Street Talk | Episode 145: Bank stocks are divorced from fundamentals

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Nathan Stovall   00:00:00

Welcome to Sreetetalk, S&P Global Market Intelligence Podcast that offers listeners a deep dive into issues facing financial institutions and the investment community.

Nathan Stovall   00:00:15

I'm Nathan Stovall, -- and on this episode, we're talking about bank stock valuations, the investment community's view of fundamental performance and catalysts for the group, including the rebound in bank M&A activity. Joining me on the show are 2 members of Mending Capital, Anton Schutz, Sr. and Anton Schutz, Jr. Love the father of Sun Duo. Thanks for coming on the show.

Anton Schutz, Sr.   00:00:41

It's our pleasure.

Nathan Stovall   00:00:42

So let's start off talking about valuations. And we ran into each other not too long ago at a conference, and it feels like folks who've paid attention to the group for a long time like yourself are a little bit frustrated. And one of my takeaways was we feel like performance is pretty good, but that maybe fundamentals are divorced from valuations. What's your view of that? Are you in that camp as well?

Anton Schutz, Sr.   00:01:11

Yes. I mean, look, at the end of the day, valuations matter, but you can't hang your hat on a valuation. You can hang your hat on a catalyst. And I think that we're now in a catalyst-driven environment where M&A is the major catalyst. Deregulation is certainly another incredibly major catalyst. And potentially even yesterday's rally was partially, I think, driven by deregulation of people piling in bank stocks. So at the end of the day, we have really cheap valuations and catalysts happening, right? They're not just coming and that's not a promise. It's actually happening. And it's the first time it's really picked up steam in terms of the M&A cycle in quite some time.

Nathan Stovall   00:01:51

Yes. It's been a few years really since we've seen it. And now we're seeing -- we had hope coming into this year and then a little pause in the spring with Liberation Day and now some real green shoots and some real transactions starting to hit the tape as we're heading into the holiday season here.

Anton Schutz, Sr.   00:02:10

That's absolutely right. Anton Jr why don't you talk a little bit about valuation and the type of numbers you've seen versus S&P and historical levels.

Anton Schutz, Jr.   00:02:19

Yes. I mean that's really what I focus on a lot right now and the kind of disconnect between the S&P 500 PE multiples versus the KRX. I think we're sitting at about a 10-year relative low on PE. I think the KRX is about 46%. I think that checked a few days ago, 46% of the S&P 500 PE multiple, which once again is at a 10-year low. So even bank stocks feel cheap, they feel cheap relative to the S&P. It's hard when so much of the weighting is in a few big tech stocks in the S&P that are obviously driving a lot of that PE multiple. But yes, it's been low for a long time. I think 2016 was about 100% or maybe we're slightly above the S&P on a relative PE basis. And I think we got up to about 110% and now we're at 45%. Considering all the tailwinds, M&A, deregulation and just a cheap multiple, it feels like it shouldn't be there.

Anton Schutz, Sr.   00:03:22

Yes. Let's not forget the Fed. I mean the Fed is another catalyst here, right? I mean banks really had a hard time making money in a 0 interest rate environment, right? We're not in that 0 interest rate environment. We're also not in a highly restrictive environment anymore, right? They're finally not going to keep shrinking the balance sheet, competing for deposits. We expect another cut probably in a few weeks. And I expect more cuts in a more dovish Fed. Now we always got to be careful what we wish for. To some extent, having the inflation hawks out there is actually not a bad thing, right? People are worried about inflation because we even get a steeper yield curve. And I think you get the back book repricing on fixed rate loans and you get cost of funds coming down. I think earnings estimates are actually too low for next year. given those catalysts. And then, of course, the really great catalyst for community banks that nobody's got in their numbers is if the housing market really takes off again, i.e., mortgage, mortgage is a really important part of earnings for a lot of community banks.

