Why I Bought A Few Shares in Carver Federal Savings Bank

Why I bought Carver Federal

Published on:
July 13, 2017
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Tardiness in filing financial statements is often seen as a red flag. Implicitly, capital markets tend to suspect that late filing is more than a timing issue, and rather, is some dark, flawed accounting practice, or some questionable managerial capability. Explicitly, late-filing almost never looks good for the price of the common share. This week, I visited datasimply.com, a website that among other things reports on such companies. Out of a list of 32 companies, I took a random sample of 5 with varying lines of business, and compared their current price to the share price a day before the late notice was given. All companies lost value.      

The Risk Carver Federal Savings Bank Faces

Carver federal savings bank (CARV), a commercial bank with less than a billion in assets, filed a late-notice in July of this year, and its share price has been low ever since. From 2012 to 2015, the stock price average was about $6 a share, ranging from as high as $18 to as low as $3. Compare that to the stagnant average price of $3 over the past few months. Being a sucker for low price compared to historical stock price, I delved further into Carver’s annual reports.

It was not a pretty sight. Carver faces so many risks that I almost wrote to the organizers of the World Memory Championship, where participates are daunted with the task of memorizing lists of random names, suggesting to add the risks Carver faces as a potential list to memorize. To name a few: the average annual earnings over the past decade were negative; because of inability to pay for junior debt, the company may cease operations in September 2017; the company lends out to borrowers, such as churches and non-profits, which are borrowers that depend on donations to pay back their loan obligations. If you are not convinced of Carver’s dire circumstances, the five-year financial results should do the trick.        

Why I bought a few shares of Carver Federal Savings Bank

While no value-bargain by any means, I still bought a position in the company, representing about 5% of my portfolio in investable securities. I had two reasons (perhaps the word “reasons” should be replaced with “excuses”). First, I felt that if a competitor, such as Dime Community Bank (DIME), with a stock price that is trading at high levels, would offer Carver’s management a lowball bid, say, 50% of tangible book value, I would still come out of this position alive (in its last public filings, Carver reported tangible book value per share of about $14).

Second, the advantage of being last in the class is that you have plenty of room to improve. And, with the right attitude and fortitude, Carver’s management can achieve much. For example, management can focus on reducing its non-interest expense; essentially, its wages. Is asking a company to become more efficient with its resources unreasonable? Management may also want to focus on providing better credits in the future, since it has done a terrible job in the past. Carver’s nonperforming assets to total assets ratio was 5.66%, about 30 times higher than the ratio for Dime.    

Now, to my usual disclaimer: by any means, this article should not be a catalyst for you to speculatively purchase shares in Carver. In fact, the reverse is true: reading my report should have deterred you from having anything to do with the company and its management. My goal in writing is to share with you how I view a position in a common stock, but not to encourage you to follow what I do.  Anytime you are interested in purchasing an investment position, at minimum, you should read about the company, you should view the company in terms of your overall portfolio objectives and, finally, form your own independent opinion.

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