Derek Pilecki of Gator Capital

Tim Melvin: Hi, everyone. Tim Melvin here, and I've got a treat for you today. We're on with Derek Pilecki of Gator Capital over in Tampa, Florida. Now, I have followed without his knowledge, Derek, for many years, stealing ideas from his newsletter, his regular shareholder letters and his federal filings. He is one of the very best investors in the financial services segment. He brings some unique thought processes to it. He's not a cookie cutter investor in financials by any stretch of the imagination. His track record speaks for itself. He's done a fantastic job for his investors. I'm thrilled that he's taken a little bit of time out today. He's up visiting family in Ohio and he's spending a little time with us. So Derek, I'm grateful for you being here today and just tell us a little bit about your background and how Gator Capital came about.

Derek Pilecki: Hey Tim, great to be on the show. I'm super happy that I'm finally on the show. We've corresponded over the years and I'm glad that we're having this conversation. So really generous introduction.

Gator was a long journey. I've been doing it for a while. We're going to hit 17 years next week. But it was a long road between the time I decided I wanted to start a hedge fund and I actually launched. So I got started with stock investing right around college and was reading all the books I could and read the original Buffett biography by Roger Lowenstein, "The Making of American Capitalists," and that just enthralled me. I was like, "Oh, this guy started a hedge fund out of his spare bedroom, like anybody can do this." But I knew unlike him, at 23, I couldn't start a hedge fund. I needed to get training, needed to work in the business.

So I was at Fannie Mae, the mortgage company in DC, doing interest rate risk analysis. This is in the '90s when Fannie was one of the most admired corporations in the country and did not take credit risk in the '90s. Unfortunately, it lost its way there in the early 2000s. But I left Fannie and went to business school and used business school as a transition to move to the buy side. I worked for a couple of small cap value firms. And then a classmate of mine from business school recruited me to Goldman. Goldman had this growth team in Tampa and they owned a bunch of Fannie Mae stock. So that's how I got the job. I worked inside Fannie and Goldman owned a bunch.

Tim Melvin: Okay.

Derek Pilecki: So the Goldman experience was great. It was great having that on your business card. I learned a lot, had access to a lot of things. The guys I worked for had previously been part of Raymond James. So it was almost like I worked for a Raymond James office, but had Goldman on the business card. It was a little strange. And Raymond James is a fantastic firm, great conservative firm. I think their stock's compounded at like 18% a year since they went public in 1986. Just a fantastic stock. So I don't have anything bad to say about Goldman or Raymond James.

When I was at Goldman, the GSEs were really big targets of the Wall Street Journal and people really hated them. And then they got into trouble by doing no-doc lending. So I was there for five years. I'd saved up some money. Living in Tampa on a Goldman salary, you can save some money. And I finally launched Gator in 2008.

Tim Melvin: Really interesting timing.

Derek Pilecki: Yeah, it was a rough start. If you look at my track record, the first three months, I was down a bunch. And then in the fall of '08, I kind of righted myself. And I remember sitting down in my home office on October 1st. I was like, "OK, I'm going to make money today. Like this dream of having a hedge fund is over. I just need to make money." And it was one of those experiences where your back's up against the wall and there's only one way forward. And so I don't want to go through that experience again, but I did it. And it was crazy. And then I caught '09 correctly and just have grinded it out. Very slow growth.

Tim Melvin: I would not call what you've done grinding it out. Maybe in building Gator and getting recognition, but your returns have been—I don't want to say spectacular. That's an overused word, but they've been consistently great for a long period of time.

European Banking Sector Discussion

Tim Melvin: So just jumping right in here because I know you're up with family and I don't want to take your whole afternoon. That's too important. But I'm going to lead with the easy one. You own a lot of European banks, or at least you did as of your last shareholder letter. We've been bullish on European banks for a very long time. We liked them back before they were cool. I think you did too. They've turned into a bit of a momentum trade. How do you feel about the European banking sector now?

Derek Pilecki: I mean, I think there's still room to go on the names. Like they've made a huge move. So, you know, could they pause here and catch up, you know, just have the fundamentals catch up the stock price a little bit, but the valuations are still very inexpensive. So, you know, I own four names. I own Barclays, SocGen, BNP, and UBS.

