I'm Buying This Profitable Bank Below Book Value

I'm Buying This Profitable Bank Below Book Value

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 , 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.

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The article I'm Buying This Profitable Bank Below Book Value originally appeared on Fool.com.

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.

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