Nathan Stovall   00:04:26

And we really have any tailwind there with 7% mortgage rates. And if we're starting to get some easing there and to your point, we don't want 0 rates, can't make any spread, having some level of normal rates, which kind of feels like we're settling in, that's kind of like the Goldilocks place for a spread-based business, it feels like. One of the things you guys talked about, too, is just really the group being so under-owned by the generalist community. And I want to get into what brings them back. But one of the things that they seem fixated on and heading into this quarter was just fear of credit. And broadly, we saw nothing. We saw a small increase in whether it was nonaccruals, delinquencies or charge-offs, de minimis, flat reserves. But you had a few one-offs over loans to NDFIs that got a lot of attention, hit the group and then we kind of recovered. What do you think about those cases? How do you think about credit broadly?

Anton Schutz, Sr.   00:05:29

Yes. I mean, look, at the end of the day, banks are supposed to lose money occasionally on a loan, right? It's part of it. It's why they make a spread. So I think we're kind of moving into a normal cycle. Obviously, the economy matters. And I think the economy is actually doing quite well in spite of all the negativity out there. The FedNow Atlanta GDP number looks pretty damn good, right? I mean that's a quick nice looking number in spite of all the negative things that are going out there. So cost of funds going down, right? That helps credit as rates come down. And I think you've got a pretty robust economy, a lot of foreign investment coming in the United States. So am I worried about credit? No. What I really like the media to do, and this is not you because you actually understand this business, is to bring back the guy who said 2,000 banks are going to fail on commercial real estate. Bring them back on TV. ask them why he's wrong. Look, I hadn't heard from CNBC and forever because they don't like me being a bow. They call me twice. They want me on twice during when the credit meltdown happened. I declined. because you know what, I'm just not going to feed into their soundbites. Fox has been fine. They've given me a podium and a chance to talk about these things. But look, at the end of the day, it really matters that this industry is very sound. And I've worried about private credit for a long time, right? It's just -- you watch these -- the KKRs, the Apollos, all these guys, these stocks are soaring and they're printing new business, and I'm just keep going, oh, boy. Because look, at the end of the day, what this stuff is doing is it's adverse selection, right? Less covenants, higher interest rates. This is stuff banks don't really want to lend to. And this NDFI stuff, too, the media is sitting there, again, not you, you understand this. Mortgage warehouse is an NDFI, but it is not a problem NDFI. So the real number, especially if you bring it down the community bank numbers is incredibly muscule and not a worry for this space. And look, that's where we always spend a lot of time. I mean when we had COVID happened, you're looking for loan losses and you're trying to figure out where is the real risk and the community banks didn't have it. The bigger banks had it, right? I mean you had loans to giant convention hotels that weren't going to have any business. Those are going to be in trouble. The roadside hotels and hotels were not. I mean, again, the smaller banks did not have potential loss content then. And looking at it today in a healthy economy, we do not see loss content in prudent lending and the industry is doing it. I mean go back to financial crisis. right? What did we have? We had negative A mortgages. We had Pick-a-Pay mortgages. We had 125 piggyback home equity loans, right? We had all this stuff in a hot market. There were bad products that led to bad things. And the management teams that engaged in that, they're gone, right? They're not back. The guys who are running these banks today are making prudent decisions. I mean I can count on one hand, and I won't name them, but the management teams that are rushing into this thing headlong, taking on a lot of risk. It works in a strong economy. But the industry itself is very strong, and I think the procedures are very good. The regulators have actually been good. And again, when you talk about regulators, the nonregulated are what's doing silly stuff, and I worry the bank is going to have to pay for it.

