Financials can be tricky, but investing in them doesn’t have to be. In the news lately you have read about the failures of two large US banks and one massive European one. There is concern about commercial real estate, and our policymakers trying but falling short of a coherent message around moving the economy forward.
It’s a challenge to sort through. The good news is that for those few willing to sift for investments in financial sector, you don’t have to make leaps of logic or sort commercial real estate and uninsured deposits to invest well.
We just need to do some basic math. There are several interesting small banks at the moment, but lower in this post are calculations on a little bank that helps us make the point that opportunities arise when the market rushes out of the sector.
You will probably never visit Catalyst Bancorp (CLST) because few have reason to drive to Opelousas Louisiana (“Zydeco Capital of the World”). Those that do own it have a tolerance for boredom, until recently:
Catalyst, aka St. Landry Parish Bank & Trust, is a small, $263 million bank with 3 branches funded by local depositors, with funds invested into mortgages and commercial loans, alongside a securities book. They don’t make that many loans, and have only small profits. Their particular business mix is important for background information only. What is important for our thesis is that in late 2021 Catalyst came public with a $53 million share sale, and is currently valued at $58 million vs $88 million of equity (or $97 million if adding back unrealized bond discounts). Adding in share dilution, Catalyst trades 65-71% of tangible book depending on bond marks.
Also important, Catalyst has an large share repurchase program, begun recently, and a CEO who understands the math below.
The bottom line: Catalyst management could repurchase every single share outstanding at current prices, and be left over with enough tangible capital to be capitalized at 2x the level of JP Morgan. If they sit back and let their bonds mature, that capital base grows to 3x (though that bond liquidity might be helpful for buybacks).
In this theoretical world, the last share might be worth close to $20 million, up from a recent $12. Not bad!
Of course, this would never happen, because the process of repurchasing shares under book value would increase book value per share, and raise the share price. Also, the process of constantly purchasing shares should also move shares higher, if management were persistent.
I don’t think shareholders would particularly mind those “issues”. Even a few 5% share repurchases and a migration closer to book value would be 30-40% upside, depending on where shares were purchased. A small number of folks recall how this process led Louisiana Bancorp to outperform the S&P by 90% over the course of its 2006-2015 lifespan, simply repurchasing shares while a financial crisis unfolded.
I am not writing everyone to recommend they purchase Catalyst. There are other banks that may perform far better in 2023 depending on the backdrop. Whether you buy banks, gold, bonds or San Francisco office foreclosures depends on your own circumstances.
The point is that of the 750 publicly-traded US banks, it’s not all mismanagement and risk, and many interesting situations emerge in the occasional selloffs that hit the sector. Several aren’t even very complicated…