Dec 24 2011

It’s a Wonderful Buy! (all credit to Peter Lynch for the title)

Seeing as it is that time of year when “It’s A Wonderful Life” will be playing on the T.V., what better way to celebrate than to take a look at a few “Jimmy Stewarts” (as Peter Lynch liked to call them).


Here are four community banks that are worth a further look.


Allegheny Valley Bancorp (AVLY.OB) – AVLY.OB is based in Pittsburgh, PA and currently operates ten branch locations. As of December 16th, the last trade was at $38.00/share resulting in a dividend yield of 6.5%. This yield takes into account the $0.05 special dividend paid out to shareholders on December 12th, on top of the regular quarterly dividend of $0.57. Non-performing loans at the end of 2010 was a very respectable 1.3% of total assets. Although there is no reason to think that NPLs have gone up very much, if at all, due to the quality of loans in the portfolio, some investors may want to wait for the full year 2011 results.


Logansport Financial Corp. (LOGN.OB) – LOGN.OB operates one branch in Logansport, IN. At the end of Q3 2011, LOGN.OB had an NPL ratio of 1.3%. The last trade was for $13.60 resulting in a 4.4% dividend yield at the current quarterly rate of $0.15/share. Interestingly, book value is approximately $26.00, which could make the shares quite a bargain at the current price.


Northeast Indiana Bancorp (NIDB.OB) – NIDB.OB is located in Huntington, IN and has a network of five branches with a sixth on the way in the first half of 2012. For the end of Q3 2011, NPL/TL (total loans) ratio was 3.68%, which is a bit high and would need to be monitored closely by any potential investor. However, NIDB.OB just raised their quarterly dividend 2.9% to $0.18/share, which gives a 5.9% yield based on the last trade of $12.20. This marks the 17th consecutive year NIDB.OB has raised the cash dividend paid to shareholders and could indicate that management sees further improvement in the loan portfolio.


Bank of McKenney (BOMK.OB) – BOMK.OB is based in McKenney, VA. Currently the branch network consists of seven locations, one of which was recently opened. The last trade was for $6.67/share on December 14th, which is also when the dividend, paid once annually, was declared. The dividend is for $0.27/share, which has been maintained at that level since 2008. NPLs saw a slight increase in the 3rd quarter to 2.35% but BOMK.OB has accumulated sufficient reserves to cover potential losses.


Nov 27 2011

Bank Bargains Galore!- Hudson City Bancorp

Hudson City Bancorp (HCBK) is the holding company for Hudson City Savings Bank. The largest thrift in the country, they operate over 130 branches in New Jersey and the metropolitan area and have over $60 billion in assets. As of Friday, November 25th, the last trade was at $5.13.

Like much of the banking sector in 2011, HCBK’s share price has taken a beating. Concerns over the U.S. recovery, as well as the Eurozone debt crisis, have investors fleeing bank shares. However, luckily for us, it seems that they have thrown out many of the babies with the bath water.

For HCBK, the concerns are way overblown. First, HCBK has one of the strongest loan portfolios of any of the large thrifts in the country. Close to 99% of the loans are one-to four- family residential mortgages and have LTV ratios of, at most, 75% with the majority having LTVs in the 60%-70% range. Large down payments by borrowers usually mean fewer defaults. HCBK’s non-performing loans were 3.16% of the total loan portfolio. Although this is a bit higher than some other institutions, the magnitude of the recession and the lingering economic effects on the borrowers must be taken into account, especially considering how large a percentage of the loans are residential mortgages. In these extraordinary times, 3.16% doesn’t bother me as much as it maybe should. Also, HCBK has an equity-to-assets ratio of 9.79% as of the end of Q3 2011, which provides a nice cushion if NPL’s continue to increase, which I don’t think they will much, if at all.

Although the NPLs ratio may not be extraordinary compared to other banks, the efficiency ratio of HCBK certainly is. They have consistently been ranked as the most efficient bank in the country, which means they are the lowest cost provider in the banking sector. Anyone who took business 101 will know that being the low-cost provider in an industry is an important competitive advantage. With an efficiency ratio of 30.25% for the nine months ending Sept 30, 2011 (which is up from 18.94% for the same period the prior year), being a low-cost provider enables HCBK to offer very competitive rates on loans and lower fees that ensures repeat business and customer loyalty. With distrust of banks extremely high at the moment, an institution that consumers feel isn’t ripping them off is a big plus. There are two points I should mention though. As a result of keeping costs extremely low and passing these savings on to the consumer, HCBK has a below average net interest margin. It generally averages somewhere between 1.70-2.00%, give or take a tenth of a percent. Most other well-run banks are able to average somewhere north of 3.50%. Some investors might want to see wider spreads between borrowing and lending but given the many strengths of HCBK in the area of cost control, it is acceptable. If they cease being a low-cost provider, then the below average spread will become a problem. That brings me to my second point. As mentioned above, the efficiency ratio was approximately 1100bps higher this year than last. Although this may be startling, it is primarily due to the increased costs of regulation. If the efficiency ratio continues to increase, then there may be cause for concern. However, HCBK management has a history of controlling costs and there is no reason to believe they will stop now. Besides, spending 30 cents to make a $1 still qualifies HCBK as one of, if not the, lowest cost producer in banking.

