The Current State of Banking with Anton Schutz

00:00:11 INTRO:
Helping community bankers grow themselves, their team and their profits. This is the Community Bank Podcast.
00:00:24 CALEB:
Well, hey everybody, and welcome back to the Community Bank Podcast. Thanks for joining the conversation today. I’m Caleb Stevens with SouthState Bank’s Capital Markets and Correspondent banking division. Today, we’re taking a 30,000-foot view of the landscape of the industry.
00:00:40 CALEB, continued:
My guest today is Anton Schutz. He is the founder of Mendon Capital, a hedge fund in Florida, and Anton specializes in the financial services sector. So, you can ask him pretty much any question about the banking industry, and he will have a very educated answer and lots of thoughts for you. And so, here is my conversation on the state of banking with Anton Schutz.
00:01:09 CALEB
Well, Anton, welcome to the Community Bank Podcast. I think this is your first time on the show, so welcome. How are things down your way in Florida?
00:01:18 ANTON:
Well, it’s my pleasure to be with you and it’s still a great time to be in Florida, great time to be outside. Might get a little tougher come August, September, but everything is good and I’m looking forward to bank stocks being great again.
00:01:31 CALEB:
Well, I think many of our listeners will know your name. You’re featured frequently on news channels, CNBC, you’ve been on a number of banking related podcasts and publications, but for the folks that aren’t familiar with you, tell us about yourself and what you do at Mendon Capital.
00:01:49 ANTON:
Sure. Well, I feel a bit like a dinosaur, but I keep evolving. So, I’ve been around for a long time. I started my career at Chase Manhattan Bank and, in the mid 80s, and after 10 years, I said “Wow”, there’s a real opportunity in regional banking here to be an investor, from a consolidation perspective, from a difference in geography perspective.
00:02:09 ANTON, continued:
And I’m a value manager at heart and you know, banks earn money, they pay dividends, you know, it’s just something that really appealed to me. So, I started Mendon Capital in 1996. And, actually started Mendon Ventures during the depths of, you know, COVID in 2020, to really help out the banking industry from a technology perspective, because we just saw that there was a large gap in terms of people having access to, you know, technology that helps banks be better.
00:02:42 CALEB:
Fantastic. What are the – Is the financial sector, is that the primary asset class that you all focus on? Do you go outside the sector. Talk about kind of what you guys are focused on on a day-to-day basis?
00:02:55 ANTON:
Sure. You know it, they are purely financial services funds. So, on the, you know, the public funds and mutual fund, they managed accounts. We’re looking really at opportunities within banks for the most part. You know, there are times that something becomes obvious, whether it’s in broker dealers or mortgage agency reeds that you might go, “Yeah, this is, this is it.” You know, even credit cards.
00:03:24 ANTON, continued:
But, you know, a lot of that consolidation in those companies has taken place and a lot of the consolidation in banking, although it’s been tremendous, has yet to still come. And I’m pretty amazed that, you know from 96 to today that I’m, I’m still, you know, talking about some of that same theme. You would have thought it would have been faster and there’d be less banks around.
00:03:44 ANTON, continued:
But you know that opportunity to make money is still the same. The geographic diversity is still the same. You think about tax advantages and different regions of the country where people are moving or different business lines. So, the opportunity and the valuations in banking and community banks is incredibly appealing to me right now.
00:04:05 CALEB:
Well, you’ve been in the business since 96. You’ve seen lots of changes over the decades, you know, coming out of COVID, we had rates near 0, now we’ve had a pretty historic hiking cycle and it seems like we’re hanging steady where they are.
00:04:20 CALEB, continued:
There was a fairly soft employment report that I think came out this morning and so maybe there’s talk about a rate cut, but I’d love to just sort of open the floor to you and say as you look at, you know, Q2 earnings that are about to come in, what do you think are some of the storylines both for regional banks and for even the smaller community banks?
00:04:38 ANTON:
Sure. Well, certainly, let me, let me get back. Let me start with the right question, because I think that’s really important for the industry. But first of all, you know, 0% interest rates really bad for banking, and I think just bad structurally, so you know certainly the banks got what they wanted in terms of rates being higher and, of course, many banks didn’t get what they wanted because rates moved up too quickly. And I think that’s a lesson from an ALCO perspective for a lot of banks. I think that you know, obviously we had failures and institutions had nothing to do with credit.