Tim Melvin: Oh, OK. I got three of the four. So now I feel smart.

Derek Pilecki: So, yeah. And so, I mean, I look at the valuations and they're not stretched at all. Like the stock charts look a little stretched, but the valuations don't look stretched. And as long as they're continuing to improve our ROEs, I think the stocks can continue to work. So, you know, especially with the two French banks, like having French bank CEOs focused on improving ROE and returning capital to shareholders—that's a big sea change. Like those two companies had been run by empire builders. And now the CEOs that are in place are trying to focus on capital light businesses and improve ROEs, reduce the volatility of their revenue streams. I think that's a big change.

And so, you know, you look at a company like BNP, which has a very high credit rating and compared to JP Morgan—JP Morgan's the best bank, like Jamie's awesome—but it's also 2.7 times tangible book and BNP's still, you know, 0.8 times tangible book. You know, I think JP Morgan's a better bank, right? It just is, but is it that much better of a bank? I don't know. So I think there's still room to go in those European banks.

UBS, I would say, that's been the most frustrating this year of those four banks. The increased capital requirements proposed by the Swiss regulator, I think we've got the worst case scenario now out. I expect them to get watered down over a couple of years. There's going to be a long implementation period where UBS will have time to raise the capital. They're integrating the Credit Suisse system still. And so they've been running with dual technology systems and they're going to start closing down a lot of those former Credit Suisse systems this year and expenses are going to ramp down. So profitability is going to expand. So I still think UBS has a lot of potential. It's one of the biggest wealth managers in the world—in the whole world. And it's trading for tangible book value or just above tangible book value. I think that there's a lot to go. And if they can turn around the US franchise, you know, the margins can expand there tremendously.

Tim Melvin: Awesome.

Anywhere Housing (HOUS) Discussion

Tim Melvin: All right. Next question also has to do with what I think is now your largest position. I noticed that I checked the filings just before it came on. And that is HOUS, Anywhere Housing. Now that's basically residential real estate brokerages for the most part. Coldwell Banker, I think is one of their franchises and a bunch of others. Now, I've been keeping an eye on this stock for a long while now, but I'm a little more concerned about the short to intermediate term direction, I guess, of the U.S. housing market. It's an interesting pick you've been building in a position in it. Can you take a couple minutes and discuss it? Because just my theory is that there's going to be a housing boom—there has to be because there's so many people still stuck in apartments and low interest rate mortgages—but I just, how do we get from here to there, I guess, is my question and where do we unlock the value in this stock? Because it's a great company. I'm just kind of curious about your thoughts on it.

Derek Pilecki: Yeah, I mean this is a super high risk pick, right? I mean they run with leverage and it's a cyclical business. It's really been in a downtrend, down cycle for a few years now. And so I don't know if it's my largest position but it's up there. And it may not work because of the debt load, but I think it's a well-run business. They manage it well. They're cutting costs out of the business. It's super—there's a lot of operating leverage in this business.

So like if the—you know, we're running with about existing home sales are running about 4 million units a year, which is down from five and a half million units, you know, during COVID boom. You know, if those existing home sales get any recovery, anything, anywhere like four and a half or 5 million, the operating leverage to Anywhere Real Estate is gonna be enormous. On top of that, they have financial leverage. If we get a recovery, say long-term rates come down, mortgage rates come to get a five handle, I think that will spark a boom and then you get the pop.

So it's like one of those things where this could be a bust because of the debt load, or it could be a five bagger. It could get to 15 pretty easily because of the amount of operating and financial leverage. So, I mean, it's definitely for the speculative part of your portfolio.

Tim Melvin: Okay.

U.S. Banking Sector Analysis

Tim Melvin: All right. Well, at the core of everything for I think both of us are US banks with maybe a little tiny bit of a leaning towards the smaller side of the ledger when it comes to banks. Now, banks, when you look at the valuations, whether it's price to book or price to earnings or however we value these, we compare them to the S&P 500. Banks are really cheap. They've been cheap for a period of time here. Why, in spite of what, when you look as a pretty healthy industry, if you go through by the quarterly banking profile and the call reports, why are valuations so low right now?

