This is happening. How much money will you make from it?

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The Trade of the Decade is happening. The only question is how much will you make as a result. Right now you can get 20% off Banking Profits with a guided portfolio of community bank stocks, weekly commentary and buy/sell alerts whenever we make a trade. You also get banking on Profits Monthly to help you keep on track of institutional and insider buying in the industry I am also including a full year of my regular Deep Value letter free to help you find bargains in the rest of the markets. The full value of this offer is almost $1600 and to help you get in on and profit from the Trade of the Decade you get it all for 20% off the price of Banking on Profits alone. Click here to take advantage of this opportunity to get all three letters for 20% less than you would normally pay for Banking on Profits alone. Use coupon code bop3r.

Listen to what bankers, investment bankers and industry experts are saying about the trade fo the decades in small banks.

Activist investors are increasingly campaigning against US financial institutions (FIs), a move driven by changes in the activists’ approach and an increased alignment with regulatory objectives, according to Fitch Ratings.- Fitch Ratings

Bank CEOs and their boards are feeling intense pressure to grow their institutions. Sixty-seven percent of the bank executives and directors who responded to Bank Director’s 2016 Bank M&A Survey believe their bank needs to grow significantly to compete in today’s marketplace. When asked how large their bank needs to be to compete, a slim majority—one-third—cite $1 billion in assets. Shara agrees, referencing a competitive and costly operating environment. “Scale is so important today. We all have similar regulatory and compliance costs, and you have to spread that over a bigger base,” he says.- Bank Director Magazine.

But smaller banks across the country can attest that in today’s environment such challenges are not confined to midsize and large financial institutions. For the past several years, headwinds facing community banks have driven record levels of bank consolidation. Since 2013, more than 700 U.S. banks have merged with or been acquired by another institution. During the same span, the number of FDIC-insured banks has declined from 7,083 to 6,270, with Arkansas experiencing a drop from 120 to 106 such banks. This consolidation has been heavily weighted toward smaller community banks, with more than 90 percent of acquired banks holding less than $1 billion in assets. The trend doesn’t appear to be slowing — analysts expect banking to remain an active deal sector in 2016 as community banks become even more attractive to their larger counterparts, and this week the CEO of the Consumer Bankers Association predicted that one in six banks nationwide will ultimately be forced to merge. Each of these acquisitions requires not only a buyer in search of growth opportunities, but a determination by the target that the time is right to sell. Why are community banks increasingly deciding that now is the time?- Aaron Brooks, Arkansas Business.Com

Consolidation in the U.S. midtier regional banking sector is likely to continue as midtier banks (with total assets ranging from $10 billion-$50 billion) seek to expand their branch footprints and asset bases, according to Fitch Ratings. ‘Midtier banks have been active acquirers over the last year and this trend is expected to persist in 2016 and beyond as midtier banks continue to buy-up community banks struggling with growing regulatory burdens in a low rate environment,’ said Bain Rumohr, Director, Fitch.- Fitch rating Service

Hedge funds such as Ancora Advisors, Clover Partners and Seidman & Associates are buying up stakes in lenders across the U.S., from community banks to large regional lenders. Driving these investments is the view that ultra-low interest rates, lagging returns on equity and tough regulations will push more banks to merge, with buyers willing to pay a hefty multiple to a bank’s tangible book value. Activist investors interviewed by Reuters say another factor is exposure to energy-related loans, which is driving down the valuations of certain banks and making them all the more vulnerable to a takeover. “Bigger banks are back in the market doing deals,” said Ralph MacDonald, a partner at law firm Jones Day, who specializes in mergers and acquisitions. U.S. bank mergers and acquisitions volume rose 58 percent last year to $34.5 billion, according to Thomson Reuters data.-Reuters

