Idea Brunch with Phil Timyan on Community Bank Investing

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Phil Timyan!

Phil is a professional investor with over 35 years of experience focused on community banks. He has filed 13Ds in multiple banks that eventually merged or were sold.

In 2012, Phil and his wife Anna Belyaev started publishing his community bank stock ideas on TimyanBankAlert.com. In 2014, the pair participated in a strategic capital raise at First Menasha Bancshares (FMBJ), where Anna served as a board member until the bank sold to Nicolet Bankshares (NIC). Over the past decade, Phil also served on the boards of Community Financial Shares (CFIS) until it was bought by Wintrust Financial Corporation (WTFC), and Royal Financial (RYFL) until its sale to Finward Bancorp (FNWD). 

Today, Phil is one of the largest shareholders in Community West Bancshares (CWBC) and has a third-party representative (Chris Raffo) seated on their board. He is active on Twitter, where he frequently tweets about community banks to his ~4,500 followers at @TimyanBankAlert. He also posts on broader topics via his personal Twitter handle @PhilTimyan. 

Phil, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your passion for investing in community banks?

Thanks for having me Edwin. As my wife will confirm, I’m a bit of a performer who likes to shoot his mouth off, so I appreciate the forum. I also appreciate the opportunity to acknowledge a few of the many people who have helped me along the way, so it’s my pleasure to be here.

I got interested in stocks in seventh grade when I was working as a caddy at Warwick Hills Golf Club. The stories I heard my golfer clients tell were fascinating. When I got to Michigan State, my undergraduate Finance Professor, Alden Olson taught me securities analysis from a different perspective. We did a case study on a bankrupt railroad, Chicago Milwaukee, and witnessed a broken convertible preferred trade from $2 to $120 per share. Later, as an MBA student, I became Dr. Olson’s Teaching Assistant, which afforded me the opportunity to help research ideas for his investment counsel clients, including a few local Michigan banks.

My interest in banking continued in 1986 when I was a broker at Oppenheimer & Co. My early professional career was as a short seller. My then short-selling friend, Shad Rowe in Dallas told me about Western Savings & Loan. If you stripped out the reported gains from selling defaulted loans and foreclosed real estate, the bank was unprofitable. Of course, the sales were to related parties at inflated prices and were a sham and Western ended up failing.

From Opco I went to work with the Feshbach Brothers in California as an analyst covering Biotech, Leasing, Insurance, and general frauds. Comdisco and Continental Information shared some similarities with banks, but when 1988 and the rolling real estate depression came along, Michelle Gass, who was already short Sooner Federal Savings and Western Savings was already covering the banks.

After I left Feshbach Brothers, I joined Gordy Ringoen in San Francisco, where bank stock opportunities were ripe and wide open for me. My first big shorts were the broken S&Ls whose regulatory goodwill had been taken away: Meritor, Ben Franklin Savings, Great American, etc. That led me to the Northeast disasters: Bank of New England, City National in Connecticut, Midlantic, Bank of Boston, Maryland National, etc. Back then, our prime broker would let us short the sub-debt of the big banks we thought might fail with only a 5% margin requirement, so we built up large positions in Riggs National and Southeast Bank of Miami and others.

In 1991 when the Fed began easing, it allowed many of the crippled banks to earn their way out of their mess with their bond books. I realized how cheap the good Savings and Loans were, and how they didn’t have any of the commercial real estate exposure.

The new savings & loan conversions fascinated me. Cragin Federal in Chicago converted at $10 with an $18 rock-solid book value. I bought it on Day One when the flippers sold it for easy money at $14. Within three years, the book value had grown to over $20 and the bank was sold for something like $32. When it became clear that many of the wounded banks were going to survive and get new capital, I turned around and started buying some cheap sub-debt pieces. My favorite (and what I named my fund after) was Riggs National. When the bank’s Chairman Joe Albritton made it clear he would infuse whatever money was needed to save the bank and went shopping for an investment banker to help, their floating rate notes were trading for 38 cents on the dollar. Those paid off at par, and I’ve been a bank stock addict ever since.

Banks increasingly face high regulation and growing compliance costs, which would seem to benefit the bigger banks that have economies of scale. With that in mind, why are community banks an attractive place to invest? Are there any community banks that can succeed in the long run without M&A?

This a favorite topic of mine. I love community banks. They’re there when you need them. You don’t get lost in voicemail hell, and aren’t smothered in their bureaucracy.

My late good friend George Igler put it this way:

“Community banking is here to stay because of the people that go the extra mile to provide the services that make the difference…

If you look at a community like West Chester, PA, there are billions of dollars in banks like Wells Fargo, JP Morgan, and Citizens. On the corner, on the Paoli Pike Parkway, where First Resource Bank (OTC: FRSB — $39 million) has a branch, there are $400 million of deposits. If a small percentage of West Chesterans were to buy FRSB shares (which are available at a discount to book value today), and then move their money across the street from those big banks to First Resource, that alone would cause the bank’s earnings to grow and put money in their own pockets. Plus, they’d enjoy a much easier and more truly “personal banking” experience.

In addition, those issues you mention, tighter regulation and higher compliance costs, are strong arguments for further consolidation in banking. This means those who invest in banks like these can expect the additional windfall from a certain percentage of these that are bound to be bought out at a premium sooner or later.

As far as being an activist goes, I’d much rather be known for encouraging everyday Americans to act on their own behalves in this way, to actively own and do business with the small banks in their communities, and to reap the benefits personally as they bring their entire communities up with them, than to have my legacy be only about my work shaking down scoundrels in the banking industry.