00:05:10 ANTON, continued:
Right. It was just purely interest rate mismatch. You know, I think the Fed has always a challenging job, but one of the things that that I think they have a very difficult time doing is getting in front of things, right? They’re very reactionary to today’s statistics versus going, you know, “We’ve got to get in front of it.” The lag to any movement as far as economic impact is real.
00:05:34 ANTON, continued:
And so, I believe they’re way behind. I believe they should have, you know, stopped cutting the size of their balance sheet. I believe they should have started to cut interest rates gradually maybe 25 basis points at a time and just keep moving until they meet resistance, right. So, things change I mean, look, they raised 75 basis points a number of times. So, cutting 25 at a time for some period of time, I think will have very little short-term impact and I think it would have would have helped a little bit. So yeah, do I think they cut in September? I don’t think they really have much of a choice. Everything I see statistically, certainly the subprime consumer is tapped out, right? Their savings.

00:06:16 ANTON, continued:
They’ve overspent. They’re carrying debt. And I think one of the things that we don’t see is the buy now pay later. There’s no stats on it, right? How much is out there. And I think it’s a big thing, and I think consumers all owe a lot more money than is known. But you know, you’re starting to see cars on lots. You’re starting to see retailers really have some real problems, some failures. You’re seeing, you know, not only you know casual dining, you know, Red Lobster, right? How’d they go out of business?
00:06:43 ANTON, continued:
So, are there there’s signs out here. They’re warning signs. Look, I’m not expecting Armageddon or disaster, but the economy is slowing. There’s absolutely no doubt about it. And you look at household jobs created. I mean, pay attention to that. Not just the job creation. And the household numbers tell us a whole different story than what’s going on with, you know, governments hiring people. Very inefficient way of spending money.
00:07:06 CALEB:
So, you would say that the Fed waited too long to start hiking and they’ve since waited too long to start cutting? Am I following you?
00:07:15 ANTON:
That is correct. I think that you know, I look the fat is not supposed to be a political animal.
00:07:20 ANTON, continued:
And you know, unfortunately it is, because people have to get appointed to it. They have to get reappointed. You know, Powell was looking to get reappointed. I don’t think he really had a choice. I think if he started to, you know, raise rates wise, what getting reappointed would have been very politically unpopular, and he wouldn’t have gotten reappointed. So, you know, I actually think pretty highly of them. But I think that that’s a
00:07:42 ANTON, continued:
That was an unfortunate aspect, that delay in raising rates, and he wouldn’t have been as dramatic. And I also think that, you know, here’s the same thing, right? A lot of the more recent appointees to the Fed have been appointed by this Administration. This Administration, at least currently, is in trouble in the in the polls.
00:08:01 ANTON, continued:
So, I think September happens for a lot of reasons. I think first of all, it happens because it has to happen. But I think the second reason is it’s certainly going to be more helpful this Administration than not.
00:08:13 CALEB:
The banks that you’re looking at, have you seen cost of funding start to level off and stabilize? Because rates have at least, you know, lately haven’t have been flat or, what are you sort of thinking on the deposit side?
00:08:27 ANTON:
Yeah, I think the pressure is off, right? The short-term pressure. The people who really wanted to go, you know, “Wow, I want money in my money market account,” or “I want to buy CDs or treasuries.”
00:08:36 ANTON, continued:
I mean that money, that money moved, it’s happened. You know, I think there’s slight adjustments here and there. I think they, you know the bank term loan funding facility was really quite a good, good vehicle. You know it says a lot that the Fed said we don’t need to continue it. I think that the pressures are off.
00:08:56 ANTON, continued:
But that being said, I think it’s gonna be a challenge to lower rates as the Fed lowers rates. I still think people are going to want to get paid and, you know, they’ll be a lag to it, but there’s still a lot of asset repricing that has to happen, right? That loans that were, you know booked in 18, 19 and 20 are, you know, repricing and they’ll reprice higher. That, that would be a positive. So, I think the funding pressure is off. I think the ability to reprice on assets higher will be good for the banking industry. You know, slow drops and interest rates will also be good. Really big sudden drops again, you know, big sudden moves are always tough. The tough to model, tough to you know put together for an ALCO perspective.
00:09:37 CALEB:
Let’s turn to credit. I’d love to get your thoughts on CRE. You know, you see these articles and Wall Street Journal and places about the ticking time bomb of CRE. You read these doom and gloom articles. Maybe there’s some implications there for the bigger banks, but on this podcast, we serve small community banks, the $500 million community bank that’s been around for 50 years and wants to remain independent. Do you see CRE being a stressor in the short term? Refer to the smaller and the regional banks.
