Wednesday, March 6, 2024

BankFinancial: Shareholder Discontent, Activist Added to Board

BankFinancial (BFIN) is a small ($1.5B assets, $125MM market cap) community bank with 18 branches scattered across the Chicago suburbs.  It was a mutual holding company conversion way back in 2004, unlike many former mutual conversions, BankFinancial is primarily a commercial bank with big chunks of their loan portfolio in Class B/C suburban multi-family properties, commercial working capital lines and equipment leases.  Their deposit costs are surprisingly low at just 1.26% (Q4), over a full percentage point below the average bank, despite the strong deposit franchise, the bank struggles to turn a profit with an ROE in the 5%-7% range due to a high expense base.  The stock trades for a hair under $10/share with a book value of $12.45/share (not mark-to-marking their loan portfolio, all of their securities portfolio is AFS), admittedly not the cheapest community bank.

With regional bank tremors popping up again, BankFinancial doesn't have the same problems plaguing others.  The bank doesn't lend to high rises or do significant construction lending, there's minimal office exposure, multi-family is in Class B/C which isn't as susceptible to overbuilding and they have a strong diverse deposit base.  What they do have is an entrenched CEO, Morgan Gasior has been the CEO since the mutual conversion, and remarkably, at the age of 60, has served as a director at Bank Financial since 1983.


Not entirely sure how that's possible, would have made him 19 at the time, in 1988 he became EVP/COO at 24, BankFinancial is Morgan Gasior and Morgan Gasior is BankFinancial.  I'm guessing there's some nepotism involved, but going back to the original conversion docs, couldn't find any previous relationship ties.  I would be curious to hear the origin story.  Despite being a bank executive for nearly 40 years, he only owns 2.5% of the shares yet collect $600+k in annual compensation.

This story isn't too uncommon in the community bank world, but what caught my attention (in addition to this being a local bank for me) was the Q4 earnings call which quickly went off the rails (courtesy of BamSEC):

Operator

And our next question will come from the line of [ Stephen Buckman ] from [ Buckman ] Capital.

Unknown Analyst

I have been a shareholder that took part in the conversion 18, 19 years ago. And I have a more holistic question as well. And that is what is the role of the Board of Directors? And I'm going to refer you to a conference call comment you made on May 2, 2022. And what you said, I'm quoting, is, "Well, first of all, I think we're in a position now where our goal for the third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So I'm going to try to hit that $1 per share in our third quarter and fourth quarter." This is 2022. And then beginning next year, the goal would shift to getting into the $0.30s or somewhere between $0.30 and $0.34. I could go on, but the fact is, 18 years later, the only guy who's made out here is you. Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the Board of Directors in terms of your underperformance during this time?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

No, this is the investor conference call. We're here to discuss earnings.

Unknown Analyst

I'm quoting you directly from May 2, 2022 [indiscernible] take a look at the conference call.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I'll just say that, if you want to discuss this offline, we're happy to.

Unknown Analyst

No. No. I'd rather this be in a public forum.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, we're going to leave it there. I don't think that this is -- that's the right forum for this. If you want to...

Unknown Analyst

Well, your underperformance for 19 years is a matter of public record. And so do you want to address it publicly or do you want to pretend that it doesn't exist?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I think we're going to leave it where I said. This is the investor conference call. If you'd like to talk about it off-line, we're happy to do so. But I mean...

Unknown Analyst

And I find that your cowardice in addressing issues that affect all public shareholders is severely -- is staggering. I'll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic alternatives. I'll leave it at that.

And another one:

Unknown Analyst

Morgan, this is [ Charles Winnik ]. On February 5, 2013, you were asked questions on your last call, you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you. Well, I definitely can't disagree with your assessment, especially considering the performance over the last few years. I don't really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved, your full earnings capacity still generates returns much less than your cost of capital, which, in effect, destroys shareholder value. Your efficiency ratio is just too high. And while loan growth is always right around the corner, you admit on every call that competition is intense, which I agree, which really just justifies the fragmented nature of the markets and need consolidation. And so, yes, we have improved outlook and hefty capital, but all negatives really speak for themselves.

So, my question really is -- you've got most of your credit issues behind you now. Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction?

And finally from Jason Stock, whose fund owns just under 10% of the shares:

Jason Stock

As you know, we've been long-term investors in BankFinancial, and we're generally not the type of investor who likes to be much of a nuisance. But as owners of over 9% of the company, I think it'd be probably irresponsible of me to not pipe in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity.

Then a week after, Ben Mackovak of Strategic Value Bank Investors, a fund that specializes in community banks was added to the board after accumulating a 5.2% position.  From the 13D filing:

The Reporting Persons acquired the Common Stock reported on this Schedule 13D for investment purposes. The Reporting Persons purchased the shares based on the belief that the shares, at the time of purchase, were undervalued and represented an attractive investment opportunity. The Reporting Persons believe significant opportunity exists to enhance shareholder value by simplifying the business, improving operations, resolving certain non-performing loans, and evaluating strategic alternatives.