A new study by Marshall Lux and Robert Greene reports that since the enactment of Dodd-Frank community banks have lost market share at twice the rate that they did prior to Dodd-Frank. The authors note that many of the regulations implemented pursuant to Dodd-Frank are not linked to the size of the institution, thus there are economies of scale in regulatory compliance. Thus, regulatory costs tend to fall proportionally heavier on smaller banks, which, in turn, tends to promote consolidation of the industry (as I noted several years ago when I predicted that Dodd-Frank would promote industry consolidation).- Todd Zywicki Washington Post

There has been a cumulative impact of M&A activity over the years. As of September 30, 2015, there were 6,270 insured depositories compared to about 18,000 institutions in 1985 when interstate banking laws were liberalized. M&A activity when measured by the number of transactions obviously has declined; however, that is not true on a relative basis. Since 1990, the number of institutions that agreed to be acquired in non-assisted deals ranged between 1.4% (1990) and 4.6% (1998) with an overall median of 3.2%. Last year was an active year by this measure, with 4.4% of the industry absorbed, as was 2013 (4.5%). What accounts for the activity? The most important factors we see are (a) good asset quality; (b) currency strength for many publicly traded buyers; (c) very low borrowing costs; (d) excess capital among buyers; and (e) ongoing earnings pressure due to heightened regulatory costs and very low interest rates. Two of these factors were important during the 1990s. Asset quality dramatically improved following the 1990 recession while valuations of publicly traded banks trended higher through mid-1998 as M&A fever came to dominate investor psychology. Today the majority of M&A activity involves sellers with $100 million to $1 billion of assets. According to the FDIC non-current loans and ORE for this group declined to 1.20% of assets as of September 30 from 1.58% in 2014. The most active subset of publicly traded banks that constitute acquirers is “small cap” banks. The SNL Small Cap U.S. Bank Index rose 9.2% during 2015 and finished the year trading for 17x trailing 12 month earnings. By way of comparison, SNL’s Large Cap U.S. Bank Index declined 1.3% and traded for 12x earnings. Strong acquisition currencies and few(er) problem assets of would-be sellers are a potent combination for deal making. Earnings pressure due to both the low level of rates (vs. the shape of the yield curve) and postcrisis regulatory burdens are industry-wide issues. Small banks do not have any viable means to offset the pressure absent becoming an acquirer to gain efficiencies or elect to sell. Many chose the latter. The Fed may have nudged a few more boards to make the decision to sell by delaying the decision to raise short rates until December rather than June or September when the market expected it to do so. “Lift-off” and the attendant lift in NIMs may prove to be a non-starter if the Fed is on a path to a one-done rate hike cycle.- Mercer Capital Bank Watch

The report from Mercer Capital report says that” pricing in terms of the average price/tangible book multiple increased nominally to 142% in 2015 from 139% in 2014. Our average holding trades for 94% of book value and the current buy list is priced at an average price to book value of about 81,4% of book value. That’s about 75% below the current average multiple right now.

We returned 18.07 in the main portfolio last year wth 8 takeovers after having 10 in 2014. Out 14 sold holding since inception have averaged a total return of about 60% from the original purchase price. This is opportunistic value investing at its finest. We have banks that need to buy, banks that need to sell and this creates the extraordinary opportunity I call the Trade of the Decade.

Click here to take advantage of this opportunity to get all three letters for 20% less than you would normally pay for Banking on Profits alone, Use coupon code bop3r.
Tim

Babe Ruth Stocks

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Originally published on Real Money

Last night, I was sifting through a bunch of paperwork and reports when it occurred to me that it had been a long time since I ran a screen that had produced strong results for me in the past. S&P Capital IQ is one of the most respected and widely used research services in the world. Most online brokers give access to the service as part of the services provided to their customers.

They offer their STARS (Stock Appreciation Ranking System) program that ranks stocks from 1 to 5, with 5 being the stocks that should outperform the market by the widest margin and 1 being the projected worst performers in the year ahead. They use several factors, including macroeconomic and company-specific factors and industry developments and trends to formulate their rankings, and they have worked pretty well over the years.