Anton Schutz, Jr.   00:08:48

The only thing I'd add on to that is media plays an important role. And one of my fun stories I like to tell is I in the middle of the NDFI stuff, I had a friend text me to saying, "Hey, I'm really worried about regional banks. And I was like, what are you talking about? But that the media perception is just that it's like the world is ending. And I like to talk about this in meetings, I'm 31. I've been doing this since high school, I've been in the family business. I've never seen a credit cost in my entire career, right, since 2012, right? There might have been a little bit after that. But I've been looking for it for a while. So everyone is very jumpy around credit still just kind of -- but everyone is -- the entire industry generalists are kind of mean reversion, right? And what was the last event that happened in GFC. That's kind of what everyone goes back to, and obviously, it's a little different. What's unknown on the private credit side, and we've already seen with banks, right, is -- and there's obviously an ongoing joke in private credit like, oh, this is going to end well. Because at some point, those credit costs for that sector are going to come, but the question is, do banks get wrapped up in it again, right? The headlines of, oh, well, private credit is kind of turning over is that what's the bank exposure, right? So what that should do is say, hey, banks are actually sound, safe and sound lending into this and private credit is maybe not or parts of private credit maybe not. What the ultimate fallout from private credit actually turning over is still unknown, but...

Anton Schutz, Sr.   00:10:10

Well, you certainly get better spreads for banks to lend. There's no doubt about that, right? The pressure on spreads is not here right now. I think the really misunderstood trade on banks, right? We've seen all sorts of crazy stuff going on with AI, right? That AI trade, banks are one of the biggest beneficiaries of AI. And the cost structure, not the revenue side, right? I'm going to put the revenue side aside and talk about the cost structure. The cost structure can go down substantially -- anybody who touches a piece of paper, I mean, you may not be needing them. And I think that the flow of money, the flow of payments is also going to be real. And we can go there next. But certainly, on the operations side, it's real. JPMorgan used to have 1,000 programmers working on Cobalt. Well, AI rewrote the programs, right? I mean it's just pretty powerful on what AI can do. And I think the cores have got to get involved, too, right? The banks have this love-hate relationship with the cores, but they've got to get involved in helping reduce costs. I think potentially AI could actually take away the need for a core. I mean that's the real potential here. It's deep, it's big, and it's cost cutting. It's not revenue generating. I think those where people are missing it.

Nathan Stovall   00:11:33

Right. And allow you just continue to grow maybe off of the same base. And the folks that I've heard on early adopters on some of the technology, definitely talk about it that way. And I definitely do want to go there. But just put a bow on that credit discussion. I mean, I totally agree with your skepticism. And one of the things that I've been saying is it might not be broad-based problems out there. There might be some smart money, but some of it might be bad. But isn't this sort of what we wanted when we designed regulation post GFC. We were supposed to push risk out of the system. Isn't sort of this is how it's supposed to be working. And the point you made that I think is a good one is unlike other cycles, the banks will have dry powder to lean in. We will not have a delevering cycle with the banking system. They actually can regain share and maybe grow through a downturn because so many meetings I've been in the last 2 years is we're in our middle market business, we're losing business to private credit because they're easing on terms, they're easing on rate, and we don't want to do it. or it's business we didn't want in the first place. It might be a welcome correction to this group.

Anton Schutz, Sr.   00:12:47

Yes, absolutely. I mean BDCs, same thing, right? It's not called private credit, but it is same thing. You look at their performance and that performance is pretty bad. So again, the banking system looks really good. And I think we got some more relief yesterday from a capital perspective, which means there's a tremendous amount of dry powder in the industry. I mean, capital levels are probably close to twice where they were entering the GFC. Reserve ratios are certainly substantially higher and more prudent lending. So this is nothing like it, and I think the opportunity is real. I do think that the consolidation cycle is going to really turn some heads. I mean I look at a company like South State, right, that's built this really nice big middle market company -- and we're going to have South states being formed all over the place, companies of that size, right? I remember working with centers State go, this is a great little bank in Davenport, Florida that's doing a nice job. And now they're South State. And so I don't know who those guys are going to be, but I think we're going to have a whole bunch more of them. And then we're going to have them on the top, we're going to have some consolidation, right? Who's going to be gone in the top? I mean we know PNC and U.S. Bancorp have ambitions to be much bigger. Wells Fargo no longer has a cap, right? So...

Nathan Stovall   00:14:08

And they have room within the deposits. -- they can buy somebody pretty big actually.