Mackovak follows a similar strategy of other community bank activists, he's on the board of some 10 small banks, pushes them to make operational changes, if that doesn't improve the multiple, then pushes for an M&A transaction to unlock value.  He recently went on Meb Faber's podcast and sounds like a smart, sober, capable board member that could crack the BFIN nut.  I don't anticipate an immediate M&A deal here (they have $52.8MM of mark-to-market losses on the loan portfolio an acquirer would need to realize), the bank does have some shorter duration loans that are coming off the books this year that they can put to work at higher rates improving profitability, but the pressure is on as a high expense base is much easier to fix (by selling out) than a flightly deposit base, long duration securities portfolio or credit issues, none of which really apply to BFIN.

Disclosure: I own shares of BFIN 

25 comments:

  1. I remember hearing about that crazy earnings call on X

    ReplyDelete
  2. It's so bad one has to wonder what kind of shareholder hangs around for 10+ years (19?!)...and are they capable of pushing for change with a very entrenched CEO. Hopefully Strategic Value brings more urgency and is willing to go through w proxy.

    Related: https://www.timyanbankalert.com/2023/12/bankfinancial-burr-ridge-il-bfin.html

    ReplyDelete
    Replies
    1. Thanks - I figured there's a long history of mismanagement. The branches appear pretty dingy from the outside, never see much action, but that's most bank branches these days.

      And I could see some original conversion shareholders hanging around, local business people that participated, etc., people that don't manage their investments to the same sense that readers of this blog probably do.

      Delete
  3. One I had been buying was GBNY (at much lower prices, as a caveat). Mutual conversion with 3 year period up now. The longtime CEO died unexpectedly last year. Lots of familiar activists in the name.

    ReplyDelete
  4. Very interesting!

    Another name that has probably been mentioned here--I'm behind on everything, everywhere--is MRDB. A nonbinding offer on the table at .55 (currently .34ish) through month end, and many squabbles. Apparently a they offer a good product, but the company's balance sheet is a mess and it could well be a zero. Good summary of the situation here (if you don't already know):

    https://tech.eu/2024/02/23/mariadb-s-financial-rollercoaster-the-plot-thickens/

    ReplyDelete
    Replies
    1. Thanks, appreciate the idea, I'll take a look.

      Delete
    2. A third bidder has entered the mix, at 60 cents/share. Still all very conditional and combative, but at least very validates the value of the product, if not leadership or cap structure. I wouldn't be surprised to be surprised to see this go for a dollar, or go bankrupt, in the next 2 months.

      Delete
    3. Sounds like resolution reasonably imminent. Negotiations ongoing between K1 and MRDB with a bid due/drop-dead date of April 12 (unless extended), and 2 competing non-definitive bids, including one at 60 cents/share. Still plenty of chance for this to go to zero, but risk/reward maybe compelling.

      Delete
    4. Very interesting situation indeed. The shareholders who were against the K1 bid (Runa) are a related party of RP ventures, who provided the loan to MRDB. On 20/2 they entered in an agreement with Michael Widenius stating that he will leave the company if they don’t transact with Runa (and gets equity in any Runa deal). Widenius is the guy who wrote MySQL, sold it to Sun and subsequently developed MariaDB as an opensource project. He’s the big swinging dick here, like Linus Torvalds with Linux. If the big boss of the open source project isn’t supporting the company that wants to make a profit from said open source project, well, they’re fucked. I think that’s why shares are trading at such a big spread. I think all these external offers are basically long shots because the founders, large shareholders AND debt providers want to take this private themselves. I’m sure there will be a resolution soon, I’m just not sure it will be a good one for outside shareholders. These guys could theoretically play hardball and/or pick up the pieces in a bankruptcy.

      On the other hand, these bids do apply some pressure and perhaps the easiest way to take this private and avoid a costly bankruptcy process is just to offer outside shareholders a similar deal.

      Intriguing, but I’m just not quite convinced.

      Delete
  5. A couple questions:

    1. Where do you screen for these "special situation" types of ideas? Do you go through company by company or do you have a spot where you can screen though strategic alternative announcements, board members being added with M&A experience etc.?

    2. Do you have a estimated timetable that would produce an attractive IRR? Interest rates seem poised to be lowered a bit this year since inflation in heading lower, so it will reverse some of the M-to-M losses on securities/loans. As you mentioned, it is not the cheapest community bank at ~.8x BV not including the unrealized losses. Do you feel this discount provides enough room for an attractive return if this process starts to drag if rates aren't reduced fast enough or if they go the other route and manage their lofty fixed expenses better?

    ReplyDelete
    Replies
    1. 1) It's a combination of all of the above. BamSEC has a nice search tool, its a good place to start, each morning I search for a few key terms or types of filings that interest me.

      2) I'm going into BFIN with a 12-18 month time horizon, I think something can happen within that timeframe. As I mentioned, this is a local bank for me, I've followed it for a bit here and there, feel more comfortable jumping in (probably some local market bias), there might be banks in your area with similar characteristics/situations. I think as the rate curve normalizes a bit there's going to be a wave of bank consolidation. Could be a good "basket" type trade.

      Delete
  6. Have you looked at any of the ECIP banks (e.g. CZBS)?

