14th for the banks I measured was 11.8. Yikes!

That means, within the data, there is opportunity. And I hear about this opportunity from bankers that really, really want to buy back their stock at these valuation levels. But an abundance of caution because of the unknown, plus optics, is preventing them from doing so. 

Fear of the unknown and the gravitational pull that whispers in our ear to buy high, sell low may be holding back the rest of us. It is tempting to be as liquid as possible during this period of uncertainty. But it is the uncertainty that has otherwise healthy and profitable banks trading below book value. Some comfortably below book value.

First Quarter

Early earnings releases, primarily by the big banks may be fanning flames of fear. Citi announced a $7 billion provision for loan loss in 1Q, up from $2.1 billion the quarter prior. JPMorgan announced a 1Q provision of $8.3 billion from $1.4 billion. But $1.3 billion in assets MainStreet Bancshares in Fairfax, Virginia announced a provision of $350 thousand, down from $358 thousand the quarter prior. 

I think it likely though that most community banks will announce increases in provision, and some significant increases, due to early forbearance and payment deferment requests. And, as I said to a bank publication reporter yesterday, big banks take more of a macro-economic approach when assessing their loan portfolio. Community banks are more credit-by-credit. And that may not come to bare until the second quarter. 


And this is likely contributing to the wide variation in valuations we are seeing. The below two tables represent the top 10 price declines in banks with $1 billion to $10 billion in total assets from December 31st to April 14th.

Some of the above banks have stories. For example, at first glance, First Defiance looks compelling. A 1.50% ROA, 12.15% ROE, only 63 basis points non-performing assets/assets and a 9.58% tangible capital ratio. Even if NPAs spiked, they have a loan loss allowance as first defense and their capital was very good. Why in the heck did their stock drop 53% and now trades at a 6x earnings and a nearly 6% dividend yield?

Probably because they closed on a previously announced all-stock acquisition of a $2.9 billion in assets bank on January 31st. After their December 31st earnings, but before quarter end. And before the precipitous Covid induced bank stock decline. The deal value at January 31st was actually greater than at announcement! 

So there is uncertainty there, at least until FDEF announces 1Q earnings, which is not anticipated until April 28th. Even then it may not be clear because it would be challenging for FDEF to get their arms around the Covid impact to their own loan portfolio, let alone another, almost equally sized bank. Uncertainty equals discount.

And so it goes with many of the banks in the $1 billion to $10 billion in assets cohort. They have stories that are not easily analyzed by summary spreadsheet. Investors must look at loan types, non-performing loan trends, capital levels and trends, and percent of allowance to total loans. And, perhaps most importantly, management. Because good management rarely falls victim to bad circumstances over the long haul.

There are deals out there. You have to put in the work to find them.

~ Jeff

Saturday, April 04, 2020

Bank Cash Forecasting: Pandemic Edition

My friends at CFO Consulting Partners most recent newsletter included timely and helpful tips on re-forecasting your cash, which is suddenly incredibly important, particularly in financial institutions that entered the pandemic with relatively lower amounts of liquidity.

Cash Forecasting

by Rob Milrod, Director, CFO Consulting Partners (

Cash forecasting, always important, becomes even more highly critical during times of economic disruption. Here are some key points to consider for an effective process:
1. Use a segmented approach to avoid over forecasting cash inflows. Consider customer segment, size, and seasonality - tax time could drive slower payment behavior for all types of clients.
2. Experiment with data that helps differentiate slower payers, e.g. credit ratings, industry, etc., to inform the forecast and contribute to faster collections.
3. Test solutions that help manage the lag between payments and collections; For example, tying accounts receivable team compensation to timely invoice issuance, offering discounts to slower paying customers for prompt payments, and perhaps requiring a partial upfront deposit from customers who regularly pay late.
4. Organize the forecasting approach and outputs in a consistent manner so that the accuracy of prior forecasts can be assessed. and so that it's clear where to adjust management's estimates.
5. For cash outflows, communication across the management team can make or break this process. Especially in a start-up where monthly spend patterns based on history are not available, there is no steady state to rely on. Management team members should regularly discuss and consolidate their outlooks for daily cash receipts and disbursements.
6. Start with prior bank statement activity to come up with typical monthly recurring items.
7. Map key bank statement items to actual expense so that the expense patterns in business plans and budgets can provide context for the cash forecast.
8. Identify cash items already expensed and therefore not in management's outlook, as well as future capital outlays. 
9. A detailed aging, accounts payable for outflows and accounts receivable for inflows, is a ready source of information for future cash flows and is extremely helpful in cash forecasting.   

10. Take into account any cash flow benefits from the new Coronavirus Aid, Relief, and. Economic Security Act.