M&F Bancorp Inc. (MFBP)

[56Chevy]

How To Spot The Opportunity In The Problems For Small Banks

November 11, 2013 12:39 PM

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The individuals running the small banks recognize the need to merge into a larger institution

After five years of operating under what can best be described as difficult conditions, many of the smaller banks want to be acquired and get out from under dealing with credit problems and regulatory burdens.

However, most of them have also seen their stock price drop substantially since the 2007 peaks, and they need to get a fair price for the shares. The officers, directors and leading members of the communities in which they are based often have significant amounts of money tied up in shares of the smaller banks. They are willing to sell, but need to get a price that allows them to trim their losses if not turn an outright profit on their shares.

Right now there dozens, if not hundreds of smaller banks trading below their tangible book value. In past post crisis consolidation waves, such as the S&L crisis in the early 1990s and the Long-Term Capital Management (LTCM) meltdown in 1998, takeover premiums were initially around 1.25 times book value before peaking at somewhere near two times book value at the peak. There is no reason to assume that the multiples will not be very similar this time around although most observers and analysts think that this wave of merger activity will last far longer than earlier period.

Investors that buy the smaller stocks while they are trading at a discount to book value and are able to sell at decent premiums stand to make a significant amount of money. As real estate markets stabilize and credit conditions improve, it is also reasonable to assume that dividend payments will increase and book values will rise over the next couple of years so the total return can be much higher over a longer holding period.

The problems and difficult conditions facing the smaller banks create an opportunity for patient investors who buy these shares and ride the consolidation over the next several years.

<this is a good read...to get more click the link>

http://www.benzinga.com/general/education/13/11/4069123/how-to-spot-the-opportunity-in-the-problems-for-small-banks

*This has been Enterprising Investor & 56Chevys' battle cry strategy for the past 2 years....good to see it in print.