Community bank investing USA

I am part of a loosely-knit group that invests in small, publicly-traded community banks in California. This category of banks is overlooked by mutual funds, including index funds, and by most institutional investors, as those banks usually have a market capitalization that is simply too small for an institutional investor to invest in. Also, many of those banks are trading over-the-counter (OTC), which is basically where penny stocks trade. It is cheaper to be listed on OTC than on Nasdaq or the New York Stock Exchange. Anyhow, this means that community banks are “chronically undervalued” compared to larger banks. For example, P/E ratios for most community banks are below 10, even though their profit margins have generally expanded recently and banks are set to increase their profits when interest rates rise. Anyhow, the stock I had recommended previously was RWCB (Redwood Capital Bank). Another stock you may want to look at is CRSB (Cornerstone Bank). You won’t be able to buy this stock with a mainstream broker in CH. However, Interactive Brokers allows you to do so.

Hans

Hello Hans. Thanks for the recommendation. Don’t get the investment thesis though. If the banks are too small for the broader investment community and if they have been chronically undervalued- why would that change now? What’s the trigger/marginal change?

Good question. So our overall plan is to acquire shares in multiple banks, particularly those that have a major shareholder who is focused on technological and operational improvements. That is the case for both RWCB and CRSB. We then nominate one or two people to the board of directors and recommend simple changes that make the bank more efficient. The major thrust here is to allow all the banks that we invest in to share the same technology, similar to how Raiffeisen or Clientis does this her in CH. Each bank remains independent and retains its culture, but benefits from technology investments that would be too expensive for each bank to make on its own. I live both in the US and in CH and as far as small banks go, they are for the most part stuck in the stone age in the US. Paper checks are still prevalent. This is a very long term play that I feel has very little downside.

Hans

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Looks like there’s some serious capital involved if you get a say in board of director seats. Sounds generally clever to basically franchise the banking industry by providing the backend services from the same company. I assume one of the investors also owns/runs that backend provider (e.g. equivalent of Finnova and Avaloq in Switzerland)?

I can see this strategy having potential. Here in Switzerland this approach has been very successful for Raiffeisen and to some extent Clientis. The Internet also give small banks a chance to go big if they do it right. A couple good showcases are the Hypothekarbank Lenzburg (Switzerland) which went countrywide with Neon and other fintechs, and Oklahoma’s All America Bank which went nationwide with Redneck Bank.

Not too much from my end. Less than $200k. The market cap of those banks are typically only around $50 millon. But the top two shareholders are supporting our board nomination(s) and overall direction we would like the bank to take. Also, many shareholder’s don’t vote, so you only need about 35% or so of outstanding shares to vote for you. Yes, we have a potential company in mind called Synctera, for the tech part. They connect fintechs with community banks. Yes, the idea is to possibly take a stake in the backend provider(s) as well.

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Yes, that’s the idea. We basically want to become a Hypi Lenzburg for a growing number of community banks. The Raiffeisen model is more involved, as they present consolidated numbers. The key is culture. You don’t want to piss off (pardon my language) local bank clients and local employees. We follow B Corp principles (Benefit Corporation). Ideally, all the banks we have a stake in are B Corp certified. This means they follow the philosophy that shareholder value is maximised in the long run by taking care of your employees, management, clients, environment and your community.