2022 Investment Series: Consolidation Trend in Community Banks

Community Bank Merger

Good news. A number of banks reported earnings on Monday. And they all knocked the ball out of the park. Now, I am not expecting you to know the names Atlantic Union Bankshares Corp (AUB), Community Bank System (CBU), Bank of Hawaii (BOH), or First Bancorp (FB). But they all had big days. 

Here’s the thing. Banks merge, and they merge often. Since 1987, the number of banks in this nation have gone from about 15,000 to under 5,000. The banks didn’t go out of business. They sold to larger banks. And investors reaped huge rewards from this consolidation. 

Now, I listed four banks that reported earnings today. And I wouldn’t buy any of them. What? Yeah, all of them trade at a price-to-tangible book value that is well over 1. 

Tangible Book Value of Community Banks

Tangible book value for a bank is its liquidation value. So, if a bank’s tangible book value was $10, and the stock trades for $6, and it liquidates, the stock is worth $10. But – in this example – it trades at 60% of its tangible book value – or 0.6x. 

There are 30 banks right now with a market cap under $2 billion that trade under a tangible book value of 1. Why? I have no idea. Markets are not rational. And most investors are not patient enough to wait for the stock to rebound. But I know that consolidation is going to continue.

Banks have aging boards of directors. They have very high compliance costs and face massive cybersecurity investments. They have to invest in apps and other technologies to compete against their larger competitors.

And now, the IRS is pushing for a reporting requirement that would make every bank offer insight on any account that has inflows and outflows over $10,000 each year (minus income payments). 

It’s a bad time to be community banks in areas that are experiencing population losses and higher compliance costs. So what will they do? Sell. Here are a few tickers and names, and their price to tangible book value.

All of them are buys at these levels. This insight is free. 

So, in the words of H.L. Mencken: “If, after I depart this vale, you ever remember me and have thought to please my ghost, forgive some sinner and wink your eye at some homely girl.”

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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