Small, micro banks

[Spekulatius]

Solid report from FMCB:

https://www.otcmarkets.com/stock/FMCB/news/Farmers--Merchants-Bancorp-FMCBReports-Record-Fourth-Quarter-and-Full-Year-2024-Financial-Results?id=465416
 

Some leadership changes were announced the last few weeks. Something to keep an eye on.

[LC]

On 12/27/2024 at 9:22 AM, Saluki said:

This is an old strategy that seems to be forgotten about. I think it was mentioned in Klarmans book. Seems solid but the few mutual bank conversions left are getting harder to find each year.

 

Not exactly micro bank stocks, but there are two that I came across recently but passed on if you are interested in digging deeper: 

 

Kyoto bank is trading below book and owns a lot of shares of other companies like Nintendo and Kyocera, so it's a way to buy them at a discount. Neither of my brokers allows me to trade their shares so I can't invest, but looks interesting. 

 

KB financial has been written about on here i think. Well capitalized Korean bank but I don't feel comfortable about it because of the exposure to the real estate sector in Korea which has unique and unusual characteristics for lending.

I own a little Kyoto financial. I should’ve just bought Nintendo.

 

korean real estate DOES. NOT. DEFAULT. not sure why but ages ago we were tasked with modeling Korean secured defaults. Had like 500k defaults on a 5b+ portfolio. Korean real estate DOES. Not default! (Take this with a grain of salt, this was 10+ years ago)

[Spekulatius]

17 minutes ago, LC said:

I own a little Kyoto financial. I should’ve just bought Nintendo.

 

korean real estate DOES. NOT. DEFAULT. not sure why but ages ago we were tasked with modeling Korean secured defaults. Had like 500k defaults on a 5b+ portfolio. Korean real estate DOES. Not default! (Take this with a grain of salt, this was 10+ years ago)

How would you even model real estate defaults? So many idiosyncratic factors go into the default rate.

 

I think the Japanese banks have huge NIM upside of the BofJapan raises interest rates which slowly seems to be happening. Of course you have to look at the maturity of their existing loans and bonds which I have no idea how to do.

Edited January 24, 2025 by Spekulatius

[LC]

There are a variety of factors - for the US market blackrock built an incredible model that took macro factors, and applied them at the zip code and zoning level...for the entire country. was a massive model and very detailed. it was used to model potential losses on ABS products.

 

For Korea it was again for modelling losses under various economic circumstances at the overall portfolio level. If I have some time tomorrow I will try and dig up the documentation.

 

But it was the most difficult portfolio to model because historical losses were so low. And it's difficult to sell "yeah we expect 0.0005% losses in cases where the country GDP drops 20% (or whatever)".  So we took the nearest/most similar countries historical behavior (default rates, valuations etc.) as a proxy. And we hired some dudes from SK to provide some local color. Their words were "it is very, very disgraceful to default on your home in SK. you do not do it". We sold the portfolio soon after so didn't really look into that to see if it was true, hence my tongue in cheek comment.

 

 

Edited January 24, 2025 by LC

[LC]

Ultimately these are PD/LGD/EAD models - similar to credit scoring but also include some valuation component of the underlying real estate during various scenarios (HPI down 5%, 10%, etc.). We also bake in a haircut to liquidate. 

[KJP]

An Executive Order last week targets, among other things, the CDFI Fund:  See Section 2(a)(vi):  https://www.whitehouse.gov/presidential-actions/2025/03/continuing-the-reduction-of-the-federal-bureaucracy/

 

On the other hand, Secretary Bessent has made several public comments that are supportive of community banks, and community banking is important in both GOP and Dem areas, so it doesn't seem to be an issue with a clear political tilt. 

[Spekulatius]

31 minutes ago, KJP said:

An Executive Order last week targets, among other things, the CDFI Fund:  See Section 2(a)(vi):  https://www.whitehouse.gov/presidential-actions/2025/03/continuing-the-reduction-of-the-federal-bureaucracy/

 

On the other hand, Secretary Bessent has made several public comments that are supportive of community banks, and community banking is important in both GOP and Dem areas, so it doesn't seem to be an issue with a clear political tilt. 

I don’t see a connection to community banking in this order.

 

I agree that reducing the compliance burden would be a large boost for smaller community banks.

[KJP]

1 hour ago, Spekulatius said:

I don’t see a connection to community banking in this order.

 

I agree that reducing the compliance burden would be a large boost for smaller community banks.

