Sunday, February 26, 2023

Bank Shareholder Liquidity Matters

Annually 1,500 bankers and those that advise them gather in the Arizona desert for Bank Director's Acquire or Be Acquired (AOBA) conference. In spite of the conference name, it's not all about bank M&A, or the Hobson's Choice of hunting or being hunted.

And I usually try to bring to readers at least one of the takeaways I gleaned from the conference. In a prior post, I highlighted a sidebar conversation I had with a fellow industry pro on ChatGBT. Here, I want to focus on a session I attended that I think would be valuable to all readers that are private, or trade thinly on exchanges like Pink Sheets.

This post is a complement to one that I did a year ago titled, Bank Shareholder Succession Matters. Are our retail shareholders aging? Will they soon want to exit, or pass down their shares to heirs that may or may not be interested in holding a thinly traded bank stock with opaque value? For larger, publicly traded financial institutions, this might not be a strategic challenge because they trade significant amounts of shares per day and over half of their shareholders are institutional, many of whom automatically buy into shares that trade on indices. 

But for most of you, shareholder liquidity takes intentional effort. And at AOBA, Laura Hamilton of OTC Markets Group, Inc., and Ciaran McMullan, former CEO of Suncrest Bank CA extolled the benefits of OTC listing, particularly OTCQX market listing in a session titled How to Maximize Your Stock as Currency.

Having Ciaran onstage with Laura as a case study added credibility to the presentation. Suncrest started in 2008 with a $19 million capital raise, and did three small follow-ons of $5, $8, and $7 million to support growth. Ten years after opening Suncrest did another $25 million raise led by p/e firm Castle Creek Capital LLC. During its existence Suncrest acquired three banks, one a smaller deal for $8 million, then another for $20 million and another much larger, at $69 million. All deals included Suncrest stock in the consideration. And to do stock deals, your stock has to be considered valuable by the target.

Suncrest sold in 2022 to CVB Financial Corp. for $234 million for 162% of tangible book when regional targets were selling for 146% of tangible book. It was a success story, and Ciaran attributed part of the success to having a liquid and visible stock via the OTCQX.

According to their presentation, the OTCQX Best Market offers transparent and efficient trading of established, investor-focused U.S. and global companies. To qualify for listing, companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, and be sponsored by a third-party advisor. 

Banks can leverage OTC Markets' Bank Reporting Standards to complete their Reg D or registered offering to trade on OTCQX, whereas NASDAQ and NYSE require full SEC registration pursuant to the '34 Act, which can be costly and burdensome. OTC Markets offers a diverse network of 90+ broker-dealers, including some of the largest community bank trading brokers such as Raymond James, DA Davidson, Janney Montgomery Scott, Piper Sandler, and KBW Stifel. It graduates a bank that trades thinly out of the CEO's desk or on the Pinks when a shareholder has a block of shares to trade from "I got a guy/gal", to "we have a market and trading volume." 

The cost, according to their presentation, was a $5,000 application fee, and $24,600 annually. Not a significant financial cost, and much of the disclosure and governance requirements are already in place at most banks. According to the presentation, the bid-ask spread was 2%, compared to 1.95% for NASDAQ, and OTCQX average shares per trade was slightly larger than NASDAQ. 

More important were some tips Ciaran had to achieve greater liquidity and visibility for your shares:

-  Increase your share count. Suncrest did it through follow-on offerings and using stock in deals. In addition, a bank could do stock splits or stock dividends.

-  Hold unique earnings webcasts, open to all stakeholders, and pick a hot-topic each quarter to add value to attendees and be different from the blah, blah, blah earnings webcasts from larger financial institutions.

-  Implement incentives for all staff to be shareholders. ESOP, DRIP, stock and option awards, etc.

-  All staff should be part of your investor relations programs. They'll be asked in the community about the bank and its prospects. Why not educate them about bank valuations and where the bank stands in terms of performance and valuation to peers?

-  Build credibility through transparency. There can be power through your shareholder disclosures. 

-  Work to get every customer interested in owning your shares.

There is psychological value for existing and would-be shareholders that know if they need to liquidate your shares that they can. It might be the difference between them buying or wanting to buy or being "not interested." Hiding in the Pinks or being private might exclude large populations of potential investors, leaving you few options when your older shareholder base wants to liquidate. 

Implement your plan before you need it. Because when you need it, will be too late.

~ Jeff

Saturday, February 04, 2023

How Does ChatGPT Describe the Economy and Banking?

At Bank Director's Acquire or Be Acquired conference, I had a sidebar conversation with a longtime friend and banking industry investment banker about ChatGPT, which stands for Chat Generative Pre-Trained Transformer. As described by, "ChatGPT is a natural language processing tool driven by AI technology that allows you to have human-like conversations and much more with a chatbot. The language model can answer questions, and assist you with tasks such as composing emails, essays, and code."

On its website, ChatGPT describes its limitations as may occasionally generate incorrect information, may occasionally generate harmful instructions or biased content, and has limited knowledge of the world and events post 2021. It's in its "feedback" phase from the public. It is open to anyone.

Will this replace the need to get information from humans, at least beyond what ChatGPT "learns" from humans by their writing? I'm not convinced. But I wanted to give it a try with relevant banking questions. Here are the results.

Me to ChatGPT: Describe the current economic situation in the United States.

ChatGPT: The current economic situation in the United States is characterized by growth and recovery following the impacts of the COVID-19 pandemic. The economy has been supported by fiscal stimulus, including government spending and relief programs, and a strong rebound in consumer spending. The labor market has also improved, with unemployment declining and job growth picking up. However, some industries and workers continue to struggle, and inflationary pressures and supply chain disruptions have created some challenges. Overall, the US economy is on a path of recovery, but the pace and strength of the recovery will depend on the course of the pandemic and the success of vaccination efforts. 

My take: This looks like it's from one year ago, consistent with ChatGPT's disclosed current limitations. But TV talking heads should be worried.

Me to ChatGPT: What is the outlook for the US economy?

ChatGPT: The outlook for the US economy is generally positive, with continued growth and recovery expected in the near term. Factors supporting this outlook include the ongoing rollout of COVID-19 vaccines, improving consumer and business confidence, and accommodative monetary policy from the Federal Reserve. However, there are also potential challenges and uncertainties that could impact the outlook, such as the pace of vaccine distribution, the emergence of new COVID-19 variants, and the possibility of inflationary pressures. Additionally, the implementation of new policies by the government, such as changes to taxes and regulations, could also influence economic outlook. Overall, the US economy is expected to continue growing, but the pace and strength of the expansion will depend on a number of factors, both domestically and globally. 

My take: Future predictions look like canned responses. And there is similar language in the first and second inquiries.

Me to ChatGPT: What is the outlook for US banks?

ChatGPT: The outlook for US banks is generally positive, with the industry expected to continue recovering from the impacts of the COVID-19 pandemic. The improving economic conditions and the steady growth in loan demand are expected to boost revenue for banks. Additionally, low interest rates, which have been maintained by the Federal Reserve, are expected to continue supporting profits for banks by reducing borrowing costs for customers and increasing the spread between interest earned on loans and interest paid on deposits. However, the ongoing pandemic and the potential for rising defaults and loan losses in certain sectors remain risks for the banking industry. Additionally, regulatory changes and increasing competition from fintech companies could also impact the outlook for banks in the future. Nevertheless, the US banking industry is expected to remain stable and continue to support the broader economy in the near term.

My take: I could envision a bank analyst saying the same thing on CNBC at the beginning of 2022. 

I asked the "best bank in the US" and it punted, saying it was subjective and gave me some criteria people consider when determining the best. Subjective questions might be a challenge.

Overall, I believe AI will evolve into a tool to weigh against our opinions. But I'm not sure, lacking context, discernment, and other "gray" factors, if it will surpass good old-fashioned judgment and common sense. 

Potential bank use cases of generative AI, aside from the questions above: Research on certain industries to help determine credit risk, such as "How did the hotel industry perform in the 2008 recession?"; Vendor management due diligence, such as "Where can I find third-party reviews on the nCino loan operating system?"; Talent management, such as "What do Generation Z want from their employers?"; Assistance in cyber security measures, such as "Describe the 2021 Kaseya ransomware attack."; And make content writing easier by asking specific questions that used to take more research, such as "Describe the impact on small business from the 2017 tax cut."

The tool is still new and evolving. It has the potential to streamline research that helps make decisions. However, as I mentioned, it will not do well in replacing discernment, context, and gray areas where community banks tend to operate.

~ Jeff