Derek Pilecki: Yeah, I mean, I think there's several reasons. I think we're still feeling the effects of this Silicon Valley implosion, right? I mean, the banks, we had had a huge increase in interest rates. The banks had lagged deposit prices. And when Silicon Valley and First Republic and Signature all went under, people didn't necessarily leave their bank. There was some—especially for those banks or banks similar to them—there was some hot money that went to the big money center banks, but most bank customers stayed with their bank, but asked for higher rates on their deposits.

So in 2023, we just had this huge squeeze where customers across the board were saying, "Hey, I'm leaving unless you raise your deposit rates." And banks responded and they really crimped their margins on top of the rates going up. Then they weren't able to lag deposit rates anymore. That has started to ameliorate like the four rate cuts at the end of 2024. The banks were able to—you know, there is some time in past customers had stopped demanding rate increases. They were really able to push down deposit costs in Q4 and Q1 this year. And so I think the street was surprised that margins expanded and deposit rates were really pushed down. But, you know, we're still recovering from that episode.

I think a second reason while we were having cheap valuations is the CRE overhang—commercial real estate. You know, we see office buildings across the country with four lease signs and, you know, people just assume the banks have them or, you know, they're struggling. There's going to be repricing of real estate as the loans come due, borrowers won't be able to handle higher rates. You know, just a general overhang concern on top, on part of investors. And, you know, bank sectors, investors like you and me, we can look through that and we're still investing in banks, but the generalists say, "I don't really know. I don't need to participate. Like I can wait till I get more clarity on that." So I think some generalist investors are avoiding the sector because of CRE.

And then the inverted yield curve that we've had, it fixed itself a little bit last year, but if you look at the short end of the yield curve right now, Fed funds is above the two or three year treasury. So at the short end, the yield curve is still inverted and that's not a great environment for the banks. I think the yield curve is telling you that the Fed has clearance to cut. The Fed can cut one or two times. The yield curve is, the bond market's saying it's okay, looking where that two year is. I think we just need to get past this tariff issue. I really don't think tariffs are going to increase inflation. It'll be a one-time bump, but it's not going to change anybody's inflation expectations. It's a one-time deal. So I think the Fed should cut rates a couple of times and get the shape of the yield curve more normalized. And that'll be a huge boost for the banks.

Tim Melvin: Okay. Now, on the CRE issue, I'm just going to touch this real quick because it is the perception, and you read the headlines always out there, all the big office towers, they're going to collapse and take the banks with them. Outside of the top tier banks, there's not a lot of exposure to those office towers, is there?

Derek Pilecki: That's right. I mean, a lot of those loans are too big for small banks to make. So, I mean, they might have some participations, but generally in Chicago, I've seen a few banks that own participations from bigger banks, but generally the small banks do not have office tower exposure.

Tim Melvin: That's correct. And a lot of it goes into CMBS, so it's not even in the large banks either. That was kind of what we felt was in the large banks that do have it. It's a rounding error on that balance sheet. It's a big, big number when you put it in a headline. But when you stack it up on a $2 trillion balance sheet, it's not that big a number all of a sudden.

Derek Pilecki: Totally agree. Totally agree.

Large Banks vs. Small Banks Valuation Discussion

Tim Melvin: Now, we talk about the big banks, and that's how I want to touch on that. JP Morgan, 2.7 times book right here. The valuations of the big banks are much higher than the smaller banks. Is that indexing and passive investing? I mean, what's going on there?

Derek Pilecki: Yeah, I mean, I think it's an unusual environment. Usually the small banks are trading at a premium due to M&A takeout speculation. Right now, large banks are trading at a premium. I think it's part of, I think, passive investing and indexing. You know, people buy the XLF and end up with all the money going into the large banks. I also think, you know, the change in the capital rules, they watered down Basel III and really the large banks are the beneficiaries of that. And so, but you know, the large banks, the growth rates aren't that compelling. You know, the loan growth's like low single digits and, you know, you have a lot of small mid cap banks with mid or high single digit loan growth. And so, I really don't get why you would invest in the large banks over the small banks here. And it's continued through recent weeks. I think the large banks, even in recent weeks, are outperforming the small mid-cap banks.

Tim Melvin: Okay.

