I’m Buying This Profitable Bank Below Book Value

Mr. Market doesn't think much of this special situation.

Mar 24, 2014 at 5:37PM

Mr. Market really boggles my mind sometimes. Today the moody Mr. Market is offering shares of a profitable bank for about 89% of tangible book value. Now, plenty of banks trade below book value, and for good reason. But this bank is awash with capital and has been buying back stock. Its credit metrics continue to improve since the financial crisis. Even better, a proven activist investor -- Joe Stilwell -- is agitating to sell the company, and the CEO has a new contract giving him incentive to do the same.

So that's why my Special Situations portfolio is stepping up to buy more stock in First Financial Northwest (NASDAQ:FFNW), even though it's already more than 7% of my portfolio. I'll be adding another $500, raising the allocation to nearly 8%.

Yes, incredibly, a profitable bank is trading for a good discount below tangible book value, and it's taken steps to reduce that discount and drive up tangible book value per share. Over the past year, First Financial spent $28 million on buybacks, reducing share count by 13%.

And that hasn't required the bank to drain the balance sheet of capital, either. Tier 1 capital remains at 27%, while average common equity/assets remains at 20%. Very overcapitalized.

Credit metrics are trending in the right direction, with non-performing assets declining from 10.1% in 2009 to 1.7% last year. That's still elevated, but management is making the moves to lower it.

Bank activist extraordinaire Stilwell continues to hold 8.1% of the stock, and he's been a huge force in getting First Financial turned around. When he first sought representation on the board, he promised to sell the company for a fair price as soon as he was able. That day looks closer than ever, with the new CEO recently signing an agreement that gives him three times his salary, should the bank be sold, up from just equal to his salary. The golden parachute just got more golden.

Foolish bottom line
So that's why my Special Situations portfolio is adding to an already overweight position in First Financial, and later this week I'll be buying $500 of stock.

Interested in First Financial Northwest or have another stock to share? Check out my discussion board or follow me on Twitter, @TMFRoyal.

3 stocks poised to help you retire rich
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.


Jim Royal owns shares of First Financial Northwest. The Motley Fool owns shares of First Financial Northwest. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers