Valuation Update on an Overcapitalized Bank with Buyback Potential

One of my favorite banks that has the opportunity and the excess capital to potentially buy back over 30% of its shares over the next couple years; currently 8 P/E

The banking turmoil over the past year has created a lot of opportunities to invest in high quality banks that trade at a meaningful discount to liquidation value, and thus the value that I believe they’d be worth in a merger transaction with another bank. I’ve manually created a list of small bank takeovers over the past few years to track what banks are paying for other small banks, and the median buyout is around 1.3 times tangible book value. This is a level that is 50-100% more than the current prices of numerous banks of surprisingly good quality. Many banks earn subpar returns on equity and therefore deserve a discount to that equity, but with bank valuations generally very low in both absolute terms and relative to the market, I’ve found a number of quality small banks that are yielding mid-teen earnings yields with stable deposits and above average ROE. I have a small group of banks that trade well below this liquidation value that I’ll summarize in a future post.

But, there are a few banks on my watchlist (and one in my portfolio) that I view as core operating companies that should not be thought of in relation to book value but rather as free cash flow generators that are steadily building up value year after year. A friend of mine calls these companies “snowflakes” — unique companies that have an operating model — a way of doing business — that is very difficult for others to replicate.