Bank M&A Discussion

Tim Melvin: Now, let's just move into my favorite topic, and that's bank merger and acquisition activity. There's been a consolidation trade in the banks since the late '80s, early 1990s from one degree or another. It ebbs, it flows, but it's still there. And we've gone from 18,000 banks to about 5,000 plus a few hundred mutual thrifts versus about, I think it's 2,800 credit unions now. So there's still a lot of banks out there. I mean, M&A is not done, is it?

Derek Pilecki: No, I mean, I think it should accelerate. I guess this year has been disappointing in the M&A front. I think the tariff issue in March and April really put M&A transactions on hold for a little bit. But I think, you know, with less regulation and, you know, you see talk about them raising different asset levels for the banks. So like, you know, $10 billion cutoff for the Durban Amendment might become $20 billion. The $100 billion mark for increased regulatory scrutiny might go to 250. I think that'll help banks do more M&A.

I also think that you look at the top three banks—JP Morgan, Bank of America, Wells—they're gaining market share organically. Customers are just going to the big banks. And we really need the banks number four through 25 to start getting more scale. And the way they're going to get scale is through M&A. And so I think there's going to be urgency on their part. There's a lot of fixed costs in technology and compliance. These mid-cap banks or mid-sized banks, I don't think anybody wants just to have three banks at the end of the day. We need to have a variety of banks, a variety of different views on credit. And so we need the mid-cap banks or mid-sized banks to get bigger.

Tim Melvin: Right. Okay. That makes sense. And yeah, I mean, we don't want three, but I don't think we need 5,000. I always thought the number was around 1,000, but that's just me.

Now, one thing that I've noticed over the years of doing this, you've got some bankers who are really good at M&A. They make smart deals. Johnny Allison, a Home BancShares comes to mind. And I don't know if you've ever had the pleasure of talking to John, but he is one entertaining individual. But he's insistent there's a right way to do it and a wrong way to do it. The right way builds value. The wrong way destroys value.

Now, you've talked about this in some of your shareholder letters before. What's a good bank deal and what's a bad bank deal? How do those look?

Derek Pilecki: Yeah, I mean, I think it's easier to identify a bad bank deal. Like you can overpay, cultures can be different. You can be on different systems, operating platforms and makes the integration tough. It's a huge distraction to the organization.

So good M&As—one firm's clearly dominant. I'm not a big fan of merger of equals because everybody's looking around trying to decide who's in charge. It's a small size transaction where it's not going to be a distraction from the acquiring bank's line officers. They're going to continue to focus on organic growth while you're integrating the new bank. You know it can be access to new markets so expansion of the footprint. It can be consolidation where you're just going to rip out the back office and get all the cost saves. Or it can be, you know, bring new capabilities like, you know, some new lending platforms or some deposit platforms that the existing bank doesn't have.

But underneath it all, it has to be financially compelling. There's too many banks that make deals where, you know, it dilutes tangible book value. It's going to, the payback period is going to be, you know, three years. You know, in actuality, it turns out that the payback period is five to seven years if it ever does payback.

And so, you know, the first thing I like is a bank who's growing organically. And then if they want to do M&A on top of that, they do it in a sensible way to expand their franchise at the margin. And so, you know, so an example of a recent good bank M&A deal was UMB bought Heartland Financial. You know, UMB was growing organically, great credit culture, low loan to deposit ratio. They're growing nicely. And then to expand their market footprint, they acquired Heartland, which, you know, had run into some problems in their bond portfolio and was trading cheap compared to where it should have been. And Heartland was a good organic growth bank too. So I think under the UMB umbrella, those Heartland bankers are gonna get back to their old growth ways. And so that's an example of what I think is a reasonable good bank acquisition.

Tim Melvin: Okay. Well, we've got a good bank. Let's talk about a bad bank acquisition that you just looked at that. What? Did that make any sense?

Derek Pilecki: I mean, I think a very recent deal that I'm scratching my head of is Columbia is buying Pacific Premier. And so like the map looks great. Like Columbia gets down to Southern California. You know, it would have taken 10 years to grow the Southern California branch system, but they get it in one swoop. But Columbia is still integrating Umpqua. So Columbia and Umpqua just got together. That deal has not worked, right? Columbia has not earned the right to do another deal.

