1 Banking in the Current EraJonathan Holtaway – President Kristyna Nepivodova – Senior Associate 8229 Boone Blvd., Suite 305, Vienna, VA (703)
2 Jefferson vs. trump
3 Themes Political change and its impact on markets.Probability and “most likely scenarios”. Distinguishing known from uncertainty in decision making. Strategy and the opportunity today.
4 Banks vs the Market Total Return 2010 to currentTrump Rally Current – would have to change title to Current
5 Bank Valuations Unexpected Trump CardInterest rates have moved up and look poised for more. (Most estimates are 2 increases for 2017 and 2 for 2018) Corporate tax reform is particularly potent for banks. Infrastructure investment may promote above average growth. A new regulatory tenor creates an optimistic outlook.
6 As you Listen to our Presentation Keep in mind the following:We are not professional, or even amateur, economists. We are not bankers. We are professional bank investors with more than 30 years investing experience. Our focus today is on the major policies and programs that have been publicly promoted by the President and the Republican Party, the history of bank performance and the investment process.
7 Community Banks* Over 27 Years Return on Assets (“ROA”)*All commercial banks with $100 million to $500 million assets nationwide - median ROA.
8 Trumped up possibilitiesDone well, tax reform would confer lasting benefits, as would a thoughtful and carefully designed program of infrastructure investment and deregulation. But if such programs are poorly executed, there is the risk of a sugar-rush as capital chases opportunities that do little to enhance the productive potential… Economist Jan ‘17 TRUMP Republican Congress Anti-NATO and EU Maintain Voter Base Wall-Tariff-Deport Pro Israel, Anti-Foreign Oil Jobs and Growth Cut Deficit Attract Minority Votes Anti-Russia, Pro EU Pro Trade Maintain Majority Tax Reform Immigration Health Care Infrastructure Regulation
9 Key Questions for Trump TimeIs there a possibility of recession (next 18 months)? Will there be tax reform? Can Trump’s administration help the middle class? Will there be significant inflation? Will a wild card ruin the best laid plans? Not Your Average Republican Volatility, uncertainty and unpredictability Dislikes regulators and regulations Hates paying taxes Is not bound by tradition Is not bound by agreements Wants America first in all relationships
10 US Federal Government Receipts, Outlays and DeficitCAGR Since 2000: Outlays 5% Receipts 3%
11 Federal Budget – 2000 to 2016 Expenditures – Key CategoriesCAGR 5.2% CAGR 4.5% CAGR 7.2% CAGR 4.7% CAGR 0.5%
12 Tax reform substituting certainty for probabilityA Bill Will Pass Bank Taxes Decrease 10% 90% Interest Rates Increase Offset Taxes For Banks or Capital Ratio Increases Economy Stimulated Real Estate & Fixed Income Declines Probability Winners & Losers
13 Dec 31, 2004 – To Current S&P 500 vs Nasdaq Bank Index (Total Return)
14 Community Banks* Over 27 Years Loans to Assets (%)*All commercial banks with $100 million to $500 million assets nationwide – median Loan to Assets.
15 Select US MACrO VariablesFed 10 Year Euro/ Yen/ Real GDP CPI Funds Treasury Dollar Growth Inflation (Yield) (Exchange Rate) (Percent Change) 2017* 1.00 2.25 0.89 112 0.7 0.6 2016 .75 2.38 0.95 117 1.6 2.1 2015 .50 1.93 0.92 120 2.6 0.1 2014 .25 1.67 0.83 2.4 2013 2.67 0.73 105 1.7 1.5 2012 1.99 0.76 87 2.2 2011 1.80 0.77 77 3.2 2010 3.38 0.75 81 2.5 2009 3.61 0.70 93 (2.8) (.4) 2008 2.84 0.72 91 (.3) 3.8 2007 4.25 3.64 0.68 1.8 2.9 2006 5.25 4.83 119 2.7 2005 4.53 0.84 118 3.3 3.4 2004 4.13 0.66 2003 4.14 0.80 107 2.8 2.3 *Note: Financial Markets data as of May 25; CPI as of April 30; and GDP 1st Quarter.
16 https://www.nerdwallet.com/blog/finance/why-people-are-angry/
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18 Impact of a stagnant middleGDP growth stuck at 2% for years. Inflation remains in check in spite of massive financial stimulation. Rich and poor do not change consumption levels, but middle class consuming behavior very tied to shifts in income and wealth.
19 Community Banks* Over 27 Years Net Interest Margin (“NIM”)*All commercial banks with $100 million to $500 million assets nationwide – median NIM.
20 Community Banks* Over 27 Years Return on Equity (“ROE”) and Leverage RatioTax and Capital Adjusted* ROE 12.67% *All commercial banks with $100 million to $500 million assets nationwide - median ROE and median Leverage Ratio. **If corporate tax rate moves to 20% and leverage ratio allowed to fall to 9%.
