I’ve been doing some research on regional banks with operations in our Pacific Northwest. The one that has been familiar for a few years now is Columbia Banking System (COLB). With the acquisition of a smaller bank in Oregon, during approximately 2016, it increased in size, as measured by assets, past $10 billion so that it must meet requirements of regulations that are in place pursuant to the 2007 financial crisis.
The Tacoma, WA company expanded its footprint into northern Oregon and paid about 2.3 – 3x tangible book value for Pacific Bancorp (formerly PCBK). Here is a graphic from the presentation of that buyout showing the dynamics of the company’s geographical footprint in Oregon:
There are reasons for considering that region. Economic data has consistently been solid. Additionally, because of all the corporations concentrated there (Amazon.com, Boeing, Microsoft, Costco, who else…) there is reason to believe that banks and lending will be needed. This is not to say that one might not do better to own one of the multinational giants, such as Citigroup (C), JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC); however, they could become political targets, as they were in 2016, and are unlikely to be bought out by some other entity.
For the purpose of looking into potential investment opportunities, or initial screening, several criteria have been relevant. Price to book value firstly, with attention to tangible book value, is used for comparison. Also, perhaps with relevance to attractiveness to an acquirer, Net Interest Margin (NIM) is utilized. There is also some attention to each bank’s efficiency ratio with the caveat that, in a buyout scenario, managements may feel that streamlining or synergies can be realized through a transaction. So, while a high efficiency ratio indicates a need for improvement, it could also increase the likelihood of merger & acquisition (M&A) activity.
When COLB made its last buyout it had a different CEO. Her replacement kept his job for about two years. A new leader has, in turn, recently assumed office. However, it is probably the case that prospects for growth involve M&A and the criteria for it may be similar, if not identical, to what it was before:
Here are recent metrics on COLB and peers:
Washington Federal (WAFD) was not as exciting. Considering these other firms as standalone investments, First Interstate (FIBK) and Columbia appear competitive; Heritage Financial (HFWA) also has several metrics in its favor. Given the similar asset sizes of COLB and FIBK, it does not appear that either could acquire the other (same for GBCI, which is already richly valued). Geographically, Columbia and First Interstate overlap, except the latter also has branches throughout the region that includes Montana and Wyoming as well as Washington, Idaho, and Oregon. The dividends they pay are notable, roughly 3% yearly, and the companies each tend to declare special distributions in addition.
However, when using a dividend discount model to value the stocks, they seem to be exorbitantly overpriced. There are varied potential reasons why the market is not pricing them on reasonable dividend growth rates. Bank leaders must feel some pressure to be able to increase their dividends. Also, it is not clear who might want to buy one of the bigger regionals.
On the other hand, there is a small bank in southern Oregon that could make sense for a regional that wishes to expand and increase its ability to pay dividends to investors. You may be able to discern in the picture above that Columbia bolstered its presence in Eugene, OR in 2016. Clearly the bank below carriers on activities directly to the south.
2/27/20
The bank with the above footprint is Oregon Pacific. Its stock trades on the over the counter bulletin board. It is not listed on a reputable exchange such as the NASDAQ or NYSE. As such, an investor might demand a substantial discount.
Current metrics follow (amid a market decline that is associated with a global incidence of COVID-19). There is not a consensus of future analyst estimates to use for a P/E ratio. Thus, $0.51 results from the previous 12 months, though the company has reported $0.15 each of the past three quarters. The NIM% is also on the high side (and was actually better during the past quarter because of an early loan repayment). Though it is not expensive on price to book value, my intent is to hold off until, when and if, the share price is under $5.35.
3/8/20
The stock price keeps heading lower, with market volatility that is associated with the covid-19 disease.
It is closed at $5.40, but does not trade with the same liquidity of shares that are listed on traditional exchanges.
Unless it is available at 75% of book value, it is a deal to pass up.
3/10/20 even if it drops that low, it is not compelling currently.
The Tacoma, WA company expanded its footprint into northern Oregon and paid about 2.3 – 3x tangible book value for Pacific Bancorp (formerly PCBK). Here is a graphic from the presentation of that buyout showing the dynamics of the company’s geographical footprint in Oregon:
For the purpose of looking into potential investment opportunities, or initial screening, several criteria have been relevant. Price to book value firstly, with attention to tangible book value, is used for comparison. Also, perhaps with relevance to attractiveness to an acquirer, Net Interest Margin (NIM) is utilized. There is also some attention to each bank’s efficiency ratio with the caveat that, in a buyout scenario, managements may feel that streamlining or synergies can be realized through a transaction. So, while a high efficiency ratio indicates a need for improvement, it could also increase the likelihood of merger & acquisition (M&A) activity.
When COLB made its last buyout it had a different CEO. Her replacement kept his job for about two years. A new leader has, in turn, recently assumed office. However, it is probably the case that prospects for growth involve M&A and the criteria for it may be similar, if not identical, to what it was before:
Here are recent metrics on COLB and peers:
Washington Federal (WAFD) was not as exciting. Considering these other firms as standalone investments, First Interstate (FIBK) and Columbia appear competitive; Heritage Financial (HFWA) also has several metrics in its favor. Given the similar asset sizes of COLB and FIBK, it does not appear that either could acquire the other (same for GBCI, which is already richly valued). Geographically, Columbia and First Interstate overlap, except the latter also has branches throughout the region that includes Montana and Wyoming as well as Washington, Idaho, and Oregon. The dividends they pay are notable, roughly 3% yearly, and the companies each tend to declare special distributions in addition.
However, when using a dividend discount model to value the stocks, they seem to be exorbitantly overpriced. There are varied potential reasons why the market is not pricing them on reasonable dividend growth rates. Bank leaders must feel some pressure to be able to increase their dividends. Also, it is not clear who might want to buy one of the bigger regionals.
On the other hand, there is a small bank in southern Oregon that could make sense for a regional that wishes to expand and increase its ability to pay dividends to investors. You may be able to discern in the picture above that Columbia bolstered its presence in Eugene, OR in 2016. Clearly the bank below carriers on activities directly to the south.
2/27/20
The bank with the above footprint is Oregon Pacific. Its stock trades on the over the counter bulletin board. It is not listed on a reputable exchange such as the NASDAQ or NYSE. As such, an investor might demand a substantial discount.
Current metrics follow (amid a market decline that is associated with a global incidence of COVID-19). There is not a consensus of future analyst estimates to use for a P/E ratio. Thus, $0.51 results from the previous 12 months, though the company has reported $0.15 each of the past three quarters. The NIM% is also on the high side (and was actually better during the past quarter because of an early loan repayment). Though it is not expensive on price to book value, my intent is to hold off until, when and if, the share price is under $5.35.
The stock price keeps heading lower, with market volatility that is associated with the covid-19 disease.
It is closed at $5.40, but does not trade with the same liquidity of shares that are listed on traditional exchanges.
Unless it is available at 75% of book value, it is a deal to pass up.
3/10/20 even if it drops that low, it is not compelling currently.