If you talk to the Columbia CEO, when they were out marketing, when the Umpqua Columbia merger was announced but not closed, people would ask him, you know, "How can I tell that things are on track?" And he said, "We just have to watch my loan growth. If, you know, we're still growing loans, things are, you know, we're not affecting the organization, like we're not distracted."

Well, the Umpqua CEO was marketing with him, heard that, and put on a bunch of home mortgages to show that Umpqua was growing too. And all those home mortgages, residential mortgages, were low coupon. And so when they integrated, the Columbia Bank CEO got stuck with all these recently originated low coupon mortgages Umpqua put on to make it look like they were growing loans. So it's just been a really tough, that's been a tough merger. And then on top of that, the stock hasn't recovered. And then you have Columbia going and buying Pacific Premier.

Pacific Premier, you know, had been a good growth franchise the last few years. It kind of had stagnated. There was some question about like what's going on there. And so like, it's not a high performing franchise at the moment. It used to be, but the last couple of years have been tough. And so like they have to integrate Pacific Premier on top of continuing to integrate the Umpqua acquisition. I think that's, you know, that's a tall order. And then you also have to ask, "Okay, what comes next?" Like, I mean, he's shown he's willing to do a deal quickly when the first one's not integrated. Is he going to do another deal?

Tim Melvin: Right. And so you just have to, you just have to step back and say, huh? Like that's, I got to avoid that.

Derek Pilecki: Yeah.

Organic Growth Metrics

Tim Melvin: Okay. Now, organic growth. How are you tracking organic growth? Is it earnings growth, sales growth, tangible book value growth, which I know some guys do?

Derek Pilecki: Yeah. I mean, I look at it a couple of different ways. So like I look at loan growth per share. So, you know, we all talk about tangible book value per share, and I think that's super important. But I also look at deposits per share and loan growth and loans per share. And so if you look at it over a long period of time, you know, the good organic growers grow loans and deposits per share. And it kind of takes into account acquisitions. So like if you, you know, because you're issuing shares in an acquisition, if you're just diluting yourself doing growing through acquisition, the organic growth banks look better.

I also think if you look at the best performing stocks over the past 15 or 20 years, they're the banks that have grown tangible book value the fastest. So that's an important metric, like which banks grow tangible book value over time. And, you know, banks go in and out of cycles of how they're valued. Price to earnings versus price to tangible book. In a downturn, we always go down to price to tangible book. But in a good cycle, everybody's looking at price to earnings. Eventually, we're going to get back to price to tangible book. And you have to be growing tangible book value to increase the value of the bank.

Tim Melvin: In a great cycle, we get back to price to make-believe earnings very quickly.

Derek Pilecki: It's true.

Tim Melvin: I do remember that part of the cycle. It's been a long time. Well, 2006 was the last time I was like, "What? You did a deal? What?" With some of those where you want to be invested, but there's literally nothing to buy at a reasonable price. I do remember those days.

Niche Bank Ideas

Tim Melvin: But, okay, you very generously agreed to share a couple of ideas with viewers today of your favorite kind of niche banks. So let's start with ESQ, Esquire.

Esquire Financial (ESQ)

Derek Pilecki: Yeah, Esquire is a great—yeah, it's a great bank focused on the attorneys. And so the attorneys have a lot of deposits because they have escrow accounts and their custody accounts that they're keeping track of for their customers. But the attorneys are not focused on earning high interest rates on those funds. They just want—it's a pain in the neck for them. They need a bank that has good software that they can get accounts open quickly. They know the money's safe. They can get the money out of the account. And so Esquire focuses on attorneys, and it's a great niche.

And on top of that, Esquire also makes loans to some attorneys to finance contingent cases that they're doing. So there's a lot of expenses attorneys incur on the hopes that they're going to earn their one third of whatever award that is. And Esquire makes low loan to value loans to these attorneys and it's super helpful. The interest rate they charge on these loans also gets deducted from the proceeds before the attorneys get their cut. So like they're only effectively paying a third of the interest costs—the client's paying two-thirds of the interest cost. So, you know, they're not—the attorneys are not negotiating on these loan interest rates.