21 Community Banks* Over 27 Years Efficiency Ratio (%)*All commercial banks with $100 million to $500 million assets nationwide – median Efficiency Ratio.
22 Road Signs To the FutureBOFI – Efficiency Ratio of 36%. BAC – Closed or sold1,600 branches in last five years. SBNY – Grown organically from $4 billion to $40 billion assets since 2005, Efficiency Ratio 31%. The technology to serve clients by internet and mobile has been available for years. Adoption has been the key, and it is accelerating. Small banks have been forced to hunker down and limit growth, both because lending opportunities were scarce and regulators were imposing ever higher capital ratios. At the same time large banks, prodded by newly imposed liquidity ratios, have been aggressively gathering deposits. Given that deposit customers may be just as likely in the virtual world to be very sticky customers, deposit victories today might last decades. In all industries there are inflection points where things start to move in a new direction. In banking we had one seven years ago, when interest rates crashed and stayed historically low. Those that saw the extended benign rate environment knew that the ability to generate productive assets would separate those that did well and those that did not. Many have assumed rising rates would be the new inflection point returning us to “normal”. Our belief is that the rate guessing game is a canard. Underneath a benign deposit cost environment, change has accelerated. In the next several years, rates may move up a little or a lot, but the deposit war and technology based efficiency will decide winners and losers.
23 Community Banks* Over 27 Years Full Time Employees (“FTE”) and Annual Average Cost per Employee*All commercial banks with $100 million to $500 million assets nationwide – median FTE and median Annualized Average Cost Per Employee.
24 Super Community Banks* Median Price To Tangible Book*Banks with assets between $5 billion and $20 billion on December 31, 2016, nationwide.
25 Community Banks* Over 27 Years Mergers Per year*All commercial banks with $100 million to $500 million assets nationwide – total merger deals.
26 Active Management Historic InsightInvestors who wish to play the timing game must possess an unusual degree of prescience about the course of the general economy, corporate profits, interest rates, and indeed the entire set of international economic, political, and social developments that affect the securities market. The existence of such omniscience, to say the least, is hard to document. (Burton Malkiel) While successful active management programs eventually create value, investors face the interim possibility of experiencing periods of underperformance. Many sensible investment strategies require time horizons of three to five years, introducing the likelihood that even ultimately correct decisions appear foolish in the short run. When market prices move against already established positions, investors with strong hands add to holdings, increasing the benefit from active management. (David Swensen) An investor who proposes to ignore market fluctuations… must not operate on so large a scale, if at all, with borrowed money.” (John Maynard Keynes)
27 Ategra’s Investment philosophyAtegra owns positions in financial institutions priced significantly below peer, yet when examined exhibit a limited downside, but an upside that is a multiple of the downside. Such opportunities exist because: The financial metrics are temporarily underperforming relative to peers. Earnings, asset quality and/or demographics are under pressure from poor macroeconomic trends. Lack of market liquidity and/or excessive investor selling is occurring during periods of panic leading often times to significant undervaluation. Ategra prefers institutions with high acquisition and/or indexing probability.
28 Publicly listed banks & Thrifts Finding valueTarget Peer Price To Tangible Universe Count Percent Book Over $100 Billion Assets 18 5 28% 121% 173% $10 to $100 Billion Assets 63 16 25% 134% 208% $1 to $10 Billion Assets 294 76 26% 126% 209% Under $1 Billion Assets** 383 74 19% 89% 139% *As of May 25, **Minimum market cap of $20 million.
29 Active Stewardship Serve as Board member. Make shareholder proposals.Push to list publicly. Recommend merger opportunities. Meet with management, board and other shareholders. Write policy letters to management and board.
30 Ategra’s view of downturnsOur strategy segregates three types of downturns: Corrections of 10% to 15%. Market level price correction for the sector or market as a whole. Reactions to special events, political, commodity, war etc. Generally viewed as creating better opportunity to buy. Sector bubbles. Oil, housing, tech are recent examples. Sector bubbles affect particular geographies and segments. Strategy is avoidance, followed by new opportunity for longs after bubble effects are priced. Bear Market Credit cycle is likely component along with a rapid rate movement. Build cash and short. Position for rebound with strong liquidity and buying power.
31 Summary Economy – will remain at 2% – 3% GDP growth, with no obvious solution to middle class problems. Corp Taxes – most likely will drop to 20%-25%, and will help the economy and create some jobs. Inflation – most likely above 2%, but still lowish. Interest Rates – short rates higher by 25 basis points every 6 months. Regulatory burden – should decrease. Trade – uncertainty. Infrastructure Projects – uncertainty. 31
32 Ategra Summary We invest in significantly undervalued financials.Our commitment is to limit the downside for our partners and provide above average returns. Qualified opportunities always present in good times and bad times, only the quantity varies. The frame of reference as to peer value is not static, it varies with the market and the specific sector. Uncertainty is mitigated through asset purchase price, continual evaluation of upside vs downside and active stewardship.