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What bank analysts look for in community bank stocks

Sometimes even bragging about your bank is acceptable


To some chiefs of publicly traded community banks, a “hold” rating on the company’s stock is almost as exciting as a bronze medal. And that puzzles analyst Laurie Hunsicker.

Management loves to get “buy” ratings, noted Hunsicker, managing director, community banks and thrifts, Stifel Nicolaus. But she told bankers attending the Annual Convention’s Community Bank Investor Panel that a “hold rating is a very good rating.”

A “hold” means that the Street is buying your bank’s story and believes in what management is doing, Hunsicker said.

Hunsicker describes herself as one of the most bearish bank analysts working today. But she pointed out that of the 122 institutions that she and other Stifel bank analysts follow, half are currently rated “buy” and half are currently rated “hold,” and none are rated “sell.” (The Annual Convention was held in late October.)

Fellow panelist Peyton Green, managing director, Sterne Agee Equity Capital Markets, allowed that the current environment was a favorable one for bankers whose banks are thinly traded who want to put themselves on the radar of professional investors and analysts.

“We will take to any story that’s at least half good,” joked Green, “because the glass has been half empty for so long.”

“Earnings, earnings growth, and the earnings outlook has been relatively poor, compared to other sectors,” said another speaker, Daniel Goldfarb, portfolio manager, Alpha One Capital Partners. But he held out hope for the banking sector. A year from now, earnings will be above where they are today, he predicted, “and people will be happy that they own bank stocks.”
 
 
Dealing with the investment community
Community bankers often approach the investment community with some trepidation. They wonder what will please analysts and investment managers and what will turn them off. The session gave them a solid dose of input from four veteran players.

Joshua Siegel, managing principal at private-equity firm StoneCastle Partners LLC, said that his firm “is a big believer in the community bank market,” and added something that might have surprised some in the audience.

“We think banking should be a boring business,” said Siegel. The chief source of community bank profits remains the spread between loans and deposits and other funding, and at the end of the day that basic formula ideally means nothing exciting, just profits.

Indeed, Siegel said there were two main points his firm looks at in evaluating investment candidates: 1. management and its performance, tone, and direction; and, 2. the banks’ geographic footprint—where it does business.

Those seem quite basic, but speakers indicated that it is the basics that make or break a community bank as an investment choice.

One of the strengths of bank investing is the plethora of information investors have at their fingertips--literally, via the internet--Siegel said. FDIC data goes deeply into a bank’s own finances, and data from that agency and others allows analysts to delve into bank market issues.

“We’ve been doing community bank stress testing for a long time,” said Siegel.

Sterne Agee’s Peyton Green said that while most institutional investors don’t care about the micro economy that a community bank typically operates in, he felt that that was an essential of evaluating a prospective investment.

To a great degree, Green insisted, “a bank is a reflection of its local economy.”

He noted that to a great degree bank stock investing is “a rich man’s deal.”

By that, he meant that it’s a game for patient capital, especially now. “

It takes a long time to compound small percentage returns. Bank stocks are not technology stocks.” Because of this, he said, he pays particular attention to management quality, as executives need to be long-term players who can keep nurturing the bank’s franchise value.
 
 
Keys to dealing with analysts
The analysts made it clear that improving relations with analysts, or building them in the first place, isn’t rocket science. Basic blocking and tackling, and even bragging, makes for a good shot at success.

A basic that community banks can make more of is the quarterly and yearend earnings release, speakers said. Sometimes it is a matter of adding information beyond the basics, and sometimes the key is to take the extra step and add in tables and other aids to something that makes the bank stand out among its peers. Stifel’s Hunsicker spoke highly of Washington Trust and its investor relations materials. She noted that the $3 billion-assets Rhode Island bank trades at a premium compared to its New England peers.

“If your bank is one of those out there that has a really low amount of nonperformers, brag about it,” said Hunsicker. “Put a big table in your earnings releases highlighting that.”

A good indicator of the importance of the latter is that Hunsicker’s firm publishes a regular report that filters the roughly 1,200 traded banks and thrifts according to just two factors: a tangible common equity ratio of 8% or better and a ratio of nonperforming assets to assets of below 1.5%. She said that fewer than 100 companies fall into the resulting group.

Stern Agee’s Peyton Green said he confers with some managements nearly weekly and with others as little as twice a year. The difference often lies in what the bank is putting on the street in the first place.

Green said that if a bank does a thorough job of disclosing its results, the likelihood that he’ll need to call management lessens, “because I won’t have much to ask you.” He said a well-written and complete earnings release will eliminate 90% of his typical questions.

Green also suggested that being forthcoming not only with the bad but also with the good helps with communication too.

“Self-claim and self-pat-on-the-back are important,” said Green.

Speakers cautioned CEOs to avoid giving earnings “guidance” in their statements and in their documents. Instead, they suggested, community banks should provide the investment community with a clear statement of the bank’s goals and its progress towards them.

Green said this means more than just disclosure--it is almost an indicator of how well management itself knows where the bank is going. He’s found a correlation in this--underperforming banks typically don’t express their goals in investor materials.

While Stifel’s Laurie Hunsicker wasn’t against giving guidance, she also advocated caution in doing so. She pointed out that banks that give guidance, even as a range of where earnings could be, and who hit their numbers, typically see their shares trading at a premium.

However, “if you give guidance and you’re wrong,” said Hunsicker, “you’re toast.”

“Most banks aren’t giving guidance and that’s smart,” she added.
Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of ababj.com, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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