And so Esquire has been putting up, you know, 15 to 20% earnings growth. It's asset sensitive so, you know, if we get a couple of rate cuts, they're not super well positioned, but it's a very wide margin and they're growing. They started in Long Island. They've been hiring. They've been hiring salespeople across the country. They opened a branch in L.A. just focused on attorneys. I mean, it's been a huge return on assets and return on equity. I mean, it's clearly the niche is profitable, to say the least. I mean, it trades at 14 times earnings. I think for the growth profile, you know, they're in a different environment. Like I can see small cap growth managers paying 20 times for this bank.

Tim Melvin: Okay. Actually, with a 2.5% ROA and almost 20% ROE, I mean, I would think 20 times earnings would be like, that's where we should be starting this conversation, really, because it is a great bank.

Northeast Bank (NBN)

Tim Melvin: And then NBN, one of my favorite banks. I've owned this one more times than I can keep track of. And fair revelation, I do own a few shares now. This is Northeast Bank. Tell us about this one.

Derek Pilecki: Yeah, Northeast has a niche buying loans from other banks. And so they buy commercial real estate loans that when other banks want to get out of commercial real estate or reduce their risk, and they, on average, buy them, you know, 85, 84 cents on the dollar and hold them to maturity. They also originate some high interest rate loans. They do not have a great deposit franchise. They have some community deposits in Maine, and then they wholesale fund themselves through the brokered deposit. So it's not a bank that's growing a super value deposit franchise, but they earn wide margins on these discounted loans they buy.

We've also been in an environment the last three years where there's been a lot of secondary market loan trading. And so they've been able to get their share and have grown their balance sheet attractively. And so the stock's worked. They issue stock to fund themselves, to have enough capital to support the growth. And with the stock trading up here, 1.8 times tangible book value, those stock sales are accretive to tangible book value. So the math all works for them to grow and raise capital. And it's at a bizarrely cheap price to earnings ratio, given the returns on capital that they are earning.

Tim Melvin: Yeah, you know, I wrestle with that myself because like, you know, banks are usually valued on their deposit franchise and they don't have a strong deposit franchise. It's just high ROE compounding. And so I don't know that we're going to get multiple expansion here. I think we just might get high rates of compounding at the same multiple.

Derek Pilecki: Okay.

Chainbridge Bancorp (CBNA)

Tim Melvin: Then one of the more interesting banks that I've run across in a while, this is a relatively new bank franchise, but it's a very interesting story. And I think there's a massive opportunity with Chainbridge Bancorp, but I think you know it a lot better than I do, CBNA. Can you talk about, because this is a fascinating bank. Can you tell us what's going on with this bank?

Derek Pilecki: Yeah. So this is a recent IPO. Piper just brought them public last October. So this is a bank in McLean, Virginia, that focuses on opening checking accounts for Republican campaigns, both PACs and campaigns. And so they have a very good deposit franchise. They're barely paying anything for their deposits. They actually have excess deposits, which they sweep off the balance sheet into reciprocal deposits at other banks, and they get paid on those. And so these campaign treasurers are not focused on earning yield on their checking accounts. What they care about is they have money coming in, money going out, they want to get their account open quickly, and they want to get their payments made easily.

And so Chainbridge has very good software that's focused on campaigns. They understand the business of campaigns, they get started, and there's not a long history or track record. Like it doesn't take three weeks to open up a checking account at Chainbridge if you're a campaign, like if you went to Bank of America, right? They're focused on this very low cost deposit franchise.

It's going to be a cyclical business because we have election cycles. We just went through the presidential election. It's a year and a half away from the midterms. So like we're at the low point in the cycle of what their deposits will be. Because it's a new bank, the market's not familiar with how that seasonality is going to work. I think the earnings estimates are way too low for this year and next year. I think, you know, one reason why their earnings estimates are too low is because they raised the capital and the share count's higher, but I also think they're going to earn money on the money they just raised. And then the deposits are going to grow through time if you look at it on a two-year basis.

And so I just think their earnings estimates are too low and the stock's trading barely above tangible book value. I think tangible book value is around 22. The stock's at 25. Super cheap. I'm surprised that it came public. I would think in this environment, the deposit franchise like this would have been attractive for somebody to pay up for. And that value is still there. They can always sell.

