Idea Brunch with Perry Weinstein of PCW Advisors
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Perry Weinstein!
Perry is currently the CEO of PCW Advisors, a financial consulting firm focused on the community banking industry. Before launching PCW Advisors in December 2021, Perry worked as an analyst at Hovde Group, Ares Management, MJC Partners, and BDO. Perry’s work has earned high praise from many prominent investors in the financials sector. More recently, Perry’s work on the strategic side has received positive reviews from community bank management teams.
This interview has been edited for brevity and clarity.
Perry, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch PCW Advisors?
Absolutely, thanks for having me on! As you mentioned above, most of my time is spent in the community banking industry. I got my start as a summer analyst at Sandler O’Neill which has since been acquired by Piper Jaffrey. Since then, my career has taken many twists and turns and in 2021 I started PCW Advisors because it enables me to work with a variety of industry experts across many fields within the community banking industry.
What are you looking for when analyzing a community bank? What are some of the qualitative aspects that influence a bank’s value that aren’t typically obvious or “priced in”?
That is a good question. For small community banks, growth is often not priced in as they often trade off TBV multiples rather than earnings. In terms of what is not priced in, I often look at banks that are going through an inflection point. An example of this is often the end of roll-up strategy where the bank is transitioning from inorganic growth, M&A, to organic growth. Instead of diluting tangible book value by doing acquisitions, a bank in this stage will be growing tangible book value at a faster clip prior to its acquisitions due to the improved earnings power gained from increased efficiencies. A good example of this currently is OceanFirst (NASDAQ: OCFC — $847 million) out in NJ. Another type of inflection point can come from a community bank hiring lenders or adding a niche lending vertical. A bank that can go from 6-7% loan growth to 9-11% loan growth can grow earnings per share at a much higher rate than before. Once the market is comfortable with the new growth rate, multiple expansion will occur. Often it takes longer than expected for this process to occur, which can frustrate investors. During this period, I focus my efforts on how management utilizes its excess capital. To capitalize on being undervalued, I want management to use this period to repurchase shares at a low multiple of earnings. In contrast, what I don’t want to see is the bank disrupting its strong organic growth by doing M&A and issuing shares. Often the deal will be dilutive to balance sheet growth and an issue that is not talked about enough in my opinion.
When researching a bank, I like to start by getting familiar with the bank’s current profitability and the key drivers of it. To better understand the future profitability of the bank it is important to understand a bank balance sheet, and how it will perform in different rate environments. In general, the opportunities I spend the most time on are good banks now, but I believe are in the process of becoming a great bank. Investors in the industry have heard me say time and time again “hope and praying is not an investment strategy.” I actively stay away from banks that are poor performers and lack the ability to grow. The only chance these types of banks have of outperforming over a 3-year period is if they sell. Often the banks that lack growth and are poor performance also have a poor funding base. The current rate environment and the anticipated future one is the driving force on how a bank is going to perform in the future. In general, the best-performing banks have a strong funding base with a good concentration in C&I loans. This balance sheet mix will result in an asset-sensitive balance sheet.
My timeline horizon for investments is between 3-5 years, so I am not usually looking for a trade. I cannot overstate how important balance sheet growth is for community banks. Community banks that can compound low double-digit growth for a 3-year period drastically improve EPS not only due to growth but also because of improved profitability achieved through scale.
The community banking sector is dominated by mergers and acquisitions. What factors influence the likelihood of a community bank being acquired?
The way I like to play the consolidation/M&A game is by focusing on community banks that have very specific characteristics. The first characteristic I look at is the bank’s history, specifically looking for recent capital raises. Banks that have raised institutional money from sophisticated investors such as PE funds and hedge funds are essentially on the clock. The second characteristic that is key is the bank being in a good/great market. The third characteristic that is essential is the bank’s deposit base. Usually, a bank like this prides itself on being a business bank with a high concentration of C&I and owner-occupied loans.
The banks I mentioned just previously raise capital from institutional investors because of the growth opportunities presented to them. Smart investors line up for this type of opportunity because they understand that the bank has a plethora of ways to deploy the new capital very profitably. In this type of scenario, management teams seek out capital to support its future balance sheet growth. Simply put, the bank’s current profitability is not strong enough to support its balance sheet growth. This presents an opportunity to investors to own shares in a bank where EPS will most often grow faster than the bank’s balance sheet due to the scale. Simply put, 40-50% balance sheet growth is possible over a 3-year period with EPS improving more than that due to the increase in profitability achieved through the efficiency gains due to large balance sheet.
Some of the names over the last few years that sold that fall into this category are, Pacific Mercantile (PMBC), Level One (LEVL), and most recently Professional Holdings (PFHD).
A few names I like currently that fall into this category and present good value are Avid Bank (OTC: AVBH — $144 million), California Bancorp (NASDAQ: CALB — $119 million), and FVCBankcorp (NASDAQ: FVCB — $167 million). AVBH and CALB are both branch light banks in and around San Francisco. Both have a very strong deposit base with ~40% noninterest-bearing deposits. They also possess a high concentration of variable-rate loans. For both, NIM has skyrocketed over the last several quarters. AVBH first raised capital from Private Equity in 2017 while CALB raised capital in 2018 from hedge funds. Both currently trade at or below the price institutional investors bought shares back in 2017 and 2018.
What are some other bank ideas on your radar now?
I’m excited to share two high-quality banks that have seen their valuations come in considerably due to recent events.