HCBN
HCBN was a small bank in Michigan that we started acquiring at $35 per share in early 2025. That price was highly attractive, as they made $5.85 of profit per share in 2024, giving us a year one earnings yield of almost 17%. We continued buying throughout 2025 and into early 2026. In March of 2026, it was announced they were being acquired by a larger bank for around $70 per share, giving us a roughly 100% gain from our initial buying in about a year - an outcome that had minimal relevance to what the broader stock market was doing. We ended up buying around 15,000 of the 1 million shares outstanding, making us one of the largest shareholders at 1.5% of the company. This one idea generated over $500,000 of profit cumulatively across all client accounts under management.
HCBN was well managed, stable, and operating a relatively boring business. Its size - only $35 million - along with the stock trading over-the-counter or OTC, led to it being inefficiently priced. Large institutional funds can’t play in these arenas, often leading to great businesses being almost given away.
In early 2025, after our initial buying, we included the following note in one of our quarterly client letters:
“HCBN: This one is interesting. This is a tiny bank in Michigan. The stock is selling for $35 a share, there are 1 million shares outstanding, so this entire business is being offered to the market for $35 million. In 2024, this business made $6 million of profit. So if you purchased this entire business for $35 million, you would have received $6 million last year that you could do whatever you wanted with. That would be your profit. 6 divided by 35 is 17%, so your year 1 return would have been 17%. To us, that just seems too high. And when we say too high, that obviously means the stock price is too cheap! What is a fair year 1 return for buying this small Michigan bank? Is it 1%? No, that's too low. Is it 17%? That's too high. You can't really come to an exact answer, but let's say a businessperson would want somewhere between 8-12% on their money to purchase this bank. Well, that would mean the business should actually sell for between $50 million and $75 million. Now, of course, anyone buying this bank doesn't want just one year of profits, but actually this is again where it's more attractive. Here are the last 5 years of profits:
2024: $6 mil
2023: $5 mil
2022: $3 mil
2021: $2.36 mil
2020:$2.7 mil
You can never really know what the future will hold, but it seems that in 10 years it's more likely profits are $10 million versus $1 million. This business has been growing and expanding, providing comfort to the idea that $35 million is just too cheap for this business. Stock prices can spend a long time at silly levels, but eventually value exerts a magnetic pull on them. We will see in time if we’re right on HCBN.”
We told our clients this business that was selling for $35 million was actually worth $50 to $75 million. One year later, a larger bank agreed, paying $70 million to purchase HCBN - 100% more than we had first bought it for one year prior. In our view, this is what investing is all about. Trying to identify mispriced opportunities where both a) your downside appears well protected and b) opportunity exists for major price advancement.