00:10:08 ANTON:
No, not for the smaller—you know, it depends how you use the word regional. I do think that some of the bigger regionals, like a PNC and a KeyCorp. You know, look, they’ve built huge reserves. I mean, I think that all of the doom and gloom articles missed that, right? I mean that you see reserve ratios on commercial office between 8 and 12%.
00:10:28 ANTON, continued:
So, it’s not an earnings issue, it’s not a capital issue. And I think the average CRE concentration or office concentration of the large regionals is like 4%. So, you know it’s nothing to put them out of business. Nothing actually to really damage their earnings because they’ve already set aside
00:10:48 ANTON, continued:
A lot of reserves for it. When you step down into smaller, you know companies that you know especially tend to be outside some of the coastal cities. You know, I say coastal cities and, you know, San Francisco, New York. You know, I think they do have some problems. They’re not necessarily back to work.
00:11:07 ANTON, continued:
I think that people are leaving those cities. Companies are leaving those cities, and I think that’s a challenge as well. But you know, if you go out into the suburbs and or if you’re in places in the South or Southwest, I think that people are still moving there. Companies are moving there. And by the way, if you’ve got a, you know, an office building with two stories in height and full of doctors and dentists and—they, can’t work from home.
00:11:33 ANTON, continued:
So, I think those properties are fine. You know will cash flows be as good for the owners of those properties? No, banks are properly underwritten all this stuff. I mean, they kind of tightened credit during COVID, they didn’t loosen it too much. So, I think all the stuff that’s been booked for the last, you know 3-4 years has been pretty well underwritten, pretty good loan to value, pretty good guarantors.
00:11:53 ANTON, continued:
So, it’s a real shame. I mean, if you go back to 2015, there was the same kind of doom and gloom, right? Commercial real estate was going to destroy America. Yeah, it didn’t happen. There’s losses, right? And by the way, again, some of the lenders to those big projects and big cities or life insurance companies and they have a really long span of if they’ve left the money, okay, they don’t mind, you know, owning the building, you know, and banks certainly have the ability even, you know,
00:12:20 ANTON, continued:
Smaller properties that may be slightly stressed. Okay, fine. You restructure it, you put a lower rate on it and you know when cash flows get better, you can do better. But I think loss content is relatively low.
00:12:32 ANTON, continued:
In the smaller community bank space, and quite frankly, I think the regulators are misplaced when they’re sitting there trying to encourage more C&I, because look at the end of the day, it is nice to have a tangible asset to put your hands on. C&I, not always like there’s not always a tangible asset there. So, I think they got to be careful what they’re what they’re doing.
00:12:53 ANTON, continued:
And then you go to credit unions, right, which all of a sudden became commercial real estate lenders. And you know, by the way, what’s their experience in lending commercial real estate, period? No matter where they are so. So, you know, I think new ideas, new businesses tend to be fraught with danger. And I think that if you’re not a good C&I lender, don’t all of a sudden think that you’re going to be.
00:13:13 CALEB:
That’s a good segue. Speaking of credit unions to M&A, we’ve seen a number of credit unions over the past few years buy other banks, which is interesting. As you look at the M&A landscape, the AOCI rate marks have been one of the biggest barriers to that business picking up. What are your thoughts as we look forward to the rest of 2024 on M&A?
00:13:32 ANTON:
Well, I mean look, accounting is the big factor here and accounting was a big factor in the financial crisis, right? Mark to market accounting caused lots of deals not to happen, right. We would’ve had half the failures had we not had that accounting, you know. So, when you go to AOCI, if you’re a credit union, you’re buying a bank, goodwill is capital.
00:13:53 ANTON, continued:
I don’t get it. It makes no sense to me, but if you’re credit union, you actually can pay those prices and look—as a shareholder, if you’re getting those prices, you’re pleased. I do think they should be on the same regulatory landscape.
00:14:10 ANTON, continued:
It makes no sense to have a different regulatory landscape, and I do worry about commercial real estate at credit unions because they just don’t have any experience with it. So, I’m not sure it’s been as well underwritten as what I expect in the community banking space.

00:14:36 CALEB:
Do you think you’ll see M&A tick up as we go forward? Just between banks merging with other banks or buying other banks, what are your thoughts there?