I look for low priced stocks that can outperform by a huge margin over the years and have picked some pretty big winners. I simply look for 4 and 5 Star rated stocks that are trading for less than $10 and then do a little qualitative research on my own to see if I like the story. I went back and checked out some older articles using this approach, and the year-ahead returns on the low price high start picks were pretty extraordinary. With that in mind, I looked this morning for some companies trading below $10 that had 4 or 5 star ratings from the well-respected research service.

There are some surprising picks on the list. I am sure David Einhorn will be relieved that his two problem child energy picks are on the list. Chesapeake Energy (CHK) has been a huge loser for everyone that has gotten anywhere near the stock. Einhorn, Carl Icahn, Southeastern Asset mangment and Harris Associates are just a few of the well-known investors that have been hammered by the second largest natural gas producer in the United States.

The company has had its debt downgraded and there are some who think it could be forced into a bankruptcy restructuring. S&P notes that the voluntary debt restructuring, large cash stockpile of $1.8 billion and the prospect of future debt restructurings may have the company in a better position that many realize. If natural gas pricing improves this stock could surprise the skeptics and a have a big year. Having said that, this is a stock suited for Babe Ruth investors who are willing to swing away for a long ball without fear of striking out.

The same can be said for CONSOL Energy (CNX). Both Mr. Einhorn and Southeastern have a position in this stock as well. The company has cut its coal exposure in the past year and its future is no much more dependent on natural gas as it is one of the largest producers in the Marcellus and Utica shale fields. It is not for the faint of heart, but the upside could be enormous. CNX gets the top rank of 5 stars from S&P Capital IQ.

Amkor Technologies (AMKR) is another low priced, high star stock with the potential for substantial one year returns. The semiconductor testing and packaging company has shown up in the portfolio of Arbiter Partner, which increased its stake in the company in the third quarter by more than 25%. Demand from the wireless and smartphone markets should help drive growth for Amkor going forward. Improving market demand along with management’s effort to reduce balance sheet leverage could drive this stock to high returns in 2016 and possibly well beyond.

They also like one of my previous long shot picks that so far has not exactly accelerated or excited. Hovnanian (HOV) is still in the early stages of what is going to be a long protracted turnaround process. A slowly improving housing market has helped the company begin the process, as backlogs are higher as we go into 2016 and the new home market seems to be slowly grinding higher around the United States. The company will not pay tax on the next $2 billion or so of deferred tax assets, and that could help increase the liquidity and stability of the company and its balnce sheet. Again, there is a Babe Ruth element to this stock, but if it works it is going to work very big.

S&P Capital IQ has been a reliable source of stock research for almost 100 years. The STRS system has done well over the years, and using it to pick low priced stocks with long shot upside potential has worked for me over the years. It is worth noting that if your broker does not give you access to S&P Capital IQ reports, many libraries around the U.S. do have a copy in the branch. It is worth taking the time to review the service and rankings at least on a monthly basis.

Talking Banks

I am spending the first part of the week out here in Phoenix, Ariz. at the Bank Director Acquire or Be Acquired Conference. The increasing pace of M&A activity has made this a popular place to be this year. There is record attendance, with over 600 bankers representing 300 banks as well as 300 assorted vendors, consultants, accountants and investment bankers. There are not as many investors, as this tends to be more of a nuts-and-bolts, how-to-get-it-done and networking function than the meet the banker-type affair seen at the brokerage-sponsored conferences.

It is one thing to read about the need for M&A in the banking space and quite another to talk to those who are living it day to day. Last night there was a “drink and meet” gathering and I got to talk to a lot of those bankers. The real takeaway was that M&A is really the only path to growth in the current environment and no one sees that changing any time soon. The slow growth economy will be the new normal for an extended period of time, according to many of the people around the hotel, and that makes consistently strong deposit, loan and earnings growth tough to achieve.

One consistent theme in yesterday’s speeches and in my conversations is that size really does matter when it comes to banks. There is a pretty much perfect inverse correlation and returns on assets and equity. The smaller banks are struggling to stay profitable and that does not look like it is going to get better.

