- Significant value trading at 80% of Tangible Book Value; aggressively buying back stock at 10% annually.
- Pristine loan portfolio with outstanding growth due to recent lift-out of loan executive team from CFG Community Bank.
- Activist investor Joseph Stilwell owns 10% position – HBK wont remain independent for very long.
- Expect sale in Fall 2015 when 3 year restriction ends.
- Comparable bank OBA Financial recently sold to FNB Bank for 130% of book value; equivalent to $21 for HBK.
Hamilton Bancorp (NASDAQ:HBK) is a Baltimore-area bank with $300mm assets and 5 branches. It provides a range of banking services primarily to small and middle-market businesses and middle-income individuals. Its' loan products comprise one- to four-family residential mortgages, owner-occupied commercial real estate, commercial business loans, home equity loans and lines of credit, and secured consumer loans. There is no Refi business, it's all purchase loans.
Hamilton Bank has transformed and thrived under the leadership of president and CEO Robert (Bob) DeAlmeida. His vision for expansion began as far back as 1990 when he was hired as the bank's chief financial officer. At the time, the bank had two locations and less than 25 employees. Today, Hamilton Bank operates five Maryland locations from its headquarters in Towson, and its staff has more than doubled.
The Fund has followed HBK for a couple of years now. After thorough research, including detailed discussions with Bob, we recently increased the fund's position to 2% of the outstanding shares.
HBK is extraordinarily cheap at 80% of Tangible Book Value. The stock trades around $13.25 and tangible book is at 16.40 (as of March 31, 2014). We expect TBV to go up significantly in the June 2014 quarter due to the stock buyback and earnings. While this might be a reasonable valuation for low-growth bank with large percentage of NPA's, it far from reasonable for HBK.
HBK has been improving asset quality and I expect the bank will continue to do so. HBK recently hired three top-notch loan executives in its commercial banking division. Ellen Fish is now executive vice president, chief lending officer; Connie Hess is vice president - sales and cash management; and Patricia Long is now vice president - commercial banking. The three women came over from CFG Community Bank. Landing them is nothing short of a coup for Bob. They each bring 3 decades of banking experience and a long list of clients for HBK. Ellen Fish has been named to Maryland's List of Top 100 Women for 3 years and to SmartCEO's Top Banker List for 2 years. The executives are already producing [In Bob's words, "They are Killing It"]. Production this quarter will be above expectations and we expect 25%+ growth annually for at least the next couple of years.
Management knows that this is its opportunity to reduce stock outstanding. Hamilton is an aggressive buyer of its own stock. Bob wants to buy back every possible share at current prices. We have been told that HBK will continue to buy back shares at a rate of at least 5% every 6 months as it is flush with cash and each buyback is largely accretive.
Joseph Stilwell, head of the $200mm Stilwell Value Partners hedge fund owns 10% of HBK. He is an activist investor with a history of buying into small banks and then pushing them to sell at premium prices. His fund specializes in small community banks, and he's not afraid to shake things up when he thinks shareholders aren't getting the treatment they deserve. Currently in a proxy fight with Harvard Illinois Bancorp, he is an activist investor who you want on your side. He wants Harvard to be sold in order to achieve shareholder value. To attract attention, he recently sent out a letter to shareholders that included a picture of Harvard's Chairman sleeping at a break during a conference. He has also recently been stirring the pot at Fairmount Bancorp and Jefferson Bancshares - Jefferson was recently sold with his input. It comes as no surprise that Stilwell has a significant stake in HBK and we are content to invest alongside of him.
HBK will be eligible for sale in October 2015 - i.e. 3 years after its mutual conversion. A very comparable local competitor (OBA Financial, (NASDAQ:OBAF)) with a similar balance sheet, was just bought for 130% of book value by FNB Corp (NYSE:FNB). OBA Financial also had approximately 300M in Loans and Deposits. FNB, wanting to buy up the I-270 corridor, has been an aggressive acquirer in Baltimore.
HBK has some hidden earnings power in its large reserve release. In October 2015, three years after the conversion, the bank has indicated publicly that it intends to distribute this reserve. Hence earnings should accelerate on several fronts. This will juice the stock price further before a sale even occurs.
While credit was a past concern, the bank is pristine today. New loans are high quality and just a few problems remain in the legacy loans. NPAs have been dropping accordingly. Currently at 2.1%, I expect them to continue to drop for the foreseeable future. Bob is also looking to reduce expenses and may close one branch in order to get profitability up. Growth will continue unabated due to the lift out of the executive loan team. Deposits are also growing and deposit costs are going down. With high growth and expense reduction, the Fund expects profitability to rise. Within one year, we expect ROA of 1%+.
The stock price was around $14+ at the beginning of the year, but recently dropped due to an unbalanced trade. There was a broker who put a number of clients into the name in late winter anticipating a stock buyback in the spring, along with a bump in price. By the time the buyback happened in May , there were so many sellers in on the trade that the company was able to buy its full allotment - 5% of the float - without affecting the price. The rest of his clients hit the bid for a full point and exited positions. We have spoken with the overzealous broker, he has told us that this clients have liquidated their shares. Consequently, any significant buying should move the price up. A purchase at anything less than $16 is a good deal in our opinion.
Here are the top institutional holders of HBK. In addition to Stillwell, FJ Capital Management, EJF Capital, Firefly and Sandler O'Neil are large holders. They own it for a reason.
Mar 31, 2014
FJ Capital Management LLC
Mar 31, 2014
EJF Capital LLC
Mar 31, 2014
Firefly Value Partners, LP
Mar 31, 2014
Sandler O'Neill Asset Management LLC
Mar 31, 2014
Big growth and pristine credit is happening at HBK, but the bank is off the radar and few investors are noticing. In a fully-valued stock market, there are few opportunities to buy a combined Growth and Value play. But this undiscovered gem will gain attention soon enough and the stock price will react. The Fund expects valuation will approach the levels achieved by OBAF when it was sold. Our target $21 within eighteen months.
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