I have some other ideas for specific applications of SJG’sideas to analyzing stocks, which may or may not just boil down to common sense. Mutual thrift conversions are a category of stocks I can look back on in a different light after some reflection. The quality of the bank is a distraction from capacity to return excess capital. The quality of the bank is relevant in as much as it gives one confidence to purchase the shares and wait for the excess capital to be returned. These aren’t growth stories, these aren’t quaint narratives of local firms doing “better banking”, and most of the qualitative appeal simply isn’t there with the crop from the past 2 years.
The first thing I would look at is the quality of the bank. It would be difficult to buy a bank on the thesis of excess capital being returned to shareholders without establishing that excess capital will exist in coming quarters. If it doesn’t exist due to growth, I wouldn’t jump to a negative conclusion, but the growth would have to be qualified on the historical record. But none of this is where you make money. This is where you avoid losing money.
I just uploaded this write up of SPBC to scribd, which is more in depth than my post on it several months ago. As is my hope with every stock I buy, it’s cheap at 65% TBV and slightly underleveraged for a bank at 11% tangible equity/assets. They’re located in Plano, a solid economy for a bank to be exposed. Now that the stock is publicly traded, the thinking is there should be incentives to properly manage the company to peer profitability.
I don’t think this is how you make money though. It should be returning what is excess capital and post conversion that can almost be the entire market cap. So say a bank should ideally have a 9% leverage ratio, SPBC has 2% of its assets that can be returned to shareholders and the bank will still operate fine. That’s about $6m in this case against a market cap of $20m, so a cool 30% gain and the bank still trades at 77% TBV. If SPBC had a leverage ratio of 16%+ and traded at 65% of TBV, it would be a lot more interesting from this perspective.
The problem is that the world is not perfect. I shouldn’t expect a $6m check in the mail any time soon. This is a slim amount of excess capital. This isn’t a very sound thesis. SPBC may initiate a dividend and distribute some of the excess capital as they are allowed, but not to the degree that really provides a nice return in a short time frame.
Abstractly, there are certain thrifts I stayed away from that never met the qualitative requirements, like Naugatuck Valley Financial, which I spoke about a while back. In hindsight, they also stated a desire to expand, a de facto statement that I wasn't going to see any of that excess capital. It’s only been several months, so it’s not like I can this based on an outcome, but the ones I bought were bought cheap and of decent quality. It’s pretty hard to lose money with balance sheet by and large clean at a large discount to TBV. They've held up well against the recent market swoons.
So like the dome and the spandrel, a quality bank is what holds up the possibility of gobs of excess capital being returned. Will this always be the case? No, but it’s more likely than not the proper aspect to be focusing on if you want to make money. There’s nothing wrong with owning a quality bank at a cheap price, but there is no excess capital being returned which really creates the reward in the aftermath of thrift conversions.
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