As onerous as the costs of regulatory compliance are, small banks also face technology expenses, particularly for cybersecurity and mobile banking, which are going to be significant and ongoing. They simply do not have the asset size to generate sufficient profits to cover all these costs.

Net interest margins are at historic lows and no one I’ve spoken to thinks the economy is strong enough to justify continued rate increases, which just compounds problems for little banks.

Most bankers here believe the survival point is around $500 million in assets. Those with less than that simply have to seek a merger partner, according to pretty much everyone I’ve talked with and several speakers.

I believe 2016 could be a huge year for investing in these tiny stocks. Those that are publicly traded will be illiquid and difficult to trade, but I think buying those you can find at 80% or less of book value will be hugely profitable in 2016 and for several more years.

The takeover premium in these smaller struggling banks is going to fall into the 100%-120% of tangible book value range, so buying at 80% or less gives you more than enough upside potential to offset the illiquidity.

Meanwhile, banks with $500 million to $1 billion in assets are also highly likely to face increased M&A activity this year. They may not have the same difficulties as the smaller-sized names but they still do not have enough scale to deal with all the costs and competitive pressures. In my view, you can pay up to 90% of book for these banks as the takeout multiples should be close to the 125% to 135% of book value.

Personally, I prefer to buy the $500 million-$1 billion banks where an activist has a significant stake. Activists have also been a topic of conversation here and one banker told me that his two biggest fears are a cyber-attack and bank stock activists filing a 13d regarding his bank.

Everyone I have talked to so far — bankers, analysts, investment bankers and consultants — thinks the pace of merger activity for publicly traded little banks will accelerate in 2016. It’s not just the headwinds the small banks are facing, the larger banks have problems of their own.

One investment banker told me that for every seller right now he has three or four interested potential buyers. There is little to no organic growth as a result of the slow economy so the only path to grow and keep the stock price climbing is to buy smaller institutions.

I have heard all the reasons for not buying small community banks. They are illiquid. The shares are hard to buy and even more difficult to sell. It can be hard to find information and news on these names. You can’t trade them. No one has ever heard of them.

All of these objections strike me as exactly the reason that long-term patient investors should be buying them with both hands at current very attractive valuations.

My successful approach to investing in community banks over the past two decades has been to buy smaller institutions that trade at a discount to book value (and preferably have activist investors involved). But another approach that’s worked pretty well has been to “buy the buyers” — purchase banks that are growing via the acquisition of other banks.

Active acquirers like Bank of the Ozarks (OZRK) and Home Bancshares (HOMB) have seen their stocks become richly valued since the U.S. credit crisis ended. You might want to buy them on a pullback, or “back into” them by owning stock in a smaller bank that gets gobbled up by one of these high performers.

Capital Bank Financial (CBF) is another one of my favorite growth banks. CEO Eugene Taylor and his team raised more than $900 million to start the firm in 2009 just as the banking world was imploding, using the money to snap up Southeast banks at bargain prices.

They initially purchased just seven banks, including several distressed institutions acquired with Federal Deposit Insurance Corp. assistance. But today, CBF has $7.4 billion in total assets and 153 full-service branches throughout Florida, North and South Carolina, Tennessee and Virginia.

Management is pretty upfront about its growth plans, writing in CBF’s latest 10-K that “our business strategy is to build a midsized regional bank by operating, integrating and growing our existing operations, as well as to acquire other banks, including failed, underperforming and undercapitalized banks.” The firm views the Southeast as its core market and is actively looking to expand there.

Back in August, the U.S. Office of the Comptroller of the Currency lifted a so-called “de novo operating agreement” put in place in 2010 as part of Capital Bank’s original approval process. This freed CBF to implement its business plan with a reduced level of regulatory oversight.

