Two Attractive Small Banking Stocks That Did Not Take TARP Money, Plus One That Did

Sep. 8.13 | About: Hingham Institution (HIFS)

Introduction: This article is intended for smaller, patient investors who are seeking the classic combination of dividend growth plus long-term capital gains. I am writing about them with the thought that their microcap status means that, unlike many estimates of the stock market as a whole, they may already be at or below theoretical fair value. None of the below are suitable for short-term traders. Since I have been following these companies (early 2011), all have seen days where no shares traded at all. To me, this is a plus. Investors own them because they want to, not because an ETF or index fund selected them.

The four companies discussed here form a cross-section of the United States.

Background: The Great Recession may have become inevitable when the two public-private GSEs were nationalized in early September 2008, followed shortly by numerous near- or actual banking institution collapses. The most (in)famous one was Lehman Brothers, of course. This failure caused the sort of panic seen with the Arab Oil Embargo that made the 1973-5 recession so severe. As part of the government's response to the crisis, the Troubled Asset Relief Program (TARP) was created in 2008. In this program, numerous large and small financial institutions received assistance from the Treasury. Small banking institutions that were considered so strong that they did not require TARP can be considered elite.

Starting with what I view as the strongest, here's a synopsis of two non-recipients of TARP bailout money, plus a small banking company in turnaround mode that did.

Hingham Institution for Savings (NASDAQ:HIFS): Unfortunately for new money, this stock has surged in the last two trading days to what is in effect an all-time high, closing at $74.46. (Note: there may have been an aberrant trade within the past year at $82.34. Either that was misreported, or someone put in a small market order and got stuck on a very slow trading day with an insane price. For all intents and purposes, HIFS definitely set an all-time closing high Friday). While a noob may have gotten snookered once in this stock, Hingham is hardly a new face. It was founded in 1834. Per its web page, its founders explained the reason they began this company:

"Parents, by making their children depositors, can teach them the advantages of savings habits and lessons of economy which may be remembered throughout life."

The simple virtues embodied in that quote are suggestive of old-time thinking. Thus it should come as no surprise that Hingham is part of the Boston metro area, just southeast of another old American town, Quincy.

The company went public in 1992, 158 years after its founding. The share price total return since then is about 14.5%. If dividends are added in, total return has probably been about 16.5%.

Hingham is a superior financial institution. As it stated in a 2012 press release, it was named the top performing thrift in the East and third in the nation by SNL Financial of the 100 largest public thrifts. Other accolades are described in that release. The compay received a similar ranking from SNL Financial two years earlier, as well.

Earnings took a modest hit in the aftermath of the Great Recession, but quickly rebounded. One of the factors that has helped the company is that it is so small that opening even one branch can make a material difference. For example, since I have owned the stock, the branch count has gone from 9 to 10. That branch, its second in Boston, is in Beacon Hill and I believe has already become a strong contributor to profits. A branch on Nantucket is scheduled to open very soon.

Management owns well over 40% of the stock. I have never seen a single insider transaction occur.

Insiders receive few if any options. Outstanding shares were 2.08 million in 2004, rising to only 2.13 million in 2012. Diluted EPS are only one cent per share lower than primary earnings.

The only earnings decrease since 2004 was a tiny drop from $2.19/share to $2.12/share between 2006 and 2007, when the housing bust was accelerating to the downside. Earnings rose from $2.12 to $2.96 in 2008 and $3.79 in 2009. They have soared since then.

Fully diluted EPS were $3.05 for the first 6 months of 2013. This is a 2% drop from 2012. Deposits were up 8% yoy and loans were up 12%. Book value reached $46.08. Non-performing assets went from very low to minuscule yoy, i.e. from 0.74% of total assets to 0.38%.

The efficiency ratio was very low at 43.6%.

HIFS is now a member of the Russell 3000.

The only major problem with the stock is that it is so difficult to purchase. Bid-ask spreads vary and can be large. I simply buy on weakness and put in limit orders at the asked if I am happy with that price. My sense is that the substantial majority of shareholders are in the stock for the long term. I have also observed that on active trading days, the stock often rises sharply, as occurred at the end of last week. Thus there appears to be more buying than selling pressure.

