Generations Bancorp (GBNY) is a newly converted second step thrift. This bank was previously listed on the OTC Pink sheets as (SCAY) from when it did its first step. On 1/31/21 the rest of the bank was sold to the public at $10 per share and began trading under the ticker GBNY on the NASDAQ.
I recently read Jim Royal's excellent book - The Zen of Thrift Conversions. I have done a fair amount of bank investing before this, and am now excited to delve into the obscure world of thrifts. GBNY is the first thrift I have analyzed and I am ready to share what I have found.
GBNY has 10 branches in the upstate New York area - near Rochester and Syracuse. Prior to the conversion GBNY had $367 million in assets and about $29 million in tangible book value. When it was listed previously as SCAY, the MHC owned 60% of the bank and 40% was public. Management owned about 5%.
In January the remainder of the stock was sold to the public, thus fully completing the conversion. After the proceeds of the sale, less fees, at $10/share the bank is valued at about 63% of tangible book, implying a 58% upside to book. The bank is clearly cheap but also has substantial problems. Generations Bank did not have a first day pop like most thrifts. Instead it has drifted down about 5% since then. I will break the investing case down in terms of pros and cons.
Cons
- Management is giving almost all of the meager proceeds from the stock sale to the bank - not to the holding company. This means that there is little to no money available for dividends and buy backs. In fact, management has explicitly said that they don't want to pay dividends. They won't be able to buy back stock for a year anyways, and it seems that they aren't interested in buying shares once the restricted period ends.
- Management wants to grow the bank. They want to use the new cash raised by the stock sale to expand.
- Generations is not consistently profitable. They either make or lose a small amount of money. With such a small asset base, it is hard for a small bank like this to have high returns on equity these days.
- Risky 3rd party loans. - 49% of their loan book is traditional home loans. But 21% of their book is auto loans, rv loans, and manufactured home loans. This is the area that management is proud of and want to expand on. They are buying these loans from third parties and out of market. They get a higher interest rate on them, yet they are substantially riskier than single family home loans.
- They incorporated the new bancorp in Maryland. This doesn't really make sense because they are based out of New York. From what I have heard, when a public company incorporates in Maryland, it is because Maryland is less shareholder frienldy when it comes to legal matters. This is a little suspect.
- Management was also throwing other proposals into the proxy voting about giving less voting rights to large holders of the stock, and other proposals that would make activism more difficult.
- They are located in upstate rural New York. Management acknowledged that the population is shrinking. Not the best demographics for a bank.
- Management is not old. The CEO - Menzo Case has been with the bank since 1999 and is only 56 years old. This is not management team looking to sell out quickly.
- In 2018 they did an acquisition and bought Medina Savings and Loan ($55 million in assets). This isn't necessarily a bad thing but it further reinforces the fact that their intention is to grow and expand. If done well this can be good, but is not the surest way to get good returns in thrifts.
- The bank is not over-capitalized. Its equity to assets are around 11%. So even if the bank wanted to do substantial dividends and buy backs they couldn't.
- At a $22 million market cap, this bank will fly under most investor's radars, which may cause it to take more time for the valuation to re-rate.
Pros
- The notorious activist Joseph Stilwell is a 9.9% owner. He entered the position in 2014 when it was trading as SCAY. His 13D filings from that time don't give any extra information, other than the fact that he has the stake.
- M3 Funds bought a 7.59% stake in the company at the second step of the conversion in January. They are a small fund that focuses on banks and thrifts. I don't know if they do any activism or not, but I would have to imagine that they would vote on behalf of shareholders and are good to have as fellow holders. Their website is incredibly dated and is worth looking at for a blast to the past.
- Management already owned shares and bought more in the second step. They own approximately 6%. They did not buy the max allotment, but they did buy.
- The bank is cheap. At $10 per share, the market cap is around $23.15 million. Tangible book is about 36.75 million. That is 58.75% upside to book from $10 per share.
- Low downside. At this price, it is unlikely it will be cheaper 5 years from now.
- At $22 million market cap and low liquidity, the opportunity exists for individual investors but not for funds or professionals.
- Almost no financial websites or screeners have proper information for GBNY. When they report their first quarter, it will finally update and start showing up for more investors.
Thoughts
This is not the best thrift opportunity. The loan book of GBNY is pretty sub par in my opinion. I understand that there is a willing suitor for every bank, but why would an acquirer be interested in a bank with so many 3rd party loans? The average thrift gets bought out at 140% of tangible book. But I am only comfortable assuming GBNY would get bought out at 100% of tangible book value.
The price is fluctuating, but from $10 a share if it takes 5 years to be bought out at tangible book that would be a 9.68% return. This is assuming no book value growth. From $9.48 a share (where it is currently trading it would be a CAGR of 10.96% a year.
The risk is that management doesn't want to sell. And does a poor job expanding. Leading to a decline in book value over time. Honestly, it really seems to me that they won't sell within five years, but it is possible. Investors could also continue to assign a low multiple.
The bull case is that this bank is incredibly cheap. Management works to expand and improve operations. And over time, the public starts valuing this bank closer to TBV. Because this just finished its second step conversion, it is not available in screeners. There are not current financials with the updated balances from the stock sale. I actually think there could be a re-rating as quarterly financials come out and more of the investing public discovers the stock.
The limited downside is intriguing. I do not recommend this as an investment though.
Feel free to message me on Twitter @noobyinvestor with your thoughts on this. I am a rook sauce investor so please correct me if mistakes were made. Cheers.
Disclosure
Long. I took a smallish position to observe the stock. I may trade in and out. This is not investment advice. Do your own due diligence.