Tim Melvin: I take it they have relationships within the Republican Party that kind of makes this a little bit easier path to do business with all the various campaigns.

Derek Pilecki: Yeah. The chairman is a former U.S. Senator from Illinois. And, you know, he actually—he held the seat before Obama won the seat, the Senate seat. So he retired in 2006. And so he's totally plugged into the Republican Party. And, you know, it kind of they happened into this was, you know, the Republican National Committee used to bank at Wachovia. And in 2008, when the McCain campaign was being run, they got a little wigged out about Wachovia's balance sheet and they were looking for an alternative and Chainbridge opened their account immediately. And that kind of was how that franchise got started.

You know, Chainbridge had just opened and, you know, this former Republican senator was running this bank. You know, his family is a banking family. His father—I don't know if you remember this old bank, Suburban Bancorp in Illinois. I think they sold to BMO in the early '90s. And his brothers run banks in Illinois. So it's a banking family. And the family sold banks before. There's no reason why we think this bank doesn't eventually get sold. This is too attractive a franchise to not get sold in reality. I mean, it's just such a great business.

Tim Melvin: And the thing that really when I looked at it, my thought was they may—the market may be figuring, well, there's only going to be deposits every couple of years. That's ignoring the modern political cycle. It's way shorter than two years. We're already starting up the campaigns for the midterms.

Derek Pilecki: That's right. We're a year and a half out.

PathwardFinancial (CASH)

Tim Melvin: So, all right. One last one I'll bother you for, and that is Pathward, CASH. What's the story with this bank?

Derek Pilecki: Yeah. So this is banking as a service. So they bank fintechs and the fintechs need a bank to hold their deposits and to get interchange revenue from, you know, ATM cards. And so like they're the premier banking as a service bank. That business is tough from a compliance standpoint. Like they have to push down on the FinTechs to make sure that they're performing the right amount of compliance. There's been some banks that have entered this business and exited. Pathward is committed to the business.

They have to stay under $10 billion to get the Durban interchange revenue from the debit cards. So there are like $6 or $7 billion in assets right now. ROE is extremely high. On a price to earnings basis, it's only like nine times earnings. And so I think, and they've been buying back a ton of stock.

So, you know, an interesting—Pathward used to be called Meta. And they, when Facebook changed their name to Meta, they had to buy the ticker symbol and the trademark from these guys. And so they sold it for $50 million. So you're just a very entrepreneurial CEO, very smart. They're making money and, you know, big tailwinds behind them.

Tim Melvin: Okay. Now, a lot of banks have run into trouble with this banking, the fintech industry. Is Pathward just doing it better than they are? Or is there a secret sauce here?

Derek Pilecki: It seems to be. So it seems like their compliance organization is at the top of the heap. And so it seems like they're doing it better. You know, never say never, right? Like you have to just monitor it. But it looks like they're doing a very good job from what I can tell.

Tim Melvin: Okay.

Final Thoughts and Investment Philosophy

Tim Melvin: All right. I don't want to take in too much more of your time. I told you I'd keep you to 30 minutes or less. I lost that one a few minutes ago. So we're a little over, but any final thoughts before we let you go back to spending time with your family this afternoon?

Derek Pilecki: Yeah, I appreciate that. So, I mean, I guess you mentioned earlier about my track record, I guess one thing that I think about a lot or try to focus on is—and it's an old adage—but let your winners run. And so like, you know, some of the times the biggest money is when a stock's hit your price target, but it's still acting great. And just, you know, don't sell, don't sell too quickly. Like if a stock's working, let it run. And I think that's been one of the reasons why I've put up some big years is, you know, especially when you get to the back half of the year and nobody wants to pay taxes, you know, don't sell your winners out from under yourself. Just let them run. And, you know, your gains will compound. So that...

Tim Melvin: Okay. Derek Pilecki, thank you so much for spending some time with us today. I really appreciate it. I'm sure all the viewers are also going to appreciate it and will come away feeling like they've learned a whole bunch today. So thank you so much for your time today.

Derek Pilecki: Hey, Tim, thanks for having me on. I really enjoyed our conversation.