The shares are trading at about 1.6X book value. In "normal" times, my guess is that takeover value for such a high-quality company would be more like 2.5X. My personal view of where we are in the business cycle suggests that HIFS may be in for a rest based on earnings momentum, but it does not matter much if as I do, you want to own this for years to come.

Two notes: First, the dividend yield on HIFS is generally higher than reported. The company almost always pays a modest special dividend once a year, perhaps twice. Second, there are no SEC filings, as HIFS has chosen to be regulated by the FDIC.

Northrim Bancorp (NASDAQ:NRIM): Northrim is an Anchorage-based financial institution. This is a cheap stock. The shares closed Friday at $23.04. Trailing P/E is 11X. The dividend yield on the recently-raised payout is 2.95%. Per the company's fact sheet:

Tangible book value reached $20.25/share; intangibles and goodwill are modest. Portfolio loans rose 9% yoy. Tier 1 capital is 15.65% of risk-adjusted assets. Net interest margin (NYSE:NIM) is very high at 4.33%. Earnings rose 10% yoy last quarter. The company's press release announcing those earnings professes bullishness on Alaska's future:

"The recently passed decrease in oil tax rates is showing early signs of success in attracting new capital for energy exploration and production in Alaska," said Marc Langland, Chairman, President and CEO of Northrim Bancorp. "Major energy producers have announced plans for significant new drilling programs, which bodes well for the future health of Alaska's economy."...

An Anchorage Daily News article on July 7, 2013 stated that construction activity in Anchorage is also picking up. "Through May 31, the Municipality of Anchorage had received building permit applications for an estimated $302.8 million worth of work. During the first five months of 2012, $240.9 million worth of building permits were applied for -- a 25 percent year-over-year increase. Since bottoming out in 2010 with $144.7 million in permit applications, Anchorage has seen steady growth. The low figure in 2010 coincides with the lowest number of construction jobs statewide in the past decade."

The very recent strength in oil prices can only be good for NRIM.

The company has not raised capital since 1999.

My sense from reviewing several research reports on NRIM is that this is a more aggressive company than HIFS. Takeover value and normalized P/E should therefore be lower. For example, the efficiency ratio is subpar at 64%. Value Line recently gave NRIM an above-average financial strength rating of B++.

Insiders engage in few transactions, but I have seen small steady buying in the two years I have been following NRIM. They own about 5% of shares outstanding. Shares outstanding declined from 6.71 million in 2004 to 6.5 million currently.

I look at NRIM as an interesting stock given its value characteristics, increasing dividend payout, and the current strength in oil prices. I do not know what to make of the high efficiency ratio and perhaps corresponding high NIM. Might these be understandable given Alaska's unique characteristics? In any case, NRIM could be an attractive acquisition to a large company that wants a presence in Alaska and knows how to bring efficiencies to operations, so overall I'm positive on this stock.

Ameriserv (NASDAQ:ASRV): This TARP recipient has rebound strongly. It now both pays a dividend and buys back stock, signs that the regulators now like what they see. Ameriserv operates in the Johnstown PA region. It trades well below tangible book value. It is truly a microcap stock. Market cap is around $60 million. On Friday it traded around $30 million in total. I'm not going to say much because it has been covered twice by Seeking Alpha contributors recently, including in a Seeking Alpha Pro article on July 1 and again on August 31. I can simply comment that this stock could be a big winner if the U.S. and regional economies take off.

Conclusion: It's my hope that the companies listed above may be so undervalued that no matter what happens to valuations of larger, better-followed equities, these stocks will move in regard to their own fundamentals. If the business fundamentals of these companies stay strong in these unusual financial times, I hope that buy and hold investors will be well regarded for their (our) patience.

Again I want to say that there is no free lunch in investing. Even on busy trading days in these stocks, which are not frequent, bid-ask spreads are wide. The three stocks discussed herein are relatively illiquid investments. Investors looking for long-term total return vehicles may wish to look into these stocks, as well as others with similar value characteristics.

Disclosure: I am long HIFS, ASRV, NRIM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser. I believe that market orders are generally inadvisable on the three stocks discussed in this article.