Three months later, the bank announced plans to acquire CommunityOne Bancorp (COB) for $350 million in a deal that will expand CBF’s North Carolina operations (especially in the Charlotte market). Capital Bank’s management has shown that it’s skilled at acquiring banks that add value, so I think this will be just the first of many deals.

In its most recent earning report, CBF announced that it hit one long-term goal of crossing over the 1%-return-on-assets mark. The bank also got its efficiency ratio below 60.

Likewise, return on equity has doubled over the past four years to reach 8.75%. I don’t think it’ll be long before CBF consistently produces double-digit ROEs and takes its place in the ranks of high-performing banks.

My core strategy in the community-banking space will always be to buy the “little guys” that pretty much need to sell (and/or face pressure from outside investors to do so).

However, it also makes sense to be a long-term investor in those banks that have solid growth-and-acquisition strategies. My “inner cheapskate” prefers to buy bank stocks that are down — but I’ll also keep an eye out for high-quality growth stocks like CBF.

Charlie Mungers Advice

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​Below is my recent article on my trip to Phoenix for the Bank Directors acquire or be Acquired conference.more than 600 bankers took three days out of their busy lives to fly in for the conference. Starting at 8 am on Sunday morning their were meetings, presentations and workshops on the subject of buying or selling your banks. Talking to he bankers over the three days it was clear that I have been very right about the trade of the decade. You must grow your bank with increasing profits and dividends to keep your shareholders happy and the only viable path to growth is acquisitions. The market is too competitive and the economy too weak for organic growth today. It really is buy or die for todays community it banks.

As investors this a major opportunity. Many bank will be sold at a large premium to the current price.Others will execute their growth plans and grow their assets, earnings and stock prices. It is a major win-win for investors. Their are activists and pushing for bankers to unlock value and their efforts will help our portfolios.
At last weeks Daily Journal Annual Meeting Charlie Munger said that”The trick in life is that when you get the two or three opportunities that come along you have got to do something about it​.” That is what the community bank stock represent today. Over the next decade fortunes will be made in these stocks. Banking on Profits can help you be one of the investors who cashes in on the trade of the decade. Our portfolio did 18.07% in 2015 with 8 take-overs and we think 2016 will be even better.

Right now you can get 20% off Banking Profits with a guided portfolio of community bank stocks, weekly commentary and buy/sell alerts whenever we make a trade. You also get Banking on Profits Monthly to help you keep on track of institutional and insider buying in the industry I am also including a full year of my regular Deep Value letter free to help you find bargains in the rest of the markets. The full value of this offer is is almost $1600 and to help you get in on and profit from the Trade of the Decade you get it all for 20% off the price of Banking on Profits alone.

Click Here to take advantage of this offer. Get all three newsletters for just $799 and start cashing in on the trade of the decade. Use Coupon Code bop3r

Buy or Die in Phoenix
Last week, I was fortunate enough to attend the Bank Director’s Acquire or Be Acquired Conference in Phoenix, Arizona. I go to several conferences and investment shows a year and this was one was a completely different duck. This was not the traditional dog and pony “look at me” event, but much more of a hands-on, how-to-get-it-done event.

I’ve traded in community bank stocks for two decades and like to think I’m pretty knowledgeable about the industry, but I can honestly say that I left feeling like I know a lot more than when I walked onto the room Sunday morning. On top of it all, the Bank Director staff did a fantastic job with all of the logistics, food was great and there was free wine each evening. The only negative was the nasty cold snap that rolled through Monday and reminded me how much I detest cold weather.

Odds & Ends
Before I get into the specifics of the conference, let me share couple of observations about the event.

There is an air of inevitability hanging over the community bank space and it was very much present at the conference. Bankers know they need to grow, or face extinction by merger. They also know that organic growth is a near impossibility in a low growth economy.

Competing against their bigger, better funded rivals is another huge obstacle to growth. The days of opening branches on the other side of town, then the next town over and so on to grow a bank are over.