Anton Schutz, Sr.   00:14:14

Absolutely. So I totally agree there. So I think we're going to see it all the way. And I think if you really go down to the tiny, to some extent, some of those logical buyers have gone. So there's less buyers for the tiny. And I think they've got to hopefully come to grips with the exchange ratio of what they're getting, right? They don't need 2x book. If they're getting somebody else's great currency and that stock trades at 1.2x or 1.3x book, great. You're getting a good piece of paper. It's about the exchange ratio. It's about the pay to trade. And I think smaller banks need to understand that. But again, you're going to see some banks come out of nowhere you're like, wait a second, what bank is this? How do they get to this size this quickly? And I also think you're going to have some of the really proven consolidors be able to do 2 or 3 deals a year. So Brad Elliott to Chris Holmes, people who are proven deal makers, regulators are going to go, let's go. Let's take some of these small guys out of here. It's no longer about job preservation. It's about can you actually manage some of these smaller companies out here. I think the technology is going to be a real challenge for the real small because you've got to invest in it. You've got to have your eyes open, you got to have the talent. And I think that's the real thing. It's not just dollars, it's actually people on your staff that can work on helping you develop a solid plan, right? There's lots of consultants, lots of people out there. I think that's why we formed the venture business, but they need all the help they can get. And whether it's dollars or just talent, they need both.

Nathan Stovall   00:15:47

And you've seen -- I mean, you've seen a Seacoast, you've seen a Glacier, you've seen a town, you've seen multiple serial acquirers. I mean even Huntington at the top end there. And regulators have supported and supported it with Swift approval, Swift closing. So clearly more there. Are you feeling like you're seeing that last point about focus on the exchange ratio are you feeling like you're seeing any change in tenor on the sell side and maybe sort of acceptance? Because I know we started off talking about valuations. Do you need valuations to go higher because people are still thinking about the sticker price. I mean I think the challenge is and how fast this could come, how suddenly you could find yourself being so much smaller than your competitors were yesterday. Is that -- that feels real. Is they're getting more acceptance there, you think, from management teams?

Anton Schutz, Sr.   00:16:41

I think there -- I think generally, the answer is yes. I think you see outliers like 2.4x in Colorado. And I know it was a unique franchise and all that, but everybody goes, "Oh, I want that." Well, you know what? I think that was an outlier. I think we're -- again, it's about what you're receiving in value. I think that matters. And I think if you've got a stock you're getting back, you go, wait a second, this is worth a lot more down the road, whether it's a double dip or just really cheap on earnings power, I think that's real. I think the other thing I've been talking to banks a great deal about is given the valuation, whether they're buyers or sellers, they all have pretty much too much capital right now. And you know what, here's a really important point. I think if you look at the players in this industry, people like Menden, people like Maltes, people like Jam, and I can't speak individually for any of them, but I feel collectively, they all manage less money than we used to. And I think that, that's -- there's just a slack in this industry of people who are specialists that will go, "Oh, this is cheap. Let me go buy more of it. Well, everything we own is cheap, right? So that's the real challenge. You bring an IPO and everybody goes, "Oh, how do I fund this? What do I sell? Again, so I believe the entire banking space needs to put its head down and actually buy some stock back. I mean some real stock. take its capital ratios down. If you can buy your stock at or below book, absolutely. If you can buy it at single-digit multiples, hell, yes, I mean, it's incredibly accretive to earnings. I just don't get when companies trade below book value, and they're going, "Oh, I can grow the loan portfolio. I literally said to a CFO recently, I said, "Yes, my son is laughing. I said to the CFO, I said, "Can you show me the math where the returns on that loan portfolio growth are better than you buying your own stock below tangible book value and 7x earnings. please. And he shakes his head and he goes, "No, I can't." -- and I said, then why aren't you at it, right? Why aren't you buying the heck out of your stock? And I think we got to take some of that slack out of the system. So I believe more and more banks are going to be doing it. People are frustrated. Boards are frustrated, right? I mean what does management have to do? I mean there's some very well-performing banks that still trade at, I think, silly multiples to their earnings growth, right, to their price to book and some actually appropriately because they just can't punch their way out of the paper bag and should raise their hand and say, it's time. Someone else, please buy me.