    ReplyDelete
    Replies
    1. I find the pitch fairly convincing, but maybe I'm missing something. Obviously the prices on many of these have risen significantly since people first started talking about them.

      Delete
    2. Here is the backstory of how Frank Morgan Gasior became a bank director at 19 and CEO at 24. Daddy named him.

      https://www.chicagotribune.com/1989/11/12/frank-w-gasior-founded-olympia-fields-bank/

      Delete
    3. Thanks! I figured. Good find.

      Delete
  7. Just curious, How hard is it to get Gasior removed?

    ReplyDelete
    Replies
    1. He doesn't own a lot of stock, so technically probably not hard, but I'm guessing he's pretty entrenched and might be hard to get sleepy retail/local investors to vote him out.

      Delete
  8. Any interest in Ottawa Bancorp (OTTW) at all? It has a similar setup to BFIN but is a bit cheaper on a TBV ex loans marked-to-market. It currently trades a bit under .8x TBV (loans not marked-to-market, all securities are AFS). They are currently ~3 years past the lockout for thrift conversions i think mostly due to COVID happening right around their 3 year anniversary. Earnings have fallen a bit dramatically in the most recent quarter due to taking on more Fed Funds for extra liquidity. Most recent quarter EPS was .08 and full year was around .66 on an $11 stock price. A couple days ago, Stilwell Group (who owns ~13% of shares) and the bank reached a standstill agreement in which they added a director to the board from Stilwell. One of the provisions was that the company must purchase at least 5% of shares each fiscal year until year end 2026 or the bank must meet with an investment banker to explore strategic alternatives. Pretty interesting

    ReplyDelete
    Replies
    1. Thanks, appreciate the idea. I might be building a little basket of banks, think the 3-year post conversions are an interesting category, especially in this environment.

      Delete
    2. WMPN worth a closer look. Alot of buybacks. Will be over it's 3 year second step thrift conversion this month making it acquirable.

      Delete
  9. Shareholder proposal in the proxy, board is recommending against it:

    Stockholder Proposal

    RESOLVED, that the Stockholders of BankFinancial Corp. recommend that the Board of Directors immediately engage an investment banking firm experienced in community bank mergers and acquisitions to guide the Company in promptly taking steps to merge or sell BankFinancial on terms that will maximize stockholder value.

    Supporting Statement

    BankFinancial is a small institution competing for customers and talented employees in a rapidly changing industry requiring size and scale for efficient profitably. Since completion in June 2005 of its conversion to public ownership, BankFinancial has failed to earn a satisfactory return on stockholders' invested capital. I think it unlikely BankFinancial stockholders will receive an acceptable return on their investment in the foreseeable future through the Company's continued independent operation. In contrast, the sale or merger of the Company with a larger financial institution likely will provide stockholders a substantial premium over present market value. BankFinancial should take advantage of the rapid consolidation in the banking industry by selling or merging the Company.

    BankFinancial's Book Value per Share declined from $13.16, on June 30, 2005, first report after the IPO, to $12.00 on March 31, 2023. Much of the decline the book value (BV) is due to the Company purchasing its shares at large premiums to BV, including from an activist investor at approximately $15.00 per Share. Poor acquisitions and a bloated expense base have also contributed.

    BankFinancial's earnings have improved recently but remain well below a satisfactory return commensurate with the risk of stockholders' invested equity capital. The Company historically has earned far less than its cost of capital. Risk-free investment returns of over 5% per annum now are available on certificates of deposit.

    BankFinancial's disappointing performance is evidenced in the price of its stock. The Company's shares closed at $8.58 on July 20, 2023 (the day on which this Stockholder Proposal was submitted to the Company), a little over half of what it traded for on day one following the June 2005 IPO.

    The Company's unsatisfactory financial performance is especially distressing in the context of the risks associated with an equity investment in BankFinancial. These risks include volatile interest rates, changing real estate values, expensive compliance with regulations and laws, technology developments, expensive cyber security, and intense competition from traditional and non-traditional financial institutions. Many non-traditional competitors enjoy advantages of less regulation and lower tax burdens than BankFinancial.

    Banks similar to BankFinancial have merged with larger financial institutions, and stockholders of the acquired banks have received significant premiums over the pre-merger market price of their shares. Cost efficiencies associated with scalable technology reward larger institutions disproportionately, incenting banks to grow larger, faster.

    The greatest long-term value for BankFinancial stockholders will be realized through the prompt sale or merger of the Company.

    ReplyDelete
    Replies
    1. What comes after this? Since the activist was added to the board, are we waiting for now to see if they can generate any better operational efficiency before truly looking at a sale? As mentioned in a previous comment, mark-to-market losses would probably put a cap on M&A in the near-term as these begin to roll off the balance sheet/interest rates start to decrease. Catalyst for change was the addition of the activist to the board, how long do we give them to create this change?

      Delete
    2. I'm willing to give it some time, in my head, 12-18 months. One of my tenants in investing is these changes take a little longer than investors think, hopefully the above shareholder proposal gets some votes, even if it doesn't pass, could push for some change.

      Delete