Every corner in the United States that doesn’t have a McDonald’s or a Walgreens on it already has a bank branch occupying the space. You have to grow, and to grow, you have to buy. If you’re not in a position to buy, you’re probably going to have to sell. Some smaller banks with a strong niche, or those that can dominate a small market, may be able to survive but most simply cannot. This is doubly true if they are publicly held banks where shareholders expect a return on their investment.

Related Link: Is Bank M&A Action On The Way?

The older bankers all have a look of almost resignation and exhaustion on their face. This attitude also shows in their demeanor, their posture and their conversation. After decades of having one of the best jobs in the world, banking has changed and not for the better. After a few years of foreclosures, calling loans, tightening loan standards and falling stock prices small town bankers are not liked any more than their Wall Street counterparts.

Bankers are about as popular as tax collectors and loan sharks these days. The regulators are a constant presence and the average banker is spending a lot more time talking to lawyers and government officials than customers and employees. As Richard Lashley of PL Capital recently noted, banking is just not fun anymore. Many older bankers are looking for an exit and if someone meets their price, they’re out of there. They didn’t sign up for this and it is time to cash in and go home.

Diversity
I have one observation that is very unlike me. I’m big on meritocracy and think that the push for diversity for the sake of diversity is counterproductive at best.

I’ve noted over the years that most companies end up looking like their customer base and that is as it should be. Having said that, banking has a massive diversity problem. It’s not just that the crowd was almost entirely white. It was almost all white, middle-aged males who have no clue what business/resort casual actually means. This was noted last year on the GonzoBanker Blog and is still true this year.

The banking industry really needs to come up with some type of education, internship or employment program that brings minorities and women into the industry. The demographics of the US are changing, and last I looked even if that wasn’t true, roughly half the population is female. The industry needs to make a real effort to look more like the population they serve.

The Conference
Presentations kicked off Sunday at 8:15 a.m PT. I’m not a morning person at anytime, but I’mreally not a Sunday morning person. However, Tom Michaud, CEO of Keefe, Bruyette & Woods gave an eye-opening presentation of the key themes for community banks in 2016. Along with the generous, never-ending supply of great coffee, this helped me deal with the ridiculously early hours.

Michaud noted that while the continued selling pressure to start 2016 has re-opened scars from the financial crisis, KBW believes the risk impacts near-term earnings, not whether the industry has sufficient capital. His firm stress-tested the banking industry and found that while profits would fall if the economy slumped further, there would not be credit crisis-like capital destruction. Financially, the industry is in solid shape with tangible equity ratios at the highest level in 70 years. He did note that because of higher capital requirement and low net interest margins, both ROA and ROE have fallen dramatically from pre-crisis times.

Thanks to the brand new fixing yesterday’s problem regulatory environment non-interest income has also fallen. It’s much tougher to make a buck in banking today.

We have seen 20 straight quarters of improving credit quality, the longest since 1991, which was the aftermath of the S&L crisis. Credit really can’t get any better. In fact, we’re seeing some signs of developing credit issues. Oil exposure is going to be a big problem for some banks and the regulators are warning about CRE concentrations. There are some signs of slowing in portions of the commercial real estate market.

I personally tend to agree with Chris Marinac at FIG Partners, who has expressed the opinion that it may be prudent for many banks to begin increasing loan loss reserves a little while credit conditions are still near perfect.

Michaud touched on consolidation. He noted that in 1988 when the interstate banking act passed, there were more than 18,000 banks in the US. Today, there are right around 6,000 and the number is getting smaller pretty much every day.

Bank M&A deals per year as a percentage of total banks are at historically high levels according to his presentation. On average, about 3.45 percent of banks get acquired per year and in 2015 that number was 4.7 percent. It’s no great secret that I think we see that or more again this year. It’s the stronger, bigger banks doing the buying as 70 percent of all acquirers were banks trading above 1.5 percent of tangible book value. Michaud also noted that markets are rewarding the buyers right now, as many of the acquiring companies are seeing a post-announcement price pop.