00:14:32 ANTON:
There are a lot of reasons for M&A to happen and all of them are traditional, I mean. Let me start with one of them that’s just obvious, right. Age of management has been a factor of in history of bank M&A. The average age of a board of directors I believe is up six years. Since 2018, right. So, there’s a lot of latent M&A out there. I think banks have missed the number of times you know, let’s sell ourselves and.
00:14:54 ANTON, continued:
The right bid. The right buyers aren’t there, and you know, I think that the number of consolidators today and the number of proven consolidators is less than the sellers think.
00:15:05 ANTON, continued:
So, I think that finding a good strong partner early in the process is a good idea than watching all your neighbors sell to the best buyers, because at the end of the day, it’s not about getting two times book, it’s about what, what piece of paper you’re receiving. If you’re receiving a really good management team, stock, 8 times forward earnings or something like that. You’re gonna make money at that transaction even if you’re not getting two times book.
00:15:30 ANTON, continued:
So, now going back to the marks. The more time goes and the more, or the more, you know, rates decrease, the easier the marks will be to solve. And again a lot of those fixed rate loans repricing, it’s not just the securities book, right, it’s the fixed rate loan portfolio that’s marked as well. So, I think that all of that, you know, matters. We’ve seen a number of transactions happen anyway, where the resulting companies are trading at five times forward earnings. You know what, I’ll buy that. As a shareholder, I’m perfectly happy to own those types of stocks and let all of that accrued earnings, you know, come back from those marks.
00:16:07 ANTON, continued:
So, I’m not sure I love every restructuring that’s been done out there. I’m certainly happy to see restructurings where you add to earnings, you take a hit, you know it’s a two year or less earned back and you’re earning more money, right? I mean, you know you just paying off high-cost funding. That’s great. You sit there and go, “Oh, I’m going to sell my long term bonds today.
00:16:29 ANTON, continued:
I’m going to buy a lot more long-term bonds with higher yields.” I worry a little bit about that because, you know, do we really know rates are coming down? I believe they’re going to come down. But you know this, this Fed is going to raise rates if they if they see something. They’re very afraid of the Volcker Ears. I mean they don’t want to, they don’t want to have the name associated with the Volcker type of scenario.
00:16:50 CALEB:
Sure. So, we’ve covered M&A, we’ve talked about CRE and credit. We’ve talked about interest rate volatility and uncertainty. We’ve talked about cost of funding. Any other storylines coming out of the second quarter or just in general that you’re that you think bankers ought to be paying attention to?
00:17:07 ANTON:
Well, I think that you know technology is really going to be critical to this industry. AI is going to be critical. It’s how you invest with, you know, in it how, you know, who you partner with. I think that’s all very, very important. And I think that that one of the challenges is if you don’t have scale, you don’t even have the people working at your institution that can help you implement that technology. I think it’s not just being able to write a check. And you know if you look at the big core providers.
00:17:37 ANTON, continued:
They’re scrambling to upgrade what they have, but getting that to their customers is a real challenge, right? Getting it through that pipeline. So, innovation is going to happen, it’s going to happen really quickly. You know, I’ve talked to a very large bank CEO, you know, recently or excuse me, Chief Technology Officer recently and you know said, “Listen you have hundreds of thousands of employees. What—how many you gonna have in 10 years?” He goes, “I can’t answer that.” I said, “You won’t answer that. Isn’t that correct? Because you know there will be a lot less people working in this industry.”
00:18:08 ANTON, continued:
There will be less institutions and less people because all that processing is going to be very, very easily done by AI, and it’s got to be internal, right. So, you’ve got to have the right people working at your companies to source the right, you know, products in order to implement the strategy. I also think that you know if you start thinking about lines of business, right? What lines of business do you want to be in for regulatory perspective? Do you want to be in credit cards? You know, lots of controversy going on about different rulings and swipe fees and even the bigger banks this morning said, “You know what we’re thinking about? You know putting
00:18:43 ANTON, continued:
Costs in for you to have a checking account anymore. Not free anymore. The regulators are charging us too much money.” Let’s see if somebody steps forward and starts doing that. JP Morgan, I think where he’s had some comments along those lines. I think you can have people talk about them, and I think you have people talk about capital. I do think that even if we don’t have a return to M&A, I think the space is undervalued. I think capital is going to accumulate really quickly, right?
00:19:08 ANTON, continued:
As the AOCI comes back on the balance sheet, as loan growth is slow, there’ll be opportunities to if you can’t deploy it in M&A, you can buy back your own stock to give you below tangible book value which many micro-cap companies are, but I think that that capital is really strong in this industry and, again, I think that the doomsayers are out there maligning an industry where capital is growing really quickly.
