Small Bank Share Cannibals

In our recent interview with Sam Haskell of Colarion Partners, we talked about small bank "share cannibals" that are taking advantage of cheap valuations (low P/TBV) and excess capital to do major share repurchases. One example that we had already blogged about in August is Crazy Woman Creek Bancorp (CRZY), which borrowed money at 5% and bought back 15% of its outstanding stock.

We can infer from CRZY's press release and financials that they paid about $14.50 for the shares, which means book value should now be $13.2 million ($24.96 per share) versus the market cap at $16.45 per share of $8.7 million. The P/B should now be around 66%. If you haircut the $3.4 million of premises and equipment and subtract $132k of goodwill, adjusted book would be $9.7 million for a P/aTBV of 90%. With equity now down to an estimated $13 million after the repurchase, and $138 million of assets (9.4% equity/assets), the company has less of an excess of capital to spend on repurchases. They earned an average of $1 million in annual comprehensive income for 2018 and 2019 (averaging about 7% ROE) so that could potentially fund more repurchases.

Still, it is worth looking for more banks that are going to do big repurchases, with more catalysts on the horizon rather than the rear-view mirror. We would ideally like a low P/TBV, high equity/assets, and a high ROE. We can start with other banks that have recently announced share repurchases. 

The holding company for PlainsCapital Bank, Hilltop Holdings Inc. (HTH), has tendered for between 18.5% and 21.3% of its own stock:

As of September 21, 2020, we had 90,251,015 shares of common stock outstanding. At a Purchase Price equal to the tender offer’s minimum price of $18.25 per share, we would purchase 19,178,082 shares if the conditions to the tender offer are satisfied or waived and the tender offer is fully subscribed, which would represent approximately 21.3% of our outstanding shares as of September 21, 2020. At a Purchase Price equal to the tender offer’s maximum price of $21.00 per share, we would purchase 16,666,666 shares if the conditions to the tender offer are satisfied or waived and the tender offer is fully subscribed, which would represent approximately 18.5% of our outstanding shares as of September 21, 2020. If the conditions to the tender offer are satisfied or waived and the tender offer is fully subscribed at the minimum price, we will have 71,072,933 shares outstanding immediately following the purchase of shares tendered in the tender offer (based on the number of shares outstanding as of September 21, 2020). If the conditions to the tender offer are satisfied or waived and the tender offer is fully subscribed at the maximum price, we will have 73,584,349 shares outstanding immediately following the purchase of shares tendered in the tender offer (based on the number of shares outstanding as of September 21, 2020).

As of June 30, 2020, HTH had a book value of $2.3 billion of which $291 million was goodwill and intangibles. That's a book value per share of $25.40 or a tangible book value per share of $22.17. So, Hilltop is willing to pay 95% of tangible book for its own stock. For the first half of 2020, Hilltop had comprehensive income of $191 million, which if annualized is a 16.6% return on total equity. 

In the August Issue of the Oddball Stocks Newsletter (Issue 31), we published scatterplots showing the relationship between P/TBV and ROE. There's a relationship: higher ROE banks tend to sell at higher TBV multiples. But, note that HTH was trading for almost 20% less before the buyback was announced, or under 80% of tangible book.

The holding company for CommunityBank of Texas, CBTX, Inc., (CBTX) announced that they are going to repurchase close to ten percent of their outstanding shares. As of their June 30, 2020 report, they had shareholder equity of $537 million and tangible book value of $452 million, compared with a market capitalization at $18.50 per share of $458 million. Shares have rallied by 20% after the buyback, which makes it look like management is pushing the price up to around TBV with their repurchases. 

CBTX earned $50 million of comprehensive income on average annually for 2018 and 2019, or close to 10% on average total equity. A couple of other noteworthy things here. First, directors and officers own 30% of the company which is impressively high. Second, loan deferrals were $545 million at June 30th but that has dropped to $129 million as of an investor presentation given August 30th.

The holding company for MVB Bank, MVB Financial (MVBF) announced that they have authorized for repurchase up to 3% of their outstanding shares. As of their June 30, 2020 report, they had total shareholder equity of $229 million and tangible book value of $209 million versus a market capitalization at $17.70 per share of $212 million. For the first half of the year, they have earned comprehensive income of $18 million, which annualizes to a return of about 16% on total equity.

The holding company for Centric Bank, Centric Financial Corporation (CFCX) announced that they have approved the repurchase of up to 8.25% of outstanding shares. As of their June 30, 2020 report, they had shareholder equity of $82 million and tangible book value of $81 million versus a market capitalization at $7.25 per share of $63.5 million. This is a bigger discount to TBV (0.78x) although it is worth noting that as a smaller institution, it has a higher share of assets in premises and equipment ($17.8 million). They earned about $8 million in comprehensive income in 2018 and 2019, which once again is a 10%+ ROE. Centric's directors and officers own 11.15% of the company. There are two funds with stakes: EJF Capital with 9.7% and Banc Fund Co. LLC with 9.1%.

The holding company for First Seacoast Bank, First Seacoast Bancorp (FSEA) announced that it is buying approximately 5.0% of the currently outstanding shares owned by stockholders other than First Seacoast Bancorp, MHC. (FSEA demutualized in July 2019, and 6,083,500 shares of common stock of the Company are issued and outstanding, of which 55% are issued to the MHC, 44% were sold to the Bank’s eligible members, the ESOP, and certain other persons in the stock offering, and 1% were contributed to the Foundation.) As of their June 30, 2020 report, they had total shareholder equity of $58.4 million and no goodwill or intangibles versus a market capitalization of $47 million at $7.75 per share for a P/TBV of 0.80x. 

For the first half of 2020, FSEA had comprehensive income of $1.26 million, which annualizes to a return of about 4% on their total equity. Their shareholder equity is 12.4% of total assets. Premises and equipment are 9% of shareholder equity; sometimes we deduct this in calculating an aTBV so that we don't end up buying too many buildings that belong in the Bank of Utica Small-Town Bank Headquarters Hall of Fame.

The last one we'll mention today is the holding company for EagleBank, Eagle Bancorp, Inc. (EGBN), which announced that it was lifting the suspension of its previously established share repurchase program. As of their June 30, 2020 investor presentation, they had tangible common equity of $1.1 billion, which was $33.62 per share, compared with a current share price of $30. The share price has run up significantly from $25 in late September. Once again, the announcement of repurchases - and maybe the repurchases themselves - have been a catalyst for a revaluation.

Of this set of recent share repurchasers, you will notice that the larger banks are in the high ROE, higher P/TBV bucket. They may interest you if you think you are able to handicap the businesses and judge that those fat profits will continue. But as Oddball investors, we are always more interested in the non-public, small companies at huge discounts to liquidation value. Sometimes traits like profitability exhibit momentum, but almost everything eventually reverts to the mean, which means that it may be smarter to buy shares in a cheap company with a fixable problem than pay a premium for a company where things have been going perfectly. In the upcoming Issue of the Oddball Stocks Newsletter (Issue 32 in November), we will be surveying the dirt cheap small banks.