Anton Schutz, Jr.   00:19:19

I think boards are getting a little bit better with not moving away from that 2x book or that price they had in mind, maybe for a few reasons, like we saw a deal yesterday where a bank went under tangible book, right, with Fulton and Blue Foundry. But I think investment bankers are probably pitching get well the get is good. right? In the last 3 years, we've had 3 crises, quick crises, with Silicon Valley, tariffs and commercial real estate, right? We had a few more years left of the window being open from a regulatory perspective and maybe a macro perspective to sell your bank. And I think boards are warming up to that. I think there's a lot more banks for sale right now. I think buyers are being a bit more picky because of that, right? Because they kind of understand the way that we're thinking, right, there's really now is the time for M&A, but I don't want to get stuck in this one deal I don't want and the one I want pops a month later. So I think boards are slowly coming around to it. And you always like to throw out statistics, and I don't know exactly what it is. But with the slowdown in M&A over the past, call it, 6 years, 5 or 6 years, Boards are getting older. Management teams are getting older, right? It's just the time marches on. And at some point, it's either if you don't deliver organically, it's time to go. And a lot of these small banks are not delivering organically and combine that with age, I think it's a good tailwind to move away from that, hey, we need 2x book.

Anton Schutz, Sr.   00:20:47

Well, and I think the other thing we're finally starting to see again is a little more activism. And we are not activists, right? We love talking to our management teams. We like trying to be helpful. But for those management teams that are recalcitrant and don't understand there's a better option out there or a better way to run your business, I think it's interesting having activists. Banks are sold and not bought, right? So I think activism is a tough strategy in this space. But what it does is it draws attention. And I think that to Boards, to management, to other investors where they go, okay, it's time. We've tried this strategy. It's not working. We can get a better outcome for our investors because I think some companies forget that they do have a fiduciary duty to investors, right? They may think about the duty to themselves and their employees and their community. But the third leg of that stool is the investment. And if you own the company yourself and you're privately held and your investors are happy with, you're great. But if you're a public company and you've been substandard for a long period of time, you do have a duty to understand what the option is. And we typically don't invest in companies that have a lot of activism because we like companies that have optionality, right? We like companies that earn their right to be independent every day. They do a great job. And by the way, because they do such a great job and a lot of times in a really good geography, other people want them. Our duty is to make money for our investors. So I've told management over and over, we really don't care how you do it. We do care that you do it, right, deliver returns.

Unknown Speaker   00:22:31

Right.

Nathan Stovall   00:22:31

Well, and one thing, picking up on some of the Anton Jr. said about the depressed levels of M&A and boards getting older. If you just even think about 200, 225 deals a year going back a long time, I know we have fewer institutions, if we were running at that 160, 170, 180 that's 20, 30, 40 banks a year that weren't selling that likely would have sold in a normal environment. And so that's just sort of stacking up. And you feel like at some point, that dam is got to break a little bit there. And Anton Senior, you were talking about buying back stock. I mean we talked about this when we saw each other at an investor conference. If you're trading at that level, I mean, one of the things -- and maybe I'm not framing it right, but one of the nice things that you could do if you're buying back stock is you almost could get a technical bump out of it, too, because there's so much passive money in the space. Am I framing that the right way, the idea could you maybe squeeze somebody out or get some technical factors by moving up into a different index or something like that, depending on where -- who you are and where you're trading...