00:19:35 CALEB:
Well, as a marketing guy, speaking of AI, I mean, I’ve heard hot takes where people will say in five years there will, there will be AI managers. So, your job is not necessarily to do the tasks, but it’s to manage the program that’s doing the task for you. So, it’s a reframing of how you’re thinking about what’s skills are needed, you know, and when all kinds of different jobs and roles, I would think. And so just an encouragement to our listeners to be thinking about, you know, how do you use the tools effectively to accomplish the goals that you have at your bank. And good segue into my last question for you, Anton, is what are banks that want to be independent over the long-term—what should they be, you know, focusing on? We believe in community banking. We think they’re very important to the economy and to communities all across the country. And so we want to help them stay independent for as long as they want to. So, any thoughts for them?
00:20:47 ANTON:
Well, let me look at a lot of lessons learned here. So first of all, don’t go out on a limb on your ALCO, right, and that’s just critical. Don’t take big bets on new business lines as well. Again, very critical. And I think you’ve got to figure out it’s all about people right this industry has always been about people. So, you know if you’re going to stay independent, make sure you have the right people. You know, they’re leading your
00:21:13 ANTON, continued:
Intuition. You know whether it’s the CEO, the CTO, right, it’s much more important now the technology side. And obviously you know who your CFO is is really critical on the ALCO side. So, I think all of that is very, very important. At the end of the day, I think the advantage that community banks will have—and I think always will have over their larger competitors, is relationships. So, you know it is about your people. You’ve got to have great people on the front lines. You know it is about customer service. So important that you know, their customers don’t have to call 1-800 something.
00:21:51 ANTON, continued:
Right? It’s really important to engage and again, technology can help with that, but don’t lose sight of the advantages that a community bank has, because they really do. And I just think there’s ways to enhance that and they’ve got to look at doing that. But the customer continues to be the most important, and service is the way that they can win out over the bigger institutions. It’s not pricing.
00:22:16 CALEB:
Right. And you’ve got a personal connection. You’re on the board of a de Novo there in Florida. What was it for you that made you say I want to be part of what these folks are building?
00:22:23 ANTON:
Yeah. What’s really interesting is I know a bunch of the people there. They were from professional bank, where I’ve been a prior board member. I think there’s some, they’re very talented people. They’ve all worked together, they’re fantastic individuals, right, not only from a professional perspective, but from a character perspective. So, you know, when they asked me to join them, you know, I didn’t really hesitate. I said, yeah, this is this is fun, you know, cause in the early days of professional, we had a lot of fun, you know, before the company got sold. And I think a lot of the core, a professional bank, is there. So, I think we also have a market, you know, in Miami that is so big and growing so quickly.
00:23:03 ANTON, continued:
That again, as I’ve said before, customer service is key, and I think the people on that team are all very cognizant of it and very good at it.
00:23:10 CALEB:
Yeah, that’s encouraging to hear that. There’s still folks that want to be part of a de Novo and build new banks. I think that’s really important and Anton, we appreciate you being on today. It’s given us a lot to think about. If folks want to reach out to you a little more about Mendon Capital, how can they find you?

00:23:33 ANTON:
That’s a really good question. I think I can probably be found pretty easily on LinkedIn, so maybe that’s the safest place to say that you know, always happy to speak. And I think as you and I were talking about offline earlier, I think one of the most interesting things this year was the fact that I we got invited to speak to two bank boards, but didn’t own any shares.
00:23:50 CALEB:
Yeah.
00:23:51 ANTON:
And, that was a neat opportunity. I, you know, I appreciate that and just spoke to Tennessee bankers again, a lot of banks got a chance to hear some stuff. And maybe they were scared, right, as a technology panel. But my goal is not to scare people. It’s just important that community banks survive and thrive, right. I think that’s what you are all about as well that you want them to do well. I want them to do well. I think it’s important for this entire country and its economy.
00:24:23 CALEB:
Well, as Jim Collins says, you have to confront the brutal facts. That’s one of the things you must do to become good, to go from good to great, as he says. And so that’s very important. And you’re a wealth of knowledge, and we appreciate you helping us think Through all the trends out there in community banking today and regional banking. So, thanks again, and we’ll have to have you back in a year and I’m sure the world will look a whole lot different and probably not what we think it will look like. So, we’ll have you back and we’ll go from there.
00:24:50 ANTON:
I look forward to it. Thank you.