10 American banks with hidden ECIP windfall gains
I mainly invest in stocks that I find using quantitative rankings. But sometimes I read about a really compelling idea from someone else. One of these ideas has been posted by anonymous Twitter user @dirtcheapstocks here and here.
This particular idea is about certain American community banks. These banks will get or have already got a capital increase through selling preferred shares to the US federal government. What is special is that, in my opinion, these preferred shares are worth much less than their book value. Reasons are that these prefs are perpetual, have low interest rates (at most 2%) and are non-cumulative. They might be worth as little as 10% of their book value but to be conservative I use 20% of book value for my analysis below.
More details are in the links above from @dirtcheapstocks. I have verified many of the facts from his/her article. People who wish to verify these facts themselves can start with these 2 documents from the US federal government: here and here.
Furthermore have a look at this spreadsheet from the US government with a list of community banks participating in this program. The list might provide you with other undervalued banking stocks. If you find them then please do me a favor and send me a message or post a comment to this article.
Unfortunately I do not have time to go through this spreadsheet with more than 100 banks. Therefore I restrict my analysis to the 10 banks @dirtcheapstocks mentioned in his article. Furthermore, normally I try to find all kinds of facts related to the business and governance when I research a stock. For these 10 stocks I restrict my analysis to checking the balance sheet and estimating equity and Price/Tangible Book adjusted for the estimated real value of the preferred shares.
I think limited analysis is enough here because I am not looking for high conviction picks. Instead I have invested in a backet of these stocks. Moreover, my feeling is governance risks are low with American community banks. Other risks are loan losses and financial distress. The first risk is difficult to assess anyway and the second risk is minor because of the ECIP support.
M&F Bancorp (ticker MFBP on OtcMarkets)
M&F Bancorp does not file with the SEC. But the company does file quarterly reports. See the proxy statement and the annual report over 2021 and the recent quarterly report (31 March 2022).
According to this press release the company will receive 76 million USD under the ECIP program.
On the balance sheet there is 17.3 million USD of other non-cumulative perpetual preferred shares as well. I think the company has to share dividends between common shareholders and these preferred shareholders based on a reference price of 11.538 USD per share. So these 17.3 million USD of prefs corresponds to 17302 preferred shares of 1000 USD each, corresponding with 1,499,566.65 shares. So, I think these prefs are very similar to commons. The main difference is that they do not have significant voting rights.
Therefore I arrive at the following numbers:
I compute the share count at 1,499,567 (equivalent from non-voting prefs) +1,979,975 (commons) = 3,479,542. Therefore, at 17.83 USD per share the market cap is 62.0 million USD.
Tangible assets are 365 million USD and the book value of the commons is 39.7 million USD. I estimate the ECIP adjusted book value at 100 million USD. Therefore P/Adjusted book value = 0.62.
This is not expensive for a bank. However, for me M&F Bancorp is not cheap enough.
Citizens Bancshares Corp (ticker CZBS on OtcMarkets)
Citizens Bancshares Corp does not file with the SEC. See their website (Citizens Trust Bank). The annual report is here. Total assets are 669 million USD.
On the balance sheet I see 22 million USD of preferred stock. This is probably other preferred stock. When searching the annual report for “ECIP” page 47 reveals the company will sell preferred stock for 90.9 million USD to the government in 2022. However the government spreadsheet mentions 95.7 million USD. That amount may include debt as well.
There are 1,976,215 shares outstanding including 90k non-voting shares and net of 457,461 treasury shares. At 25.1 USD per voting share the market cap is 49.6 million USD. Tangible book value is about 52 million USD. So, the stock trades for approximately book value. But when using a more realistic value for the ECIP preferred shares adjusted book value is more like 120 million USD. At a multiple P/Adjusted book value of 0.42 I find this stock very cheap.
Bay Community Bancorp (ticker CBOBA on OtcMarkets)
The operating subsidiary of Bay Community Bancorp is Community Bank of the Bay. According to the spreadsheet this bank received 119.4 million USD of ECIB. See also this press release. Furthermore the annual report over 2021 is here. This bank does not report with the SEC. Total assets are 716 million USD.
The tangible book value of the commons is 68 million USD. The share count: 8,814,208 (voting) +56,844 (non-voting) = 8,871,052. Market cap: 79.4 million USD at 8.95 USD per share.
ECIB adjusted book value should be about 185 million USD. Therefore, P/Adjusted book value is about 0.43. I think that is very cheap.
BankFirst Capital Corporation (ticker BFCC on OtcMarkets)
BankFirst Capital Corporation does not report with the SEC but still informs investors well. Here is the recent quarterly report (30 June 2022). See also the annual report over 2021 and the proxy statement (circular for the annual shareholders meeting). Tangible assets are 2.132 billion USD.
According to the spreadsheet from the federal government the company received 175 million USD of ECIP support.
Tangible book value per common share is 20.85 USD. Share count: 5,322,699, so market cap = 205 million USD at 38.54 USD per share.
I estimate the book value adjusted for the real value of the ECIP support is about 300 million USD. So, P/Adjusted Book value is about 2/3. That is not the bargain I am looking for.
PCB Bancorp (ticker PCB on Nasdaq)
PCB Bancorp is listed on a major exchange and therefore has to file annual and quarterly reports with the SEC. The filings are here and the most recent quarterly report is here. See also the annual report over 2021 and the proxy statement. See also the filing related to the ECIP support. Total assets are 2.345 billion USD.
At 18.74 USD per share I compute a market cap of 283 million USD. The book value of just the commons is 334 million USD. PCB Bancorp got 69.1 million USD of ECIP support.
When adjusting the book value for the real value of the preferred shares I estimate it at about 390 million USD. In that case P/B is about 0.73, which is not the bargain I am looking for.
Security Federal Corp (ticker SFDL on OtcMarkets)
The SEC filings are here. Total assets are 1.40 billion USD.
At 27.29 USD per share the market cap is 88.8 million USD. The company received 82.9 million USD of ECIP support. Including 80% of this support in the book value of the commons results in 157 million USD of adjusted book value. Therefore adjusted P/B is about 0.57.
Even with ECIP support leverage is high. But Security Federal Corp is cheap enough. Moreover, this stock has a low P/E.
United Bancorporation of Alabama (ticker UBAB on OtcMarkets)
Total assets of United Bancorporation of Alabama are 464 million USD. The bank gets or got 123.75 million USD of ECIP support. At 29.45 USD per share the market cap is 106 million USD. Tangible book value of the commons is 27.4 million USD. After adjusting for the real value of the preferred shares I estimate the book value at 127 million USD and P/B at 0.83. This is not the bargain I am looking for.
Ponce Financial Group (ticker PDLB on Nasdaq)
The SEC filings are here. Total assets are 2.04 billion USD.
At 9.25 USD per share the market cap is 229 million USD. The company gets or has already got 225 million USD of ECIP support.
The tangible book value of the commons is 291 million USD. When adjusting for the real value of the ECIP support I estimate the book value at 475 million USD and P/B at 0.48. I think this is very cheap.
Bay Community Bancorp (ticker CBOBA on OtcMarkets)
Bay Community Bancorp does not file financial reports with the SEC. See the annual report over 2021. Total assets are 716 million USD.
I compute the share count at 8,871,052 and therefore the market cap is 80.9 million USD at 9.12 USD per share. The company got or will get 119.4 million USD of ECIP support. Tangible book value of the commons is 68.0 million USD. When adjusting for the real value of the preferred shares I estimate the book value at 164 million USD and P/B at 0.49. I think this is very cheap.
Broadway Financial Corp (ticker BYFC on Nasdaq)
See the SEC filings, in particular the recent quarterly report (30 June 2022). Tangible assets are 1.20 billion USD.
I compute a share count of 76,120,828. At 1.16 USD per share the market cap is 88.3 million USD . Tangible book value of the commons is 106 million USD. When adjusting for the real value of the preferred shares I estimate the book value at 226 million USD and P/B at 0.39. This is extremely cheap.
Harbor Bankshares (ticker HRBK on OtcMarkets)
Harbor Bankshares does not file financial reports with the SEC. See the annual report over 2021. Tangible assets are 331 million USD.
I compute 1,180,620 for the share count. At 19.45 USD per share the market cap is 23.0 million USD. The book value of the commons is 16.7 million USD. When adjusting the book value for the real value of the preferred shares my estimate of book value is 67 million USD and P/B is 0.34. This is extremely cheap.
Final words
In the long run P/B is the most important metric for banks without many competitive advantages like those mentioned here. These stocks can trade below book value but usually not much below book value. Only with special circumstances they can trade below book value for a substantial amount of time. For example, I remember many bank stocks with P/B below 0.5 in the years after the Great Financial Crisis. Unfortunately there are no cheap banking stocks from the Great Financial Crisis left. However, I think ECIP support is also a special situation that has resulted similar investment opportunities.
So, ECIP support has resulted in new low P/B bank stocks. The difference with the low P/B banking stocks after the Great Financial Crisis is that ECIP low P/B stocks are much more difficult to find. There are fewer of them and one needs to do some analysis to compute the P/B.
In addition, these opportunities may take some time to get picked up by the market because these companies are small and trading in their shares is usually thin. Many investors will not buy banking stocks listed on OTCMarkets. And other investors consider companies that do not report with the SEC as uninvestable.
For these reasons I expect these stocks to continue to be undervalued for the next year or maybe the next two years. But eventually the market will price in that these ECIP preferred shares are worth much less than their book value.
Out of these 10 stocks the only stock that is investable for most investors and still way undervalued is Ponce Financial Group. Therefore, Ponce Financial Group could be an even better investment than the other 9 banking stocks.
Disclosure: long Bay Community Bancorp, Broadway Financial Corp, Citizens Bancshares Corp, Harbor Bankshares Corp, Ponce Financial Group, Security Federal Corp
I think you have the wrong tangible book value for the common for UBAB. Tangible book value was about $80mm before ECIP and now $198mm after. It says $55.27 tangible book value now on seekingalpha. So maybe .64 p/b. I had to double check this one because this company seemed to have a decent long term business with good management. About 20% EPS growth for 10 years on the back of 6% revenue per share growth. NIM is above 3.65%. Their historical p/b has been about 1. Their ROE for the last 4 years has been between 13% to 24%. Forward compounding returns might imply mid 20's% for many years and this stock could be held long term(imo from initial research).
there are still larger bank stocks that trade below book value. E.g. Credit Suisse trades for 25% of book value.