Followup on Our Small Bank Posts

Calculating P/TBV for First Step Mutual Bank Conversions
A reader writes in about our small bank cannibals post,
"As of their June 30, 2020 report, they had total shareholder equity of $58.4 million and no goodwill or intangibles versus a market capitalization of $47 million at $7.75 per share for a P/TBV of 0.80x."

In GAAP terms this is the true P/TB value, in reality though it is not true.

That is in regard to First Seacoast Bancorp, a partially demutualized bank where the mutual holding company still owns 55% of the bank's stock. We simply took tangible shareholder equity and divided by the total shares outstanding, including the ones that are owned by the mutual holding company. This is technically correct, although it does not account for the fact that the MHC shares are not really "owned" by anyone.

There are several ways that you can adjust this calculation to reflect that. You could make the assumption that the unsold MHC shares will be sold at some given P/TBV multiple, or that they will be sold for the current market price of the shares that have already been sold. So, depending on how you think about this, the FSEA could be at a more attractive discount than 20% below tangible book value.

"Looking for bank stocks in the dumpster? Not everything can be salvaged"
Our friend at Colarion (who we interviewed earlier in the week) wrote a post about the pitfalls of investing in the very lowest P/TBV banks. The list he gave includes CIB Marine (CIBH), which we have written about numerous times in the Oddball Stocks Newsletter. He cautions against investing in value traps,

run by managements indifferent to their ownership base. Banks are particularly susceptible to this because activists are uncommon across much of the country and it can be expensive and draining to run against entrenched managements

He has some good suggestions for how to avoid these, like "not located in a demographic / fiscal hazard zone area." 

Whether to go for high ROE, reasonable P/TBV or to "dumpster dive" for the biggest P/TBV discounts is just another instance of the value vs quality debate. We have plenty of friends on both sides, and each side can learn from the approaches of the other side.

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