Anton Schutz, Sr.   00:23:39

Yes. I mean, unfortunately, the index formulas are so wild and crazy that it's really hard to forecast. I mean you can get there's a minimum market cap. I mean the best example would be First Interstate, right? They just got added the other day. And the catalyst for them consolidating share classes was years ago, and they did it, right? It took, I don't know, 3 years, 4 years, maybe more, right? And it's just -- so yes, that's a thing, particularly if it's just a simple formulaic one, right? If it's in Russell 2000, right, if the cutoff is $140 million and your market cap is $135 million and you have excess capital, well, -- you see what happens to your stock price if you actually turn on a buyback. It's not about manipulation. It's about the right math. But if the right math causes your stock price to go up because your returns go up and you take shares out of the market and you get into the Russell, great. That's fine. That one is an easy index to forecast for the really small banks. But when you start getting in the S&P 400 and 600 and obviously, the bigger S&P 500, really hard to predict it. I wish I knew the math behind the formula. But if we have the M&A cycle that we expect we're going to have, there'll be a lot of companies coming out of indexes, right, because they're going to just be gone, and they're going to have to be replaced in some way, shape or form. So I think we see a whole combination of all that from a value creation. I think the biggest factor in bringing the generals back, and it seems so silly, is they underperform because they don't own the financials. and particularly small-cap financials, right? If they start underperforming, they will start coming. And it has nothing to do with fundamentals. I hate to say that, but you know what, they're missing their bogey and they're missing their bogey because they don't own small-cap financials, they'll be here.

Nathan Stovall   00:25:36

And other things have overperformed greatly.

Nathan Stovall   00:25:39

Yes, right? So...

Nathan Stovall   00:25:41

If that stops, if you don't own financials, it feels like you could easily miss out on that party.

Anton Schutz, Sr.   00:25:50

Exactly. And I think that, that's real. I mean I'm old enough to have seen 2000. And I will tell you that not only were investors in dispair, managements were in dispair. And maybe there was a little more activism back then, but I remember talking to some management going, we're really worried that someone makes a bid for our company that's way above where our stock trades, and we have no choice. because their stock is so cheap. I mean, they're trading at 4, 5, 6x earnings and 80% of book value. So I mean, that was the environment we're in, in early 2000. And all you had to do was be there for those stocks, and we were.

Nathan Stovall   00:26:29

Let's -- in closing, let's get back to the tech conversation. You made the point about really, it's an efficiency play. And I think that's really interesting because you talk with companies and maybe they're a little bit nervous about something being customer-facing. They're worried about everything that goes in it, but there's tons of back office things that feels like to be done. Could you talk about some examples of you seeing banks employ some of that technology that's worked? And maybe add on top of that, do you think that's something everybody has to look at now? We talk about the window being open for M&A. The window is open from a regulatory perspective to innovate and partner more in a way than we've seen in a while.

Anton Schutz, Sr.   00:27:11

Absolutely. And I'll let my son chime in. He's done a lot of due diligence in a lot of tech companies. But at the end of the day, I think that marriage between technology and customer service and customer-facing experiences that are good are incredibly important, right? I mean how many times do people call 1-800 large bank and they end up with somebody in a foreign country that they're difficult to understand. They may not understand the customer. They may have wait times that are not good, really, really brutal. And we've seen technology that literally allows the customer to have like a relationship manager, they can call every time. And like 80% of the time, that customer is willing to wait for that person. That's a company called Agent IQ, which is something that Men Ventures invested in. But we've seen great success with that and customer retention is really important. So if you've got a customer that's happy when they call in and takes 30% of the volume off your call center, wow. I mean, that's a huge win. How do the big banks seal your customer when your customer is happy, right? I mean, in fact, hopefully, your customer is telling other people that they're really happy with the performance. But if you can basically get more efficient and create loyalty, that's -- wow, that is really important. We also -- when we look at important things that are out there that are dealing with compliance, dealing with fraud, dealing with theft, dealing with payments, you can improve the functionality of all of those parts, less people, better technology, better outcomes. Anton, do you want to give a couple of examples?

