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Tim Melvin

Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, advisor and portfolio manager. He has also...

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Product Performance

Executive Exhaustion Fuels Opportunity For Investors

Rod Steiger, President and CEO of Wayne Savings Bank in Wooster, Ohio, announced that he will be retiring at the end of the year. He is also resigning from the board of directors at that time.

In the press release announcing the move, Mr. Steiger said, “After a long and rewarding career in banking, I am looking forward to the next phase of my life. I am very fortunate to have had the opportunity to serve as a Director and CEO of Wayne Savings Bancshares, Inc. and Wayne Savings Community Bank. I am most proud of helping to navigate the Company through a long and difficult recession, and leaving it in a better position than when I arrived. I wish continued success to all of our stockholders, employees, customers, and communities."

By itself this is a minor story. However, it's a story that is playing out around the nation in a major way. A Google News search of “Bank CEO Resigns” generates 18,700 hits. “Bank CEO Retires” get an additional 15,700 hits. Scrolling through these news stories reveals that most are about community and regional bank executives throwing in the towel and retiring, or just leaving banking for other endeavors. In some cases they are being forced out by unhappy boards of directors and outside investors; for the most part, it's high-ranking bank executives walking away from banking via retirement or just resignation.

Related: Smaller Banks Can Lead You To Bigger Buys

This is not hard to understand, if you examine what the last five or six years have been like for senior bank executives at the smaller banks. Although most of them didn't have any special investment vehicles or a complex mortgage-backed securities portfolio, they've felt the same pain from these exotic instruments as the bigger banks that dealt in the toxic paper. Most of them were not big players in the subprime mortgage racket that brought the industry to its knees, but they paid the same price as those who stuffed their pockets with these wildly expensive products.

The folks running the small banks have gone from well-respected members of the community to members of a despised profession in just a few short years. They've had to foreclose on people they've known for years and deny loans to members of the business community they would have made on a handshake prior to 2008. Weekly staff meetings are not about how to market the bank and serve their customers, but instead focus on cleaning up the loan portfolio.

Rather than playing rainmaker and overseeing the operation of the bank, their days have been filled with meetings with the lawyers to deal with new regulations. They've had to worry about selling the Other Real Estate-owned portfolio and often felt more like real estate salespeople than bankers, as the portfolios of bank-owned properties exploded in size.

These executive have had to shop around portfolios of nonperforming loans to the shark-like distressed investors that buy these assets and hope they could get a price that was at least somewhat fair. These executives have had to focus their time on everything but the banking business that they've known for decades.

Related: Pay Attention: The Private Equity Message To Investors

It has been a horrible business to be in and many executives just want out. The headwinds of increasing regulation and a weak economy are not going away anytime soon. Low interest rates will keep net interest margins tight and it's going to be very difficult to earn a decent profit. The small banks face an increasingly competitive marketplace with the larger regionals aggressively looking to gain market shares. It's not going to be much fun to run a bank for the next several years.

This executive exhaustion is also a driving force behind the Trade of the Decade in small bank stocks. Many of the bankers simply do not want to do this anymore and see a limited opportunity from the community banking sector. In addition, many of the small bank executives have much of their net worth in shares of the bank they manage. In order to successfully orchestrate an exit and retire comfortably, they are increasingly considering selling the bank at a premium to a larger institution that can more effectively deal with regulatory pressures.

Fortunately, they will find many willing buyers among the regional banks. Organic growth is hard to come by in the sector right now and the most effective way to grow earnings is to buy assets. The smaller banks make a natural target for those institutions looking to grow earnings for the next several years. Investors can take advantage of this powerful trend by buying shares in the smaller banks at a discount to asset value.

Tags: Google regional banks Rod Steiger

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