Only a few hours before he ended the Nasdaq markets day with its symbolic “closing bell”—actually a button pressed in a studio just off New York City’s Times Square area—ABA Chairman Jeff Plagge commented on the significance of ABA’s ABAQ stock index at an event marking its ten-year anniversary.
The 380 Nasdaq-traded banks in the index—the ABA Nasdaq Community Bank Index—“are classic community banks,” said Plagge, president and CEO of Northwest Financial Corp., Arnolds Park, Iowa. “Community banks are an attractive investment,” Plagge added, “because they are relevant.” Indeed, the index later grew to be the basis of an exchange traded fund, the QABA.
The index, a pioneer in being an industry specific index when it was founded, ushered in an age of thousands of such measures, according to David Krein, managing director and head of Nasdaq-OMX Index Research, which assisted in formulation of the original index. Since then the group of banks has regularly been supplemented with additional players. The index includes all but the largest banks on Nasdaq, with a small representation of related organizations.
Through the industry’s ups and downs, the index has reflected those trends. However, officials at the conference marking the anniversary noted that the index has shown a 37.27% return for 2013 year to date. Over its ten-year history, the index has shown an 18.43% return. Both figures are as-of Nov. 22.
Appeal of community bank stocks
As part of the annivesary event, ABA Chief Operating Officer Mike Hunter engaged a panel of experts on the economy, bank capital, and banking issues. Two professional bank investors with very different perspectives on community banks both expressed the appeal they saw in community bank securities.
“There’s a lot of consolidation yet to come, and that’s opportunity to me,” said Anton Schutz, president and CEO, Mendon Capital Advisors. “And there’s a lot of potential growth waiting to happen.” Schutz works with banks, investors, and investment funds interested in various aspects of community banking’s future path.
“The biggest concern is liquidity,” said Schutz of the investors he works with. “When you buy into community banks, you want to know also how you will get out.” He said these investors focus especially on value creation, and like to see organizations that have cleaned up their portfolios, post-crisis, and have worked to avoid high-cost funding.
By contrast, Joshua Siegel, chairman and CEO, of StoneCastle Financial, and managing partner and CEO at StoneCastle Partners LLC, tends to take the long view on community banking. (StoneCastle Financial’s new program for raising capital for community banks was recently endorsed by ABA's subsidiary, The Corporation for American Banking. Read an article about the program here.)
Indeed, Siegel takes a very long view. “The stability of earnings in community banking dates back over 100 years,” he said. He is of the “patient capital” school. Siegel has remarked in the past that community banks should be “boring,” rather than growth stocks.
Siegel is a big believer in “local.” He says there is a two-tier aspect to the economy, where national trends may to a degree be overridden by local developments and by the performance of a community bank that knows its markets intimately.
“The local banker doesn’t care who is having an IPO” in the big wide world, said Siegel. That banker’s focus is on area businesses and industries. (For more about his philosophy about community banks, see “For community banks, it’s an wonderful opportunity.” )
Siegel’s long-term perspective can be expressed this way: “When you think of a community bank as a long-term producer of cash flows, it changes your mindset. And it takes away that pressure of “When is that exit opportunity coming?’ ” Even when a bank is having trouble, he says, investors of his mindset look beneath the immediate picture, recognizing the link to the community’s status, and examine the long-term potential.
Siegel isn’t without his concerns. For example, he noted that an increasing number of banks, apparently stretching for yield, are becoming negatively gapped. The big question of when rates will begin their inevitable climb back up has him watching this trend carefully.
Schutz admitted to like concerns. “Why would you be putting all of your investment portfolio assets into the hold-to-maturity category?” he asked.
Can’t ignore the investor
One of the latest banks to join the ABA index is ConnectOne Bancorp. Frank Sorrentino, CEO at the New Jersey community bank, based just across the Hudson River from Manhattan, spent much time working with both Schutz and Siegel’s firms as he sought more capital. He is convinced that successful community banks must grow to maintain their edge—independence relies on such growth. While his own bank’s story thus far has been one of significant organic growth, he said his bank raised capital to support that but also to prepare for acquisition opportunities, though none has been appealing enough just yet to pull the trigger.
Sorrentino said that he spent a good two years exploring the markets, getting feedback, before his firm launched its public offering. Talking to hard-nosed investors convinced him of the need to go public.
He’d have meetings with potential investors and when the bank’s private status of the time came up, they grew skeptical.
“I should do this… uh, why?” he quoted them. In the course of preparing to go public, he found, becoming more appealing meant many changes. These ranged from changing the nature of employees hired to changing the personnel in some key positions, to be more appealing to investors. One such change was in the CFO post.
“If you are going to take the public step,” said Sorrentino, “you have to work with a different type of investor with different expectations. We made tremendous changes.”
While Sorrentino takes pride in being an aggressive banker, that road is not for everyone.
Siegel, preaching patient capital, said he is willing to work with the tortoises of the industry. “If a bank doesn’t have an opportunity to grow,” he said, “it shouldn’t force things.”