I'm late to the party, but banks are beginning to look interesting - maybe because I'm just beginning to look. Smaller banks have been smacked around for a variety of reasons. Competition is pretty fierce. Some have gobs of shitty loans on their balance sheets. The market did throw the babies out with the bath water, but now some of the better regional or small saving and loan banks have been repriced to a realistic level. I find the mutual thrift conversions to be the most interesting area because there are many still coming to market that have strong balance sheets and conservative underwriting standards.
Mutual thrift conversions are a unique transaction that Klarman and Greenblatt highlight in Margin of Safety and You Can Be A Stock Market Genius, respectively. Basically a thrift issues shares to the market and purchasers end up owning the proceeds of the offering as well as the bank itself since nobody owned the bank prior to the offering. It's a case of 2+2=5 since the bank doesn't have any shares outstanding, but the bank can't sell shares for nothing.
The typical example is when you can purchase the bank for 50% of tangible book value. A bank worth $10 has a share offering for proceeds of $10. The stock trades for $10, but it represents $10 in proceeds and $10 of bank. What is interesting with some of the small (<$30m) offerings is that interest is so low that some offerings have been below 50% of tangible book value. While I missed the boat on those, there are still some upcoming. The nice thing is that even if they are up 20-30%, they still trade at a substantial discount to tangible book value despite having enviously low levels of bad loans, so they are still worth looking at. Every thrift needs to apply to the OTS to convert. The OTS is going to be disbanded shortly, but you can find all the application letters here so that you can follow the upcoming conversions. All their prospectuses are available through EDGAR. Even though the banks don't have 10 years of information filed with the SEC, they have had to report transparent financial data to the FDIC. This allows someone to go back in time and see how their loans have performed and what kind of growth the bank has seen.
What first got me interested was this write up of a mutual thrift conversion last month. I think the level of NPLs at that bank make it less attractive since downside is greater. There are others that have better loan performance and are overcapitalized. Their earnings power is low, but the asset quality is strong and are far more valuable than the current market capitalization. An issue not specific to Wolverine is the liability side comprised of advanced from the Federal Home Loan Bank (FHLB) and deposits. Advances from the FHLB are a high cost source of funds. Many of the smaller thrifts have relied on time deposits to attract funds, which are considered lower quality since these tend to flow to wherever is offering the best interest rate. There are still plenty of banks with core deposits comprised of sticky accounts like checking and savings though. There is value in these above tangible book value because an acquirer would pay extra for the deposits it would have to pay a lot to acquire through incentives. That's why you see the megabanks offerings cold hard cash for you to open an account with them.
I haven't really looked at the megabanks, but I have seen some prominent investors tout BofA as cheap. Jeffrey Gundlach sounded off BofA as a proxy for an echo in the housing bust. The video is more worthwhile than the article. He is one articulate guy who backs his ideas up with solid facts. He makes a very pertinent point about BofA holding tons of subprime loans that are still souring and have worse and worse recoveries. This opens up the potential that the entire principal on the loan gets written off. It will be interesting to follow for its broader ramifications on confidence in the rally, but will prove immaterial to the value of many of the thrift conversions since they never wrote poor quality loans. At the same time, it may push out the timeframe for when the market reprices the banking sector.
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