June
Banks and Wealth, California relative value, OZK, DAVE
Good morning,
Charlotte and Atlanta readers: I will be scheduling a swing through these towns later in June / early July, and would be glad to meet some of you.
If you “play” conversions or IPOs and want additional liquidity Most large brokerages think FCNCA is great collateral but FCNCB is OTC listed so is not.
There is a bank that can help address this issue, and can help many conversion or IPO investors with a large OTC bank portfolio that want the option to create tax-efficient liquidity. I am affiliated with a bank (Commerceone Bank - Commerceonebank.com) that lends against OTC bank portfolios at reasonable advance and interest rates. If you are a responsible soul who would like this tool at your disposal, then feel free to reach out, or I can make an introduction.
OZK drama
Last edition this note included a discussion of OZK, suggesting that while the stock may look like an easy short, looks can be deceiving, because the bank’s massive construction loans are written to tighter standards than many understand.
But execution is not so sexy as a crash story. Like NASCAR spectators, the market is on the edge of its seat in this rate backdrop looking for destruction, something like the below:
So a Citi note from friend and 5 Points reader Ben Gerlinger described how the sausage was made with two large loans, and shares dropped 15%. Maybe the short is easy after all.
Except the next day the company and several analysts gave reasonably convincing arguments as to why neither loan would actually lose money, and anyone who put the short on the day of the note is now under water.
Colarion clients are not long OZK but I maintain if you want to make money bearish longer-term, look for the weak managements or the REITs and funds underwrite construction off appraisal value, and put cash in alongside equity. Google “PIK private credit” and follow leads. Read therealdeal.com and see who is on the loans, and study bridge-lending REITs like KREF or banks like EGBN.
At OZK however, to bet that Gleason will properly underwrite for 45 years from 1977 to 2023, including 2008-2009, but 2024 will be the year of NPA spike is a tad oversimplified.
In this note:
The Californians: Why does Wells Fargo get 11-12x earnings while all the high-ROE California banks taking Wells’ good customers get 6-7x?
The oxymoron of bank wealth management. Most banks with wealth management can’t create a “flywheel” to grow wealth customers alongside banking customers, but a few can. 5 Points looks at wealth management banks from Peapack to First Foundation and Orange County, among others, with a story from a visit to Thomasville National.
Dave is a financial up 400% year to date. We look at how.
Failures. “Billionaire Barry Sternlicht” expects banks to fail one a week. Why has only one meaningful bank failed since Signature?
The challenge of owning Commonwealth Business Bank (CBBI)
1. Upside down California bank valuations
March 2023 changed the perception of bank investments, which we are still dealing with today. As that perception fades, there may be a profit opportunity.
Common sense suggests that after Silicon Valley,
a) the largest banks are bulletproof and
b) the small banks will bleed deposits, plus will see their spread shrink due to fixed-rate assets.
Except scenario b) above has been false:
At April 2023 FDIC reported $5.1trn of deposits at small banks and on May 8 it was $5.4trn.
For margins, a recent Piper Sandler survey showed about 70% of bank CFOs believe their net interest margin had bottomed or already begun to rise in the first half of 2024.
Yet there are trillions of dollars at RIAs and Merrill accounts who follow the false logic, and they express this by crowding into names like Wells Fargo.
Many RIAs justify fees by pretending to pick stocks. They chose 30 or so positions to mimic the S&P 500, and a few of those 30 have to be banks. Since rule #1 is don’t get fired, today they are usually just choosing from too big to fail banks - WFC, BAC, JPM, and maybe USB.
Before 2023, these few banks may have been chosen according to factors like valuation, profitability and dividend, and a small local bank may have slipped into the portfolio.
The market doubles down on the mistake because Vanguard and Blackrock mimic the active management allocation.
This happens even after Jamie Dimon sells hundreds of millions worth of stock, says on the 1Q conference call that the stock is a not particularly attractive, and six weeks later torpedoes his own company’s investor day with the same message.
Turning to California, which would you rather own?
a) The RIA / Blackrock lilypad with Well’s 12-13% ROTCE at 12x earnings with a ~70% efficiency ratio.
b) One of the below at around half the multiple:
To be sure, the quality of banks and managements in the list above varies materially, and I even caution readers around CBBI at bottom of this note.
But many seem compelling relative to Wells, a market share sieve competing on rate and arguably run by regulators.
To name a few:
Rick Sowers at PBAM, who banks a number of attractive verticals, has seen shares affected by an overhanging seller…at 5x trailing earnings. He has been transparent about moving to Nasdaq longer-term to attract the forced Blackrock buyer.
The CEO of RWCB is at retirement age, sitting at 6x, sustainably making better returns than Wells.
The CEO at CWBK won’t return my calls, perhaps wisely given his share repurchase is active and he doesn’t seek competition at a 14% earnings yield.
PFBC and FFBB make slightly less money than a printing press in their own way, neither of them burdened by Wells’ bureaucracy, commoditization, capital requirements or regulatory burden.
Or, we can keep investing like it’s March 2023.
2. Why do some “asset management banks” thrive while others flounder?
A discussion of OBT, THVB, PGC, FFWM and the riddle so few bankers can solve.