Is Bigger Better?
My next session was titled “Is Bigger Better?” (perhaps a similarly-titled breakout session at the AVN Expo in Las Vegas) and one of the speakers was Steven Hovde of The Hovde Group. He is one of the best speakers I’ve seen in some time and if you have a banking or finance-related conference coming up and need a speaker, get this guy. He’s active in consulting, investment banking and capital markets activities in the community bank space and he also owns controlling interest in some banks. He knows the industry and knows it well.

Hovde pointed out that in the current environment, large banks are outperforming smaller ones on just about every metric. Smaller banks are feeling the pinch of regulatory costs and rule changes that lower fee income is hurting the little banks more than larger ones. The smaller banks are also seeing tougher competition — not just from banks, but credit unions and non-traditional lenders.

To thrive, you have to get bigger. To get bigger you probably have to buy and again, if you can’t buy you probably have to sell. He pointed out that the “sweet spot” for most profitable banks lies within the $5 billion to $25 billion range and looking at his data, it looks like the sweet spot of the sweet spot is in the $5-10 billion size.

The markets like bigger, as well.

Banks between $1 billion and $5 billion in assets are trading at 1.69 times TBV, while banks between $5 billion and $10 billion in assets are trading at 2.33 times TBV. Buyers are paying more for bigger as well as since 2000; sellers with more than $1 billion in assets have commanded a 40 percent premium over those sellers with less than $1 billion. The headwinds for smaller banks are intense and you have to get bigger fast. If you can’t, you have to sell.

Roundup
Lest you think I’m going to run through every session over the two day, be sure that I’m not. I wanted to highlight these two presentations because they really set the tone for the conference. I attended a lot of nuts and bolts presentations about how and when to get the deal done and other related topics. To cover everything I heard and learned in Phoenix would be a small book.

If I included all the conversations in hallways, around the fire pits and bar about banking, the economy, wine, scotch, Kentucky basketball, Kansas City Sports teams, fashion, fintech, financial journalism and snow removal, I would be months writing this and would probably have to bring in John Feinstein, Al Roper and Ben Stein as co-authors. It was an incredibly productive, entertaining and educational few days.

I do want to touch on more session. On Monday, there was session with two lawyers and an investment banker titled “Shareholder Activism – Be Prepared When It Happens.” I closely track bank stock activists and the session, along with hallway and cocktail conversation, reinforced a long held belief.

One of the reason bank stock activists have so much success is that the community bank industry isn’t prepared for activism and they have a limited selection of tools to fight back. There is a “give them some board seats and maybe they will quiet down” mentality in the industry and it’s a huge reason activists (and by default, me) have done so well. Letting the bank activists I follow and know on your board is like inviting lions to a sheep herd. The may be polite about it, but they’re going to eat well.

You and your board will find ways to improve returns, buy back stock, increase dividends or whatever else it takes to get the stock price higher or you are probably going to come in one day and find a for sale sign on the door. They will not go quietly into the good night without a big payday.

I also noted a disturbing “how do we protect our bank” attitude on the part of bankers and board members. Keep in mind folks that once you sold stock to the public, it became our (shareholders) bank and you work for us. Our mindset is not all that different that the activists. We want to see decent returns on our money. Your absolute best defense against active shareholders is to make sure you, your officers, employees and board members are significant shareholders in the bank.

Activists will leave you alone if you have enough votes to make a proxy fight expensive and difficult to win (most of them can count votes). You may also find yourself strangely motivated to do things that get the stock price higher!

Parting Wisdom
If you’re a community banker, you should be at this conference every year. You should be sending your senior officers and board members.

If you’re a significant bank stock investor, you should go once for the educational experience.

If you sell to the banking industry, you’re making a huge mistake to not get involved as a sponsor or vendor (please bring more free office supply giveaways). I barely put a dent in my annual supply needs and will now have to go to the Orlando Money Show to obtain more pens, pencils, calculators, highlighters and coffee cups).

