Once is Chance, Twice is a Coincidence, Three Times is a Pattern

About nine months ago, Oddball Stocks Newsletter guest writer Catahoula wrote an article entitled “Put Yourself in My Shoes” on Five "Teenage" OTC-listed banks that were trading between 0.75x and 1.25x Tangible Book Value, with an efficiency ratio under 55%, net interest margin greater than 300 basis points, and were between 10 to 20 years old (hence, "teenagers").  

Today, we sat up and took notice when the third of those five banks, Centric Financial Corporation (CFCX) announced a merger with First Commonwealth (FCF) in an all-stock transaction valued at approximately $16.20 per share.

Over the years, we've grown fond of Centric, a solid bank that has flourished under Patti Husic, President and CEO. CFCX  was founded in 2007, making it a teenager at 15 years old. Centric Bank has principal executive offices in Enola, Pennsylvania. This is the Harrisburg area about 110 miles away from Philadelphia. A major hiccup along the way occurred about a year ago when the bank suffered a $5.1 million fraud in 3Q21. Though mighty unpalatable, one loan fraud is a business risk in banking.  

CFCX has sometimes traded 85% of tangible book value, which is confounding. If you compare Centric (CFCX), which trades on OTC, with Bank of the James (BOTJ) a similarly-sized bank on the NASDAQ, Centric is more efficient and profitable. But there's sometimes been a valuation difference of thirty percent of tangible book value between otherwise comparable public and private (OTC-listed) banks! 

We find this really fascinating because these paired comparisons of similarly-sized banks demonstrate a discount that arises purely by virtue of being OTC-listed instead of public. If the Oddball Stocks Newsletter stands for anything, it is for harvesting this OTC valuation discount.

We asked Catahoula why he thought that so many of the teenage banks he mentioned have merged.  He said that a bank in its second decade often faces increasing pressures. The board and executives have tapped out their contacts in the immediate community for business. They contemplate growth through expansion, but they are not as familiar with neighboring towns. Sometimes they are reluctant to acquire acquire another bank. He also said that capital management becomes more important. As profits accumulate, banks may face pressure to pay a dividend or buyback stock.

Often, early investors look for a a cash-out of their initial investment before two decades have elapsed.  Banks initially listed on the OTC Markets usually intend to graduate to the major exchanges, hoping to uplist to NASDAQ, and ultimately the NYSE. Uplisting supports expansion of the shareholder base to include institutional investors, with a goal of eventually becoming included in the Russell 2000 or 3000 indexes.  

Whether increased valuation comes from a buyout or uplisting to a major exchange, at Oddball Stocks we like to eat steak for the price of hamburger. We will continue to bring you small, non-public companies and banks trading in the obscure corners of the market. If you are interested in the two remaining teenage banks that Catahoula identified, be sure to check out Issue 37 of the Oddball Stocks Newsletter.