The Sweet Sound of Small Banks making money over many decades.
Average deal price for any reliable community bank today is 1.50 -2.0 book value and usually a P/E of about 15-25 is gotten. Things can vary due to size, asset quality, market area, deposits market share. Also, management strength is critical and are they staying?
Today we yet another bank deal with Hancock Holdings (NASDAQ:HWC) merging with Mid-south Bank (MSL) for $12.75 a share in stock and 1.40 times tangible book, while this deal is no huge surprise the price for a bank even with credit issues can get a reasonable price over book, even though they had credit troubles. If MSL was clean, I am sure it would have been more like 1.75 or 2 times book for Texas banks that are clean.
MSL had a substantial deposit footprint and are in some fast-growing markets something Hancock wanted.
MSL did report another significant loss for the quarter today that might have pushed this sale of the bank.
Last Month we had Choice One Financial (NYSE:COF) merge with County Bank Corp and a merger of equals. Since then COFS stock has slowly crept up, and they paid a special cash dividend to the shareholders.
GNF Financial (OTCPK:GNBF) usually pays cash dividends and stock dividends.
Sana Cruz Bank (OTCPK:SCZC) usually pays cash dividends and stock dividends.
You get the idea, many times the stocks don’t even trade down once the stock or cash dividends are paid they kind of roll into the price, seems crazy but that’s how it works many times.
The real payday is when they sell out for cash, and it is like a 100% pop, that day, like Kinderhook Bank (OTCQB:NUBK) sold to Community Bank Systems (CBU) earlier in the year for almost two times book and a 100% pop in the stock.
Today we still have insiders buying shares.
Today we have deals and mergers happening each month.
Today we have a friend at the Fed.
So the banks are making a steady income today, with lower than normal risks.
Today we have bank stock specialists and activists buying shares.
The number of the banks left has dropped from 15,000 plus 15 years ago to under 6,000 today; this trend will continue till we get to say 2,000 banks or less. That’s 4,000 more deals or about 15 more years of deals.
We expect at less 100 more deals this year, the past few years we have got about 200-250 deals.
Some names to go next include, OPY, GNBF, and MPCH all for different reasons and all are cheap and all three as of today are under tangible book value. Even though book value grows each year, so they can buy their stock and make it accretive to book value and earnings growth. So far only OPY is buying their stock like crazy today, the other two don’t trade much, but the Banks should at least do a dutch tender for 15% of their stock at 10% over the book value. If for no other reasons than to create liquidy for long-time shareholders that can’t wait for the sale.
Some banks will get just book value or just over that if they have no growth or slow markets, as long as the book is clean. All banks with stable asset quality can close up today, and you would get the cash that’s what book value is cash. The sale of the bank is always better. Usually, another bank can cut costs and save 20% + on expenses going forward, that’s why usually they pay at least 150% of the book a premium for buying a trustworthy business that took years to develop. So as long you can buy at book value or less you have limited downside unless the management does something stupid, which can happen. Learn to know your bankers; it is crucial.The bottom line is this sector has so many names to invest in and so many banks that are not covered by any analysts there is always a few miss-priced at any time, in good times and bad times.
Many do trade on the OTC Bulletin Board, so they are not marginal, which can be a good thing.
But plenty trade on the NASDAQ, but the real bargains are usually on the Bulletin Board.
They are many smart players in this field, so follow big money, if you can’t do the work yourself.
But there is not any other sector were the upside can be 100% and the downside 5% on dozens of names other the bank sector.
The only real downside is if you pay the right prices near book is the large spread on the stocks, many have a $1.00 range or more, ( example bid $29.00- ask $30.00) so if you have to get out fast you may have to pay for that, but as long as you bought at the right prices you should be ok. Always use limit orders on any trades anywhere.
Some final ideas to spot takeover targets:
Look for banks with over $50 million in deposits per branch they seem to get the best prices.
Look for near perfect asset quality to protect the downside risk.Look for smart, honorable bankers.
Look for active markets; Like Texas or CA or slow markets, both can win, just lower prices for no
Some of the bigger banks like J.P. Morgan (NYSE:JPM) Park national (NYSEMKT:PRK) have top management, read their annual reports and learn a lot about the banking sector and the overall economy, before you do anything in this space, read those two reports first today, before you buy any stocks ever again. You will learn a lot, just from a few hours of work.
Remember you only need 5 or 6 issues to become wealthy or less any more names than that, and you won't have the time to do the work on all of them.
Douglas Hughes 4/29/2019BankNewsletter.com
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: great article for old and new bank stock investors