Anton Schutz, Jr.   00:28:46

Yes. I mean one thing I'd add on the tech side and just kind of what you mentioned on talent is now kind of the time to innovate. It's difficult to find talent. Like you said, like the window might be open for exploring these kinds of things. But if you're an AI engineer, do you want to go to open AI or JPMorgan? It's generally a pretty easy decision. And smaller banks definitely have more difficulty sourcing that kind of talent. So really hard to build. I think we're still -- like I know you mentioned it's a little bit laxer on the regulatory side, but we still need a framework before you can dive into that, right? I think some banks obviously got burned with that on the blockchain thing and the banking as a service thing, right, where they kind of like this makes a ton of sense. And regulators said, no, it doesn't. So yes, I think everyone is going to be a little bit slower into it and be methodical in how they think about it. I like the adage if you're fifth, you first in bank tech, right? It's -- it's just see what everyone else is doing. You don't need to be on the cutting edge, but keep an eye on it. And the other challenging part of bank tech right now, especially if you're not JPMorgan, one of the big guys who has hundreds of thousands of people looking at this is there is so much technology being thrown at banks right now, right? Every bank I know has sat on numerous seminars or webcasts or whatever for AI and stablecoins, right? And we get every bank think talking to us, thinking or asking what are your thoughts? How do we approach this? And it's kind of like be patient, learn, try to understand where you can either deliver better customer experience, cut costs, create revenue opportunities, but you don't need to dive into this head first. bigger banks obviously could experiment a bit more, but the banks we deal with regional community are still kind of sitting on their hands waiting a bit. But there are technologies coming out that should be marginally beneficial to -- at least on the cost side. We have one technology that it was a mortgage QC company, quality control. And that used to just be ticking and tie in visually, right, a person in a room making sure numbers lined up. With AI and in this company, you don't need that. You don't need humans to do that. So I think that department went from 30 people to 6. There's just a lot of opportunities in bank land to just turn paper processes or old antiquated processes digital. right? And that has a cost associated with it, right? It's not just saying, hey, we eliminate all these salaries, that has to be replaced with technology costs. But there's a lot of examples out there where these are easily automatable tasks.

Nathan Stovall   00:31:29

And more scalable as a result.

Nathan Stovall   00:31:32

And I'm listening to you talk about it, it reminds me of like thinking about approaching a deal, be an aggressive data or a slow mararrier when it comes to the sort of technology, I mean, you'd be remiss not to look at things, right?

Anton Schutz, Sr.   00:31:46

Yes. No, there's no doubt about it. I mean -- and look at the payment space, right? Look at the fraud that's in the payment space. And I think the fraud that will probably come into the stablecoin space, right, the digital wallets that have been stolen out there. I mean, again, the banks have got to be very careful about how they do this. Where is it? Where is it going? Where is it housed? -- are there enough short-term treasuries right out there to really back all of this stuff? And I think that, that's really important. I do worry that the banking system will be made to pay for some of the errors that are coming. There will be errors out there by nonbanks. There will be losses. And I do worry about that for the industry because they may get lumped in much like they're getting lumped in with the NDFIs, and they didn't do it. But at the end of the day, they're a regulated institution. So I believe as we go down this path that more regulation is better than less and consumers should be really thinking about wanting to do business with a regulated entity. And I think that's where banks are missing that marketing and selling opportunity that, hey, you know what, we have a lot of capital. People are watching us. We're safer. I mean you're not allow to say that, right? Nobody is allowed to know what a bank's CAML rating is. Why the hell not? -- they should know what a Camel rating is because if you can't have a great CAML rating, you're doing something wrong. And oh, by the way, again, I don't know this, but among the nation's largest banks, the word out there is that a lot of them have weak Camel ratings and maybe that was retribution by somebody versus actual weakness in process. And I think that the M&A game among the largest of the large will pick up when those Camel ratings improve as they go through the regulatory cycles. But I do believe that banks should have ratings that people can know because you know what, if you put ratings on some of these crypto companies out there, I'm not sure where they would look all that good, right? I mean...

