Earlier this week, we did an interview about small banks with Sam Haskell of Colarion Partners. Today, we have an activist bank investor, Abbott Cooper of Driver Management. He was quoted in this morning's WSJ article about the First Citizens and CIT merger.
Tell us about yourself and Driver Management... what do you do and how do did you get started?
I started out my career as an M&A and securities lawyer, then moved into investment banking where I covered banks. I finally made the jump to investing and ran a bank focused strategy at a small asset management firm for about three years before setting up Driver. I have always been interested in activist investing and for a long time thought that such a strategy would be successful when applied to banks. Clearly, there are a number of other activist investors in the bank space, but it is such a target rich environment, I figured there would be plenty of opportunities.
I would also say that my background has been incredibly useful in activist investing. My experience as a lawyer is very helpful in terms of the nuts and bolts of managing an activist campaign and identifying board actions that appear to be in violation of duties owed to shareholders, etc. The investment banking experience is also valuable—I tend to think of activist campaigns as a pitch, where the client is not the company but its shareholders. The biggest difference, however, is that it is a rule of thumb for investment bankers to never pitch a bank to sell itself—given the obvious conflict of interests, it is a sure fire way to never get a meeting with a CEO again—yet often that is the best way to maximize value for all shareholders.
Are you a concentrated activist fund, or are you a more diversified banking sector fund that takes activist stances when appropriate? How many activist situations are you involved with at a time? How many other bank positions? All small banks, or do you go up and down the sector in terms of size.
Right now, Driver focuses exclusively on activism in the bank sector. We have a number of positions and have two that we are particularly focused on now—FUNC and ESXB. We focus on small banks because I think they present the greatest opportunity for value creation through activism. As I mentioned, often times, the best way to create value for shareholders is through a sale and, generally speaking, the larger the bank, the fewer (if any) potential buyers who can or will pay a significant premium.
We know you've gone activist on First United Corp (FUNC) in Maryland, can you tell us about that idea - how you decided to go activist on it and what the opportunity looks like now? We saw that management tried to pull some dirty tricks and throw sand in your face, but it looks like you're fighting through it?
We are in the midst of litigation with FUNC right now, so I don’t want to say too much about that situation other than bank directors who interfere with the election of directors by exploiting bank regulations or manipulating bank regulators should be held to the same standards for determining whether those actions represent a breach of fiduciary duty as directors of non-banking institutions who do the same through “regular” corporate actions such as bylaw amendments or dilutive share issuances. Put another way, there is no carve out to bank directors’ duties to shareholders just because they can figure out a way to use bank regulations as an entrenchment device.
What has your experience been as an activist communicating with the fellow shareholders of banks? We always wonder why anyone would ever vote against a dissident director nominee, given that activists tend to be significant shareholders putting up substantial amounts of time and money to fix what they perceive as problems. Are you any closer to figuring out the psychology of shareholders who vote for incumbent directors that own little or no stock?
To answer the last question first, in some cases it is not psychology, it is self interest that leads investment managers to vote for directors even though the manager is unhappy with the bank’s performance. Some firms will have other business they want to do with under-performing banks where they are an investor and don’t want to jeopardize potentially profitable relationships while others believe that adopting a universal pro-management approach will mean they get the first call when there is a below market private placement or the like.
To me, it is pretty simple—either an investor is satisfied with the performance of a bank (in which case, go ahead and vote in favor of the incumbent directors) or they are not (in which case they should vote against the incumbent directors). There is a great story in Bob Iger’s book about how one year he was unpleasantly surprised to find that there were a ton of votes against four Disney directors who were up for re-election and Iger found out that the votes belonged to Steve Jobs, who was on the board and one of Disney’s biggest shareholders. When Iger asked Jobs about it, Jobs said he voted against the four incumbents because they were a “waste of space.” Unfortunately, even when firms are not guided by other motives, many asset management firms really have a hard time deviating from the proxy advisors’ recommendations. I personally think that is an egregious abdication of responsibility, but that is a topic for another time.
