Dad Fell Harder Than the Markets

banks

The Dow Jones stretched out another gain to finish the week, and the VIX is back under 18. I am just finding out. Last night, I took my daughter out to ride her bike and to blow bubbles. She had spilled soap on the front step, and I hosed it down. But I didn’t know that the soap wasn’t all gone. 

So, when I stepped out to take a phone call today, I found myself awkwardly landing hard on my right arm. A solid right wrist sprain and what feels like a cracked ulnar later, and I’m back in front of my computer. In the end, I fell harder than the markets this week.

Playing the Banks 

Yesterday, I noted that my father-in-law talks to me about community banking just as much as he does about the Baltimore Orioles (and boy, does he like complaining about that baseball team a lot.) As I explained, he focuses on U.S. community banks that are trading at a tangible-book-value of 1 or less. That means the bank is valued on the market at less than the sum of its parts. 

His thesis is simple. The only way to increase your deposits in America (aside from population growth and wealth) is to buy another bank. Despite this obvious consolidation trend and the expectation of rising interest rates, there are somehow 85 banks in the U.S. trading at a price-to-tangible book value of 1 or less. It’s worth noting that the bulk of these banks are very illiquid with broad bid-ask spreads and tend to sell off quickly at the first mention of fear. 

Community Bank Stocks

I promised you a bank yesterday. But I’ll give you two because these are the only two that trade under that level and have a daily trading volume of at least 100,000 shares. Hanmi Financial Corporation (NASDAQ:HAFC) and NorthEast Community Bank (NASDAQ:NECB). 

On a cash-flow basis alone, HAFC should be worth more than two-times its current price. Yet it’s trading at a P/TBV of 1. This is an interesting bank because it primarily serves the Korean communities of California, Texas, Illinois, New York, New Jersey and Virginia. There is a stunning disconnect between some banks’ valuation and the customers they aim to serve. 

For example, Citizens Bancshares (OTC:CZBS) is a small, Black-owned community bank holding company with branches in Georgia and Alabama. The tangible book value of this company’s stock is about $26.01. 

It trades today for $10.75. That’s right, it trades for 42 cents on the dollar. Citizens is a very illiquid stock. Today, about 1,000 shares exchanged hands. If you’re interested, set a limit order around $10.50 and wait. It’ll fill, even if it takes a few months. 

But at some point this banking company is going to sell itself, and I’m happy to accept a dividend while waiting and investing in their great company. Meanwhile, NorthEast’s P/TBV is even cheaper at 0.83x. It trades more than 100,000 shares per day. That’s good news. 

And given that populations are leaving New York, this company becomes a prime takeover target. I’ll take a deeper look at each company next week. I’m very familiar with both because I’ve been taught them the same way that a father might teach a child how to keep score. I’m not sure if we plan to pass down the community bank knowledge to my daughter. But I know for a fact that the consolidation trend will be around throughout her entire life. For now, I’m going to ice my wrist.

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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