 

See Section 2(a)(vi) of the order

 

https://www.cdfifund.gov/

 

And, for example, https://investors.unitedbank.com/Press-Releases-And-More/press-releases/news-details/2025/United-Bancorporation-of-Alabama-Inc.-Announces-Fourth-Quarter-Results/default.aspx

 

Or this:  https://x.com/alluvialcapital/status/1645806316055859201

Edited March 19, 2025 by KJP

[Spekulatius]

59 minutes ago, KJP said:

 

See Section 2(a)(vi) of the order

 

https://www.cdfifund.gov/

 

And, for example, https://investors.unitedbank.com/Press-Releases-And-More/press-releases/news-details/2025/United-Bancorporation-of-Alabama-Inc.-Announces-Fourth-Quarter-Results/default.aspx

 

Or this:  https://x.com/alluvialcapital/status/1645806316055859201

Yes, that fund just showered a few banks with very low cost permanent funding . Total waste.

 

I do think the onerous bank regulation are a bigger deal for smaller community community banks as they create fixed costs that quite significant for smaller banks.

[Eldad]

On 10/28/2024 at 7:47 PM, shhughes1116 said:

Lots of different reasons to own banks.  Because I am constrained in the parts of the market I am allowed to invest in, I spend a lot of time looking at banks.  
 

I like FFBB, UNIB, SBNC, LRBI, DENI, BEOB, FRSB, NBN.  All for different reasons.   I routinely flog myself for not owning more NBN, SBNC, and BEOB.  

Have you ever been able to figure out what equities SBNC owns? I saw their ROE and was puzzled but it’s mostly from the MTM of their fairly huge equity portfolio. I guess they don’t have to disclose it. 

[shhughes1116]

19 hours ago, Eldad said:

Have you ever been able to figure out what equities SBNC owns? I saw their ROE and was puzzled but it’s mostly from the MTM of their fairly huge equity portfolio. I guess they don’t have to disclose it. 

Are you referring to their sizable stake in FCNCA?  I believe that is the bulk, if not the entirety of their equity portfolio.  

[pricingpower]

On 12/27/2024 at 12:19 AM, nsx5200 said:

Even put in a little bit of work to find the list of mutual banks from some Federal bank registry.  Wondering if anybody have experience with this, and if this is still viable.

"The Zen of Thrift Conversions: How To Turn Hidden Bank Stocks Into Big Gains" by James Royal is a nice modern take on the strategy.  Think there's a risk/reward sweet spot where you have to be someone that wants to maintain a cash balance in your portfolio, it helps to live somewhere not a big finance city and can't be deploying too much as there are usually participation size limits.  Peter Lynch talked about it in a few places as well if I recall.  

[KJP]

1 minute ago, pricingpower said:

"The Zen of Thrift Conversions: How To Turn Hidden Bank Stocks Into Big Gains" by James Royal is a nice modern take on the strategy.  Think there's a risk/reward sweet spot where you have to be someone that wants to maintain a cash balance in your portfolio, it helps to live somewhere not a big finance city and can't be deploying too much as there are usually participation size limits.  Peter Lynch talked about it in a few places as well if I recall.  

 

You can also wait and buy them at some point post-conversion, e.g., if they trade at a big discount to book and execute on buyback authorizations.  SR Bancorp is an example that has been written up on here.  PFS Bancorp is another current one. 

[Eldad]

14 hours ago, shhughes1116 said:

Are you referring to their sizable stake in FCNCA?  I believe that is the bulk, if not the entirety of their equity portfolio.  

Thanks

[D33pV4lue]

BRBS is an interesting name in a turnaround. Got into Fintech deposits and received a consent order. New CEO came in and replaced all the executives. They have made tremendous progress in a short period of time excited fintech deposits, worked to reduce brokered deposits, and repositioned loan book. 2025 plan to focus on income statement. They brought in a new head of commerical banking and will look more like a traditional community bank moving forward. FFWM is another turnaround that could be interesting. Did a recap in 2024 and brought in a new CEO. I'm not sold on their strategic plan but at the current price it's worth a flier. Their problem is exposure more than problem loans. Large MF CRE portfolio at rates way below market but well secured ~55% LTVs. 

 

RE Conversions: The environment has been pretty crappy the last few years. Especially for MHC first-step conversions. I think CLBK is really the only one with a positive total return. The standard conversions have been better but the returns are not like they used to be. Just don't think there is a ton of appetite for small thirfts with a few branches and +75% 1-4 loans. If you have access CapIQ has a list of conversion candidates. TBH you might have more success checking back after the 1-year anniversary's and buy the ones that initiate buybacks. 

[weighingmachine]

How are people thinking about California, Alaska, and other Western region banks, now that Wells Fargo's asset cap is removed?

 

also, here is a writeup on FFBB from Keith Smith:

https://seekingalpha.com/article/4720907-ffb-bancorp-stock-truly-a-growth-company