Richard Lashley, “A Shareholder’s Perspective on Bank Stocks”

By Travis Johnson, Stock Gumshoe, April 3, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Richard Lashley at PL Capital has been involved in proxy contests and shareholder activism with small banks around the country for about 18 years. Chris Mayer talked about him a bit a year or two ago when he was talking up some banks that were doing thrift conversions, which has been a big focus of Mayer’s for a few years too.

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His thesis: the post financial crisis recovery period, still ongoing, will be among the three best periods to invest in bank stocks in the past 30 years.

And there will be an M&A boom in small banks that will last for another 3-5 years.

The banking industry has had three crises — S&L in 1989-90, LTCM in 1998-2000, and the 2007-09 financial crisis. This last one was much worse at an 82% collapse, worse even than the 49% of the S&L crisis — downturns are sharp and short but recoveries are long … and the banks went sideways for a couple years, so the recovery is barely underway.

Bank failures during the crisis were much less bad than teh S&L crisis failures. Fundamentals like ROE, ROA, NPA percentage are back to where we were pre-crisis on most metrics. Mid cap and small cap banks ($500 million to $5 billion) are not quite back to historical average price/tangible book metrics … we wont’ get back to 2.5X book value like during the peak, but we should go substantially higher.

Small banks and huge banks are both cheaper than the midcap ($1-5 billion) banks. They invest in the small banks and try to sell them to the big banks that trade at premium valuations. The number of US banks has been declining for 30 years, at least one merger per day for 30 years and there are still 6,800 banks in the country (18,000 in the 1980s). Bank M&A will keep happening, and bank stock investors will make money as it does.

Both buyers and sellers in bank M&A are going up.

“Secret formula” — most banks sell for 10X what their earnings will be after cost savings.

His ideas: Tarp Warrants and a few small banks.

If you believe in the big banks, which dominate the business ...

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