The First (NASDAQ:FBMS), Provident Financial Services (NYSE:PFS) and Lakeland Bancorp (NASDAQ:LBAI) are top portfolio picks from Anton V. Schutz, President and Chief Investment Officer at Mendon Capital Advisors.
He is also the Portfolio Manager of RMB Mendon Financial Services Fund.
He founded Mendon Capital in 1996 with a long/short and event-driven investment strategy focused exclusively on the financial services sector.
Previously, he worked at RBC Dain Rauscher with an institutional sales trading role in the financial institutions group.
He also spent 10 years at Chase Manhattan Bank, where he structured investment products utilizing hedge funds and also developed and applied financial risk strategies.
He has been interviewed by CNBC, Bloomberg, The Wall Street Journal, Barron’s, The New York Times, Financial Times, Business Week, Investors’ Business Daily, Smart Money and others.
He graduated from Franklin and Marshall College and received an MBA from Fordham University.
In this 3,472 word interview, exclusively in the Wall Street Transcript, Mr. Schutz recommends The First (NASDAQ:FBMS), Provident Financial Services (NYSE:PFS) and Lakeland Bancorp (NASDAQ:LBAI) and some other small regional banks that investors should consider in the midst of the current crisis.
“When we talk about optionality, there’s a bank called The First (NASDAQ:FBMS). They’re headquartered in Mississippi. They’ve been a very acquisitive company through the years.
The latest acquisition, which is pending, actually puts the pro forma company 30% in Florida and 30% in Georgia.
It’s a management team that has created a lot of value and owns a fair bit of stock. They actually have the ability to benefit should they ever decide to sell that company.
Now that company is very attractive to others, particularly the Georgia and Florida piece, the deposits in Mississippi, and has a loan-deposit ratio in the 60s.
And what matters there — those deposits are what’s really valuable. The cost of funds is very, very important to banks. And when you have lots of deposits, excess deposits, you get to match those off against long growth.
And as The First (NASDAQ:FBMS) grows in places like Georgia and Florida that are faster growing, you actually get to improve your earnings because typically the yield on loans is better than that on securities.
So the company has got upside.
They’ve got management that cares.
They’ve got a great geography.
And they have that optionality they talk about, which is they’ve done a great job, they’ve built value, they can continue to build value, or someone else can go, “You know what? This is an $8 billion bank in great markets. I would really love to own that bank.” It’s certainly one of the fund’s bigger positions.”
The regional bank picks are transaction oriented organizations.
“A big fan of self-help stories and I think I mentioned before, you get paid to wait sometimes when you have a high dividend. So Provident Financial Services (NYSE:PFS) is in the middle of closing a merger also. Funny there’s a theme there. They’re buying a company called Lakeland Financial (NASDAQ:LBAI).
Management knows each other well at the two banks. In fact, they worked together at a bank many years ago. They’ve got some good overlapping geography. This is a management team I’ve known very, very well from the chairman on down for several decades.
And they are a conservative bunch. Their cost savings projections, I think, are conservative. You got close to a 5% dividend while you’re waiting for them to show and get the deal approved and start getting the cost cuts in place.
When I look at where this company trades, it’s probably about seven times 2024 earnings. And I think they’ll eventually — beyond the dividend — I think eventually they’ll also turn to buying back stock.
Both companies have had some of that in their history.
So, again, banking on a management team that I’ve got a lot of history with, has a lot of skin in the game and the word “self-help” matters, because you can go out and buy an index of regional bank stocks, and there’s good companies and bad companies and undervalued and overvalued, but a company that actually can differentiate itself in the middle of that index, I think, is really important.
Let me also go back to the word “index,” or ETF. There’ll be a lot of buying interest in this company. Assuming this deal closes, the ETFs are going to have to increase their weighting because their target Lakeland is not in all the same ETFs that PFS is in.
So, lots of buying interest should happen. Actually, some of the estimates I’ve seen are over 20 days of buy interest of PFS when this deal closes.”
The First (NASDAQ:FBMS), Provident Financial Services (NYSE:PFS) and Lakeland Bancorp (NASDAQ:LBAI) are not the only banks on the radar at Mendon Capital. More bank picks from Anton Schutz range into Kansas:
“Happy to talk about Nicolet Bank (NYSE:NIC) up in Wisconsin.
They’ve been a proven acquirer. Very conservative management basically founded the bank.
And every deal they’ve done has been nicely accretive and very good at executing on closing transactions. They’re digesting what they have today.
But this is over a $1 billion market cap — a bank that a lot of people never heard of, that is really doing a nice job.
They don’t pay a dividend yet. We’ll see if they do down the road. They’ve historically also bought back stock at times.
But I think that this company has built a tremendous amount of value coming out of nowhere. And I think they’re going to have a lot of small banks over the next few years to buy again to help create value.
Their footprint stretches from Michigan all the way over into Minnesota.
And there may be lots of small banks that will raise their hands.
And the reason some small banks may raise their hands to try to sell themselves are multiple factors.
One that’s always been out there is age. Another one has been cost of deposits. Rates have been rising. They may not have loans offsetting that and may be tough to earn money.”
Technology is a necessity at the acquisitive banks such as The First (NASDAQ:FBMS), Provident Financial Services (NYSE:PFS) and Lakeland Bancorp (NASDAQ:LBAI).
“I think a more and more important factor that we wrote about in our last interview is technology.
Banks need to invest in technology one way or another.
If you’re a really, really large bank, you’re investing tens of billions of dollars and a lot of that goes to maintaining your old systems.
And if you’re a smaller bank, you have a chance to actually be a little bit more nimble and take advantage of some of the best providers that are out there.
But if you’re really small, you may not have the expertise or talent or the money to invest in improving your technology.
And what’s happened since the whole COVID crisis is people have changed their banking habits.
They’ve gone much more online, much more digital, and having that right type of product is really critical to their success.
A lot of smaller companies just can’t afford to either have the time, knowledge or money to invest in improving their technology stack.”
Read the entire interview to find out why The First (NASDAQ:FBMS), Provident Financial Services (NYSE:PFS) and Lakeland Bancorp (NASDAQ:LBAI) are top portfolio picks from veteran bank investor Anton V. Schutz, President and Chief Investment Officer at Mendon Capital Advisors.
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