Anton Schutz, Jr.   00:33:54

It's funny. Most of the -- or not most. The 2 kind of stablecoin pitches I've heard, 2 banks, right? I was in a room full of banks and there's a stablecoin company or someone who provides stablecoin services. pitching to these banks, this group of banks, both of them were fear-based pitches, right, where they're like, if you don't do this, you might not exist in 5 years, right? Everyone is going to go to circle, they're going to eat your lunch. And it was -- I think no banks were like, yes, I'm so I'm afraid, right? But it was a weird tactic, right? It's like if you don't do this, money is going to move to the unregulated system. And it's like I don't know how many depositors at community banks are really battling between going to circle or XYZ community bank. But it's been an interesting to kind of find the stablecoin providers angle into like why should you buy this technology? What's the urgency, right? Right now, it's fear. They're trying to kind of create fear around fintechs winning the day.

Nathan Stovall   00:34:52

Beyond cross-border, that's the one we hear or somebody throwing out some crazy, it's not a yield because they're not all the yield, but they offer a reward. That's about it. So yes, I agree that it feels very fearmongering and saying that you're in trouble if you don't.

Anton Schutz, Sr.   00:35:11

I think...

Nathan Stovall   00:35:12

So stamp...

Anton Schutz, Sr.   00:35:14

Yes, watch and be careful. Look, we're doing the work, right? We're deeply in the weeds trying to make sure that banks are there. And oh, by the way, I joined the Board of Bank Miami, right, de novo. And I think you're going to see an interesting environment, right? As valuations get higher, hopefully, they get higher in the banking space, you actually see the ability for more de novos to form, right? This M&A cycle should create some voids out there for the smallest of the small and customer service will throw off customers and good people. But it's really hard to raise money when you've got a lot of public banks that trade below tangible book value for people to go, I'm going to write a check for a de novo and it's going to eat tangible for a while. That's one of the challenges out there. But I think that changes as valuations rise. I do believe valuations rise, and I do believe that there will be holes out there for smaller institutions to provide better service. But the interesting thing about a de novo is they have no legacy technology, right? And I think there's a chance for some of those smaller, newer companies, if the regulators will let them, right, to evolve in a really interesting way and leaning towards better productivity, leaning towards prudent innovation. I think that's -- and things like stablecoin could be really interesting for cross-border. But again, it's the merchants that want to get paid quickly. The consumer, why do they care, right? They can pull out their credit card and do that. And oh, by the way, from a regulatory perspective, if we start getting higher size limits for different regulatory frameworks, again, helps M&A, right? That's a huge catalyst.

Nathan Stovall   00:36:59

Certainly. And they're talking about it. And they're also talking about fostering more de novo bank formulation. To your point, we have a lot of things there, but they seem serious about it. And if you've spoken with the Travis Hill or Jonathan Gould, they feel or Mickey Boman, they feel very different than the old regime.

Anton Schutz, Sr.   00:37:15

Yes. Yes. And we hope they have time, right? That's the -- again, that's the other thing. We talk about fearmongering for something else, but fearmongering is we get somebody comes back in and retribution. I have no idea why they hate the banking space. It's just bizarre to me because banks are the grease of the economy. And I think the industry has done a very good job of lobbying and motherhood and apple pie and hot dogs. And I don't understand why this hatred towards the banking system because they are so important to formation. If you think about it, look, Silicon Valley, right, gone. What has that done to innovation? I mean it's hurt innovation in a major, major way. that I think there's been a deep freeze on capital moving towards smart ideas. And I think Silicon Valley is really critical to it. So I think there's a role for some of the smaller banks. I think that companies like an Avid Bank can fill a large role, but they're small, right? So what we need is hopefully, for citizens to get more engaged. I'm hearing that, right? I'm hearing they're getting more engaged. But that capital formation that banks provide, whether it's capital through venture or capital through lending to small business, it's critical for the American economy. And banks should not be getting attacked, they should be getting encouraged.

Nathan Stovall   00:38:35

Certainly. Well, I love that positive message. I think that's a great place to leave it. Let's end on a high note, right on the day before Thanksgiving. Thank you, Anton and Anton, for coming on the show and enjoy your holidays and here's to stronger valuations ahead.

Anton Schutz, Sr.   00:38:53

Happy Thanksgiving. Let's all be thankful for the coming return of bank stocks.