The message was simple: To perform you must be bigger. To get bigger you must buy. If you can’t buy, you probably have to sell. As a minor point, bank stock activists are going to continue to have a great deal of success and outside investors need to be tracking their buying and selling carefully.

Be Spectacular

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It looks more and more like the Trade of the Decade could be spectacular in 2016. In addition to an acceleration in the pace of merger and acquisition activity, I am starting to see some institutional interest in these stocks. This interest comes from beyond the small handful of activists and specialists who habitually buy the little banks.

Large sums of money coming into the space will create quite a bit of buying pressure and could prove to be gas on the fire for bank stock returns next year. If you don’t have at least some of your investment portfolio in the community banks, you need to have a long talk with yourself about your apparent allergy to profits.

I have looked this week at the top holding of some of my favorite bank stock investors. Today, I am going to double up and give you the top three of my two favorite bank stock activists. Lawrence Seidman and Joseph Stilwell have both been successful activists in small banks for two decades, and have extraordinary records of success. I probably owe them both dinner and drinks as they have made me a bunch of money as a result of carefully tracking their 13D and 13F filings.

Stilwell’s top holding is First Financial Northwest (FFNW), based in the Puget Sound region near Seattle. This is a two-branch bank with about $978 million in assets, so it is right on the $1 billion bubble. It’s in solid financial shape and business is pretty good. In October, the bank announced a 1,410,000-share repurchase program after closing the prior buyback by repurchasing 864,463. It also increased the dividend by 20% earlier in the year and the shares now yield 1.75%. Stilwell owns 9.75% of the bank.

His second-largest holding is Provident Financial Holdings (PROV), a 14-branch bank with $1.17 billion in assets. Provident has also been active buying back stock and 297,596 shares or 69% of the shares authorized in the April 2015 stock repurchase plan. At the current price of about $19 per share, the stock is yielding 2.46%.

His third-largest holding is Malvern Bancorp (MLVF), a seven-branch bank in Paoli, Pa., with $2.5 billion in assets. Virtually every community bank stock activist owns this one and I am frankly surprised it has not been taken over. Most of the investors supported Anthony Weagley when he was appointed CEO in 2014 and have given him time to turn things around. Stilwell filed a 13D this time last year.

“After having met with the new CEO and the new chairman of the board, we believe that management and the board of directors are now focused on maximizing shareholder value,” Stillwell said. It is working so far, with strong improvements in return on assets and return on equity.

Lawrence Seidman has also made me a lot of money over the years. He sold about a quarter of his top holding, Towne Bank (TOWN), in the third quarter, so I will skip over that one and go to his second holding. Stonegate Bank (SGBK) is turning into one of the better bank-stock growth stories. The bank has been growing both organically and via acquisition and now has 26 branches and $2.3 billion in assets.

It is also the first U.S. bank to offfer a credit and debit card approved for use in Cuba. It was also the first bank to begin a correspondent banking relationship with Cuba’s Banco International de Comercio. With a solid South Florida base of operations, this could lead to sizable profits for the bank as U.S.-Cuba relations continue to thaw. This well-run bank is near the top of my “buy in a pullback” list.

Seidman was a small seller of his second-largest positions, Kearny Financial (KRNY), so I will skip that one and move to his third-largest holding, Waterstone Financial (WSBF). Based in Wauwatosa, Wis., the bank has 11 branches with about $1.7 billion in assets. Like so many of my favorite small banks, it is actively buying back stock below book value and 1,274,238 shares were repurchased during the quarter ended Sept. 30.

Seidman’s third-largest position is an old favorite, Prudential Bancorp (PBIP). The Philadelphia-based bank has seven branches with about $487 million in assets. The bank has been underperforming in the crowded Philly marketplace. The mutual conversion was done in October 2013, so there are change-of-control restrictions until Oct. 9, 2016, but this increasingly looks like an attractive target for a larger Philadelphia bank.

Stilwell and Seidman have been successful community bank activists for a long time. Tracking their buying and selling can help you maximize your profits from the Trade of the Decade.