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THE ODDBALL STOCKS NEWSLETTER | 19

Feature: Small Banks and the OTC Discount


For the past three Issues (31-33), we have had a regular coverage beat on OTC-listed banks (as well as
some cheaper NASDAQ banks) and now that the reopening and value rotation trades have progressed,
we thought it would be time to see how much juice is left to squeeze.3

We mentioned in Issue 31 (August 2020) that the S&P Regional Banking ETF (ticker: KRE) was
trading for around 11 times earnings, 0.8 times book, and a 3.8% distribution yield; cheap compared to
the rest of the market (e.g. SPY) at 27 times earnings and 3.6 times book value. In this chart you can
see the ratio of the two exchange traded funds (KRE/SPY):

The regional banks took off in mid-October and have barely looked back since. The regional bank ETF
– which has large banks, averaging $11 billion market capitalization – is up around 80% from August
and is no longer really cheap: it trades at 1.4 times book and 15 times earnings now.

We have noticed recently that small banks, and especially OTC-listed banks, are lagging this recovery.
This may be an opportunity to replay the reopening trade that happened in liquid public banks with a
set of less liquid public and private ones that are still cheap even with the same or better metrics. To
give you an example, among two sets of banks that we track (NASDAQ and OTC) which were each
chosen last year for cheapness, here is how they are priced relative to tangible book value.

p/TBV ROE Tier 1 RBC NPA% %demand deposits Share Count y/y
NASDAQ 100% 7% 15% 0.4% 26% -2%
OTC 79% 8% 18% 0.3% 26% -3%
Difference 21% -1.7% -3.2% 0.1% 0.1% 0.9%

3 Please see especially our Feature articles “Small Bank Snapshot” in Issue 31 and “Small Banks” in Issue 32.

Copyright Oddball Media, LLC 2021 ISSUE 34 (March 2021)


THE ODDBALL STOCKS NEWSLETTER | 20

Our sample of OTC-listed banks is 2100 bps cheaper on tangible book value than our sample of
publicly traded banks despite earning a significantly higher ROE, having higher capital, having lower
non-performing assets, a touch better demand deposits, and buying back more stock year over year.
Note that both sets (which number a couple dozen banks each) are very small banks with average
market capitalization under $500 million.

We find this really fascinating because for the first time, using sets of companies in the same industry
that are highly comparable, we are demonstrating a discount that is stemming from not being public –
or, conversely, from being OTC listed. If the Oddball Stocks Newsletter stands for anything, it is for
harvesting this OTC valuation discount.

An excellent example of this is one of guest writer Catahoula's banks, the OTC-listed Farmers &
Merchants Bank of Long Beach (FMBL or, colloquially, “fumble”). It has $10 billion of assets, $1.1
billion of tangible equity, earned 0.8% on assets and 7% on equity last year, and has 18% Tier 1 capital.
It trades for 84% of tangible book value or about 12 times last year's earnings.

We can make a paired comparison with a public, NASDAQ-listed bank of similar size; another
Catahoula bank: Carter Bancshares, Inc. It trades at the same multiple of tangible book value, has $4.2
billion in assets and $440 million in tangible book, only 13% Tier 1 capital, and earned only 0.4% on
assets and 3.7% on equity last year.

Now, “Fumble” has 0.05% NPAs and Carter has 1.1% NPAs plus 13.2% of loans on deferral (which are
almost all hotel loans) as of the end of 2020. We are not knocking Carter – we think there is a good
chance that a travel boom is coming this summer that will make hotel loans the least of anybody's
worries. But isn't it interesting that the difference between public and private banks the same sized that
are priced the same (on tangible book) amounts to multiple rungs on the quality ladder?

Here is a quick update with figures (from December 31, 2020) of banks we have mentioned in some
recent Issues.
Ticker list P/TBV ROE ROA Tier1 P/E NPA% %demand.dep. share count y/y
BKUTK OTC 41% 9.2% 1.8% 20% 4.4 0.1% 18% 0.0%
FMBN OTC 51% 7.7% 0.5% 16% 6.5 0.7% 14% 0.0%
FIEB OTC 64% 8.4% 0.9% 14% 7.6 1.0% 31% 0.0%
CIBH OTC 73% 13.0% 1.1% 16% 5.6 0.5% 16% 1.8%
ERKH OTC 76% 0.6% 0.2% 42% 117.2 0.0% 7% -8.0%
CNAF OTC 78% 8.2% 1.3% 23% 9.5 1.0% 42% 0.0%
CARE NASDAQ 83% 3.7% 0.4% 13% 22.4 1.1% 19% 0.2%
FMBL OTC 84% 7.0% 0.8% 18% 12.1 0.0% 38% -1.5%
FRSB OTC 88% 10.3% 0.8% 11% 8.5 0.1% 28% 0.4%
CFCX OTC 92% 10.7% 0.8% 12% 8.5 1.1% 27% -3.5%
EXSR OTC 94% 11.1% 1.1% 15% 8.5 0.1% 40% 0.0%
UNIF OTC 94% 10.5% 1.5% 20% 9.0 0.2% 24% 0.1%
HRRB OTC 104% 11.2% 0.8% 14% 9.3 0.2% 33% 0.0%

Copyright Oddball Media, LLC 2021 ISSUE 34 (March 2021)

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