The big concern that many investors have with HCBK was the balance sheet restructuring that resulted in an after-tax charge of $644 million and a reduction of the quarterly dividend to $0.08 from $0.15 (among other things). There are too many details that can be analyzed with regards to the restructuring so I won’t go over them here. The press release is available on the HCBK website. The main thing to know was that the restructuring was NOT a result of weakness. HCBK management was positioned for a rise in interest rates that never came. Due to the continued low interest rate environment and the resulting refinancing taking place by borrowers, combined with some higher cost borrowings on HCBK balance sheet, management and regulators felt it was prudent to extinguish some of these borrowings. As a result of the restructuring, combined with an unwillingness to expand the balance sheet during the current low interest rate environment, HCBK is better positioned for the future.

With the shares trading well below book value and a 6.2% dividend yield, combined with the reasons stated above, HCBK is a worthy candidate for further research.

Nov 25 2011

Are you really an investor? (part 2)

As someone who actively follows economic news and markets, it makes sense that many of my conversations with family and acquaintances revolve around investing, especially considering I don’t really have many other interests. Lately, the conversation will start with someone commenting about the recent volatility in the financial markets and ask for some of my thoughts. Hoping to look  like a Wall Street genius, I attempt to craft a brilliant response as to why stock market fluctuations and economic reports never dictate my investment decisions . Unfortunately, ”don’t really think about it much” is the best I can do. If they decide not to head for the bar at that point and continue the inquiry, the second question is usually about what stock should they buy (if they actually value my opinion) . Whether they have a portfolio that is big or small, my answer is always the same. “Have you looked at your local bank?”

So why bank stocks? Why do I feel they are a great starting point for the novice or experienced ”do-it-yourself” investor? First, there are many of them. Too many for Wall Street to follow. There is somewhere in the neighborhood of 8000 banks in the U.S., most of which are small, community banks. Luckily for investors, many small, well-run institutions are publicly traded. Second, community banks are some of the easiest companies to analyze. This can be somewhat confusing to people considering the events of the past several years. Community banks are vastly different operations than the banks that we hear about in the news. Many investors will have a hard time analyzing the massive financial institutions like Wells Fargo or Bank of America. Even large regional banks such as BB & T, Zions Bancorp and U.S. Bancorp can be difficult, even for experienced investors. However, once an investor has a grasp on the basics of banking (which comes from reading the annual reports of banks), analyzing small banks, even larger institutions, becomes quite simple. With some practice, the analysis gets easier and easier to the point where you can spot a good bank almost instantaneously. The last reason is, in my mind, the most important. Many of the small banks trade on the NASDAQ or the OTC (over the counter) markets. For these shares, especially on the OTC, there may be very few trades within a week or a month, if there are any at all. Although this illiquidity may scare some investors, it shouldn’t. In fact, I contend that it may be better for some investors to own a bank with illiquid shares (although there are other companies in different industries that trade on the OTC that are legitimate companies, much of the OTC market can be a mine field. More often than not, when browsing lists of OTC companies, the ones of any interest at all will be a bank). Many investors check the prices of their individual equity investments every day. Some check every week. Unfortunately, this can cause the investor to act, generally when prices drop and almost always against their own interests. Especially in times such as these, where the markets are extremely volatile, investors forget that they are nothing more than business owners and should think along those lines. When an investment can go for months at a time without trading, no matter what is happening in the broad market indices, a funny thing happens. It no longer makes sense to check the price of the shares all the time. In my personal portfolio, I own several community banks and I haven’t checked their share prices in months. Instead, reading the quarterly reports and annual reports is what becomes important, not reading the ticker. You begin to think like a business owner. As a result, the quoted prices only become relevant when they indicate businesses are selling cheap in the market and more money can be invested.

Now I am sure that owning a small banking institution with illiquid shares or, at the very least, small daily trading volume isn’t for everyone. Some people like the action that comes with daily share price  fluctuations and attempting to beat the “smart money” in the Wall Street “casino”, which is how many people view the stock market. The secret is that the market is only a casino if it is treated like one. If it is viewed in the context of what it really is, an auction market where buying and selling stakes in businesses at prices that may undervalue, overvalue or fairly value a business takes place, then, and only then, can an investor succeed.