This a break from my typical long thesis/posts. I want to take a look at two banks and how the capital and balance sheet strategy can impact the performance and long-term value proposition to its shareholder base.
Let us start with the items the following two banks have in common:
- Each bank has between $3.0B and $4.0B in total assets.
- Each bank is well-capitalized (and well above regulatory minimums)
- Each bank has good profitability metrics (ROA > 1.4% and ROTCE > 10.0%)
- Cost structures are similar (efficiency ratios < 60%)
- Loan portfolio/risks similar
- Noninterest Income (as % of revenue) are similar
- Differences in Asset Quality metrics (NPAs, NPLs, etc) are immaterial
- Each bank is geographically constrained and operate in markets with low/slow growth potential.
With those disclosures, let’s dive in…
Continue reading “A Tale of Two Banks”
Ron Popeil Note: this name is illiquid, boring, and unlikely to accommodate an institutional buyer base. But I like the bank, shares are cheap, and I want to write it up.
Financial Reporting Note: FABP reports to a June 30 Fiscal Year. In writing this post, I’ve done my best to clarify any/all items that are a Fiscal Year-End calculation.
Another entry to my “Ron Popeil Bank Basket“: Farmers Bancorp (OTC Pink: FABP) the holding company for The Farmers Bank in Frankfort, Indiana. Farmers Bank, organized in 1876, has a long history of servicing its customer base in central Indiana and delivering strong performance to its shareholders. Since 2008, FABP management has delivered an average 1.02% ROA and 9.95% ROTCE, and the Bank appears well positioned to continue to deliver a similar return profile to its shareholders over the next cycle(s).
Shares of FABP are currently trading at a trailing P/E multiple of 9.8x and a P/TBV ratio of 122%. Both the EPS-based and TBV-based valuations are outright attractive levels to take an ownership stake in a banking franchise with a proven track record of delivering double-digit returns on equity over a full credit cycle. Continue reading “Farmers Bancorp (FABP)”
Quick note on the banks profiled — I don’t think there is a good way to discuss/monitor portfolio management involving these long ideas. For example:
Continue reading “Portfolio Management Note”
First Mid Bancshares, Inc. (Nasdaq: FMBH) is a $3.8 billion community-focused bank franchise with an attractive deposit base and a diversified revenue stream anchored by a Trust & Wealth Management and Insurance subsidiaries. The company’s bank subsidiary, First Mid Bank & Trust, traces its roots all the way back to the First National Bank of Mattoon, which was founded in 1865 and carries the torch as the oldest nationally chartered bank in Illinois. Today’s organization provides a full suite of financial services in addition to its branch banking legacy, including a trust & wealth management arm with $4.2B AUM), agricultural services (farm management & brokerage), and diversified insurance offerings. The company’s footprint is spread throughout central and southern Illinois, along with a loan production office in Indianapolis and a location in Clayton, MO.
At current levels, I believe FMBH shares are attractively priced to initiate a long position in a bank with a strong deposit franchise, strong capital positions, standalone and acquisitive growth potential, and a track record of profitability and credit quality. Shares of FMBH are currently trading at a trailing P/E multiple of 12.8x and a P/TBV ratio of 149%. Both the EPS-based and TBV-based valuations are slightly below its peer bank average and indicate shares could see 13-15% upside based on year-end 2019 earnings and TBV growth to be valued alongside peers. Furthermore, I believe FMBH’s diversified revenue stream is being undervalued at current levels.
Continue reading “First Mid Bancshares, Inc. (FMBH)”
Peoples Financial Services Corp. (Nasdaq: PFIS) is the holding company for Peoples Security Bank & Trust Company, which was formed in December 2013 in a merger that brought together two 100+ year old bank franchises in Northeast Pennsylvania. Since the merger, PFIS has continued to enhance its franchise value in its core/legacy markets and targeted four additional markets/counties as growth opportunities. As it stands today, Peoples is the 12th-largest bank headquartered in Pennsylvania (largest in NE PA).
At current levels, I believe PFIS shares are attractively priced to initiate a long position in a bank with a strong deposit franchise, strong capital positions, standalone growth potential, and helmed by a management team with a track record of profitability and credit quality. Shares of PFIS are currently trading at a trailing P/E multiple of 12x and a P/TBV ratio of 146%. Both the EPS-based and TBV-based valuations are attractive levels to take an ownership stake in a banking franchise that is strategically and operationally positioned for strong growth while delivering double-digit returns on equity over a full credit cycle.
Continue reading “Peoples Financial Services Corp. (PFIS)”
Red River Bancshares, Inc. (Nasdaq: RRBI) is the holding company for Red River Bank, a Louisiana state-chartered bank, and provides a fully integrated suite of banking products and services tailored to the needs of commercial and retail customers. The company was founded in 1998 by a group of experienced bankers and business leaders and Red River Bank opened for banking services on January 14, 1999. Over the following two decades, management expanded across the state of Louisiana, via organic growth and two whole-bank acquisitions, and now ranks as the sixth-largest bank headquartered in Louisiana.
Red River raised capital through five private stock offerings from 1998 to 2017, raising $40.9 million over the 20 year period. During this 20 year period, management grew the balance sheet at a 18.2% compound annual growth rate (92% of the total growth was organic) all while maintaining an impressive credit history. Management noted in its S-1 filing that during “the years 2003 through 2018, our average ratio of nonperforming assets to total assets was 0.26% and our average net charge-off ratio was 0.08%.” Over the same timeframe, Tangible Book value per share compounded at 12.5% compound annual growth rate.
As part of its continued growth strategy, management decided to raise capital via the public market for its most recent raise and completed its initial public offering in May 2019. RRBI sold a total of 690,000 shares at an IPO price of $45.00. After an initial pop in the share price ($50.75 high on May 10th), RRBI’s share price has trended lower and broke below the IPO price in late August.
At current levels, I believe RRBI shares are attractively priced to initiate a long position in a bank with a premier deposit franchise, strong capital positions (levels are enhanced post-IPO), standalone growth potential, and helmed by a management team with a long track record of profitability and credit quality. Shares of RRBI are currently trading at a trailing P/E multiple of 12x and a P/TBV ratio of 133%. Both the EPS-based and TBV-based valuations are attractive levels to take an ownership stake in a banking franchise that is strategically and operationally positioned to deliver double-digit returns on equity over a full credit cycle. Continue reading “Red River Bancshares, Inc. (RRBI)”
Note: this is a departure from the banks that I have profiled, to date, on this blog. M&F Bancorp has significant challenges to address, and as recently as year-end 2017 there could have been an argument whether or not MFBP was a going concern (MFBP’s equity position decline nearly 50% from FY 2015 to FY 2017). I do not view an investment in MFBP to be a core holding. Additionally, due to the size of the MFBP and its distressed valuation, this is a company WITH A TINY $5 MILLION MARKET CAPITALIZATION. It is illiquid.
M&F Bancorp, Inc. is the bank holding company of Mechanics and Farmers Bank. Founded in 1907, M&F Bank is North Carolina’s oldest African American-owned bank and the second oldest in the nation. Over the last century, M&F Bank has grown into the 9th largest minority-owned financial institution in the United States, upholding the community values on which the bank was founded. The Bank has seven branches in NC: two in Durham, two in Raleigh, and one each in Charlotte, Greensboro and Winston-Salem. Mechanics and Farmers Bank remains committed to providing bank services to a historically overlooked and underbanked community in the markets where it does business.
Continue reading “M&F Bancorp, Inc (MFBP)”