I am in the midst of my annualish trek through all the community banks that trade over the counter. These range from the truly tiny, with balance sheets under $100 million, to gargantuan institutions that could easily be included in major market indexes were they to list on the NYSE or NASDAQ. As always, I am finding really interesting opportunities. Banks rapidly attracting deposits and growing their earnings assets, yet trading at or below book value. Banks building valuable mortgage origination or SBA lending franchises, but not getting any credit for these valuable and low-risk income streams. Venerable institutions with long track records of success that nonetheless languish in obscurity.
NASB Financial is one of these venerable institutions. NASB Financial, headquartered in Kansas City, Missouri, owns North American Savings Bank. North American Savings Bank has served its community for 90 years, growing spectacularly along the way. Today, the bank is a major mortgage originator and has developed an innovative lending product for those who wish to invest in real estate via an IRA.
Since 1990, NASB’s balance sheet has grown from $388 million to over $2 billion. Shareholders’ equity has grown from $17 million to $227 million, a 10% annualized growth rate. This 10% growth rate is extremely impressive considering the bank has paid out roughly half its annual earnings in dividends along the way.
Today, NASB Financial trades at a trailing P/E ratio of 9.1 and a price to book ratio of 1.2. The bank’s equity is 10.9%, and the net interest margin is roughly 3.9%. Given this bank’s long history of excellent profitability and growth, this valuation looks extremely low. It certainly is well below peer valuations. Just as a check, I pulled a list of American exchange-listed banks with balance sheets ranging from $1-3 billion. The median price to book ratio was 1.61, and the median trailing P/E ratio was 19. On either basis, NASB Financial trades at a large discount to its peers.
So why does NASB Financial trade so cheaply? Since you’re reading this blog, you can probably already guess that the company’s shares are pretty illiquid. They are, even for an OTC stock. Another reason is that NASB relies more heavily on funding from the Fed than most of its peers. At June 30, Federal Home Loan Bank advances made up 26% of the bank’s total liabilities. This amount will likely trend down as Fed funding becomes more expensive. Finally, NASB is a closely-held corporation. Like many other OTC-traded banks, NASB Financial is a family affair. David Hancock about one third of the company’s shares, and his wife serves as a director. Some investors steer clear of situations where a company is substantially controlled by one individual, but I don’t mind owning these companies when that holder has done an excellent job making money for shareholders. I believe this is one of those cases.
I don’t own NASB Financial, but I present it here as an example of the kind of opportunity that abounds among OTC banks. I highly encourage anyone with the time and the inclination to go hunting in this very fruitful niche.
Alluvial Capital Management, LLC does not hold shares of NASB Financial. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at email@example.com.