Some other examples of community banks that are knocking it out of the park include Truxton Trust (OTC: TRUX — $203 million) in Nashville, Fresno First Bank (OTC: CFST — $220 million) in Fresno, and Coastal Community Bank (NASDAQ: CCB — $633 million) in Everett, Washington.

What are you looking for in a community bank? Are there any common red flags that turn you off, or common positive signs that make you more interested in a bank?

Things I love to see in a community bank include large shareholdings in the board room, a dominant position in the towns the bank serves, and a smart, grounded CEO who cares about shareholders. A few current examples where these conditions hold are Spring Valley Bank & Trust (OTC: SVBT — $51 million) in Jasper, Indiana, and Lake Ridge Bancorp in Wisconsin, which is the result of the merger between State Bank of Cross Plains and Monona Bank.

Some things I consider to be red flags are high-efficiency ratios and CEOs who got their jobs via birthright, are overpaying their boards to skirt accountability, or have a habit of hiring friends and family every chance they get.

A prime example is Chevis Swetman at Peoples Financial (OTC: PFBX — $66 million) in Biloxi, Mississippi. At first glance, Peoples seems to have a nice trust department, a top market position in many towns, and a CEO and board who are vested. But in reality, Peoples is one of the most bloated and inefficient banks in the country. Chevis and his brother-in-law director inherited most of their shares, and Chevis acts like the bank is his personal property. At any time in the past 20 years, Chevis could have sold it for twice where it trades today. Instead, he loans money to people like Michael Avenatti and other dubious lawyers and judges. He got away with it by setting up a deferred compensation plan that was paying directors 10% interest until activist investor Joe Stilwell came along and shined a light on the scheme. Chevis is a third-generation Peoples bankster. I’ll make a prediction though. Stilwell will not give up. One of these years, he’ll either win his proxy fight and get board seats, or Chevis will give up and sell the bank like he should have done long ago.

One big piece of news for community banks was the U.S. Treasury’s Emergency Capital Investment Program (ECIP), which injected many community banks with non-cumulative perpetual preferred at very favorable rates. Many recipients (e.g., MFBP, CZBS) have seen their stock skyrocket amid investor enthusiasm. What do you make of the program? And are there any banks you see benefiting that the market hasn’t appreciated yet?

I love the benefits the ECIP program provides, especially in hindsight as rates have risen. The poster child for being first and doing it right is BankFirst Capital (OTC: BFCC — $225 million) in Columbus, Mississippi. I remember when the program was first announced. Luke and Moak were pinching themselves in disbelief. Not only did they vet it fast and take it early, but they bought a bank that also participated in ECIP, which may provide a double bang for their dollars depending on how the wind-down rules are interpreted.

One bank the market doesn’t seem to believe will be able to capitalize on ECIP is City First Bank in LA (NASDAQ: BYFC — $64 million). But I think CEO Brian Argrett is quite bright and has good plans to use the funds. Even if they were only to put the proceeds in short-term money markets the spread would add about a dime to earnings. Meanwhile, the bank’s holding company stock, Broadway Financial (BYFC) trades for 59% of book value. If they get lucky and are able to redeem the ECIP at the discount some think might be available, book value somewhere down the road could be a multiple of what it is now.

Another bank that ECIP is benefiting from and that I hate to even mention because of the really bad decisions they’ve made in the past and their horrible corporate governance is Merchants & Marine Bank (OTC: MNMB — $53 million) in Pascagoula, Mississippi. M&M has several directors and a CEO who don’t own a single share of stock. A couple of years ago, they paid a premium to buy a castoff branch in another state instead of investing in their own stock that was trading for 58% of book value. Only a CEO with no stock would even try this and only a bank board with directors who own no stock would let him get away with it. Directors with no skin in the game don’t care nearly as much as directors who are meaningful owners. Actually, that’s not quite true. Jim House at First USA Bank (NASDAQ: FUSB — $57 million) did a similar thing, and he does own some stock, so you’d think he might make a better decision, but he didn’t, and his board didn’t stop him.

Who are some of the community bank CEOs you admire most? And why?

Since I’ve already plugged the banks run by Tom Stumb, Eric Sprink, Steve Miller, and Glenn Marshall, I’ll start by acknowledging a great banker we lost, John Luchessi from Chico, California. Luchessi built a great bank, sold it, tried to retire, and then built another and better one down the street, Northern California National Bank (NCNB), which was sold a couple of years ago after John had passed away.

There are a number of retired bankers whose careers I admire, because they were old-fashioned bankers who started from humble beginnings, knew how to take care of their customers, and preached common sense — Bankers like Daniel Blanton at Georgia Bank & Trust (SBFC) and Pat Frawley, who fixed Community Bank of Blountsville (COMB) in Alabama after was looted by the prior CEO and was at the brink of seizure. Frawley followed up by building Community & Southern Bank after the Great Recession.

Another banker I admire is Leonard Moreland, who just sold Heritage Bank (HSBI) to The First Bank (NASDAQ: FBMS — $995 million). Moreland literally dug Heritage out of the ditch after the Great Recession, which caused every other bank in the area’s market to fail. Along the way, Moreland helped to save the businesses of a great many customers by helping them restructure burdensome loans. Those customers will never leave.

Some bankers I admire at the helm of banks whose stocks I’d buy today are all careful, calculated bankers building lasting and valuable banks that are very attractive acquisition candidates. Not that I think any of them should or will sell their banks. They all also have most of their net worth invested in their bank’s stock. In this list, I count four people: