Monday, February 12, 2024

Analyst Insights: Two Banks that Deliver to Shareholders

Be curious. That's how I approach Twitter ("X"). Yes, there are some dumpster fire opinions. But then again, there are some real valuable insights that I and we can learn from. And this most recent string by bank analyst Perry Weinstein is one of them that I thought should not be lost to a tweet stream. 

Perry's perspective is clearly focused on shareholder value and may be viewed as shareholder primacy, a sometimes derogatory term because pursuing shareholder value could be done at the expense of other stakeholders, such as employees, customers, and communities.

But the pursuit of shareholder value need not be a zero-sum game, if executed correctly... i.e. not at the expense of stakeholders. In that context, his observations on QCR Holdings, Inc. ($QCRH), an $8.5 billion bank from Moline, IL, and CF Bancshares, Inc. ($CFBK) a $2.1 billion bank from Columbus, OH are very valuable. To the curious.

I offer the string without edits. References to "I" means Perry.

1/25 I like to touch on a topic that can get overlooked, decision making, and how past decisions or lack thereof, can give an investor a better understanding of what will occur in the future. I will highlight $QCRH and $CFBK.

2/25 Past actions/decisions give the best insights into a management team's acumen, capabilities, willpower, and its pursuit of excellence...effort lol.

3/25 Before we start, a summary of a quote by Einstein that perfectly captures the concepts being discussed; doing the exact same think and expecting a different result is the definition of insanity.

4/25 Look how much $CFBK accomplished in just over 4 years. (1/2)
1. Raised capital in late 2019.
2. Launched its equipment finance group - 11/2020
3. Agreed to sell 2 branches in weak markets - 12/2020

5/25 Look how much $CFBK accomplished in just over 4 years. (2/2)
4. Entered Indianapolis on 5/2021, a top 2 Midwest market with Columbus, another market $CFBK is in.
5. Shuttered large parts of its mortgage operations in stages, first in 7/2021 and later in early 2023

6/25 Selling branches is not easy, but it was best for shareholders. Management did not prioritize how things were or what certain people "might like". This management team clearly continues to question how things were/are and are relentlessly trying to improve.

7/25 These actions make it clear what $CFBK's management team will prioritize in the future... shareholder value.

8/25 Due to these decisive decisions/actions, $CFBK has positioned itself to be a very desirable target, with a market presence in the two fastest growing markets in the Midwest, Indianapolis and Columbus.

9/25 $QCRH is another great example of a management team prioritizing long-term shareholder value, not how things are or what certain individuals might like.

10/25 Past actions taken by $QCRH:
1. In 2018, started its LIHTC lending line.
2. Instead of doing what was "easy" and raising capital, $QCRH decided to sell its least profitable charter, Rockford Bank and Trust, to bring in the capital to support its robust growth.

11/25 These two decisions are what first prompted me to closely follow this organization. This management team, led by Larry and Todd, demonstrated its focus on long-term shareholder value, rather than what other banks do or prioritizing how things were.

12/25 Now let's discuss what we can learn from the actions that $QCRH's management team DID NOT take that maximized shareholder value. $QCRH did not raise capital and despite earnings skyrocketing, $QCRH has resisted raising its dividend...interesting, what does this tell us?

13/25 Not raising its dividend clearly demonstrates to me that $QCRH's management team understands the key principles of Deploying Capital Most Profitably.

14/25 Capital priorities for banks:
1. Balance sheet growth-regulatory must
2. Use excess capital for acquisitions, business or bank, and share repurchases.
3. Dividends: If a bank always trades at a high premium to earnings, like CBU, increasing the dividend is more appropriate.

15/25 Great banks ALWAYS have excess capital in order to take advantage of unforeseen opportunities. Understanding the value of time, not having to use excess capital immediately, is another quality I look for in a management team.

16/25 To summarize, topflight management teams continuously find more profitable ways to deploy excess capital than simply increasing the dividend.

Now let's discuss what we can learn from inaction that harms shareholder value.

17/25 A few blatant examples come to mind:
1. A bank that continues to be over-branched
2. A bank that has core fee businesses, wealth management, trust, insurance, that continue to be subscale and these businesses are more like "Hobbies" than businesses.

18/25 These examples are telltale signs that a management team is content, not willing to make tough decisions to cut expenses, and lacks motivation to find ways to scale fee income businesses.

19/25 With the new proposal for higher capital requirements for certain banks, do you think capital light businesses are less valuable or more valuable? Do higher capital requirements increase or decrease the profitability of loans, a capital-intensive business?

20/25 Another example is when a management team waits for a merger to close because "it will be easier to make changes." A merger announcement is no excuse to postpone actions that can be taken TODAY to improve shareholder value.

21/25 If I see a bank that possesses one or more of these "telltale signs", it is evident to me that this franchise is run like a bank not a business. So, what does this tell you about management?

22/25 Management is not asking the question "what can we do to increase profitability?" Great management teams always ask "can we do this better?" A curious mindset is vital. Often, in this type of organization, there are too many layers of management.

23/25 An overcrowded exec team results in a slow acting bank, causing any positive changes to take forever, if at all.

A noncentralized management team can produce a lack of proper information flow to the very top. The CEO could very well not know, but that is no excuse.

24/25 A CEO needs to have an "I can attitude" and do it yourself mind set. If not, the cycle continues. The best CEO's take responsibility for everything and don't say "well it's not my job."

25/25 In summary, understanding "the why and how" a management team both thinks and makes its decisions can be incredibly helpful in better predicting future returns. Actions or lack thereof, are clear signs of the capabilities and motivations of a given management team.

//Note: This post or this blog does not offer investment advice.//

Perry is currently the CEO of
PCW Advisors, a financial consulting firm focused on the community banking industry. PCW Advisors looks to serve community bank focused investment funds by providing unique and customized analysis that is significantly different than traditional research. Perry combines a deep understanding of the fundamentals of bank investing with a more specialized emphasis geared towards understanding decision making, to provide clients with actionable ideas. Before launching PCW Advisorsin December 2021, Perry worked as an analyst at Hovde Group, Ares Management, MJC Partners, and BDO. Perry’s work has earned high praise from many prominent investors in the financial sector. More recently, Perry’s work on the strategic side has received positive reviews from community bank management teams.

Perry graduated from the University of Southern California with a Business Administration degree. He holds licenses Series 7, 63, 79, 86 and 87.

Contact Information:

Phone: 310-384-6153

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