It looks like there are a set of unprofitable or barely profitable small banks trading at half to two-thirds of TBV and a set of solidly profitable (7%+ ROE) banks trading at more like three quarters of ROE. Would you agree? How do you decide between them, or do you buy both?
I think that is probably generally right, but I wouldn’t really buy either at this point. I don’t think that there is a lot of urgency right now to invest in the banking sector and valuations could easily get cheaper rather than more expensive. That said, if anyone ever feels a burning need to invest in bank stocks, I don’t think you can go wrong in investing in stocks with proven CEOs who can make money in all environments and who own stock worth multiples of their take home pay. Tom Broughton at ServisFirst and David Rainbolt at BancFirst are two examples of that type of CEO who immediately come to mind.
We see a split in bank investors (like Colarion, who we profiled earlier this week) who think the best trade is well run, higher ROE banks even though they are more expensive, versus a set of really dirt cheap banks which often have problems and recalcitrant managements that need activism. You seem to come down on the side of activism - does that make you more of a value investor?
I guess it does, but only because I know that I will provide the activism. Unless there is an activist already in the stock (or there is a likelihood that one will surface), there are a lot of dirt cheap banks out there where the management and board are just going to continue with business as usual and if an investor hopes that management team and board suddenly wake up one day with a burning desire to increase shareholder value, they are in for disappointment.
What are the features that distinguish between banks at a premium to TBV and banks at a big discount? Is the market right to distinguish but just wrong on price?
I would say generally it is profitability since return on average tangible common equity remains highly correlated to price to tangible book value but there are also a number of banks that public market investors just seem to hate despite strong numbers. Bank OZK (OZK) is a prime example of a very profitable bank but one where the public market just can’t get comfortable. Given OZK’s excess capital and the fact that the CEO owns more than 4%, they should be thinking about buying out the public shareholders that just seem unlikely to value the stock correctly.
A statistic we saw is that "75% of banks today trade below TBV — more than 2011 (71%) and 2009 (66%)". What are you seeing? Do you think this is a singular opportunity?
Again, that seems right and it is probably an opportunity but since I think valuations are going to stay at this level for a while, I don’t know that I would say it is a singular opportunity.
Would you agree with the notion that some sectors like FAANG/tech are a bubble, and some like banks are an "anti-bubble" right now?
Maybe—although I am sure that there a number of bank investors out there that would love to get a little more air in bank stocks
How are you constructing a bank portfolio right now to take advantage of the valuations and negative sentiment?
Unless someone is prepared to be an activist, I think the best strategy is to buy stocks that don’t drive you nuts when you look at them on the screen every day. By that I mean quality franchises in good markets with excellent management teams—the type of stock that should deliver excellent returns over time, whether through capital return or stock price appreciation. Those might not be the cheapest stocks right now, but they will probably let you sleep better at night.
Do you have any overlap with the Stilwell bank portfolio? We took a look at the eight banks he mentions in his Section 13 filings as current targets, and we see that they are almost all profitable, between half and 85% of book, and do not have majority owners. Is that your wheelhouse or do you prefer a different slice of the bank market?
I think that type of bank is generally in our wheelhouse—we look for franchises that other banks are going to want to buy (for a premium) but are unlikely to really become high performers on their own, which is generally due to out of whack costs and/or an intractable commitment to an inefficient branch network, as well as a culture where the management and board are not held accountable for poor performance. I don’t mind seeing a bank with a higher efficiency ratio because that makes it easier for a buyer to justify paying more, since there should be low hanging fruit in terms of cost saves. We also like to identify banks where management and the board do not have a lot of skin in the game and where there is a history of poor corporate governance practices.
What are your thoughts on the First Citizens and CIT merger that was announced this morning? How many more of the ultra-low P/TBV banks do you think will get picked off?
On the CIT/FCNCA deal, I don’t think there are a ton of read throughs for M&A generally, although it is always good to have precedents where the deal was enthusiastically received by investors.
On other ultra-low P/TBV banks, it is hard to say—I think that there were compelling strategic rationales for CIT/FCNCA and I don’t know if that applies to any other bank on that list.