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The Undiscovered Katahdin Bankshares

Carlton Getz, CFA profile picture
Carlton Getz, CFA


  • Katahdin Bankshares is a microcap bank with compelling opportunities for efficiency improvements and growth.
  • The lack of easily accessible financial information makes analysis more difficult and requires significant effort to develop projections for the bank's operations.
  • Our calculations suggest the company may have an advantageous loan portfolio composition and maturity/repricing mix to take advantage of rising interest rates.
  • Katahdin's consistent profitability and growth in book value provides long-term investors a significant opportunity even without significant operating improvements.
  • Katahdin Bankshares may also be a compelling future acquisition target for Camden National Corporation.

Katahdin Bankshares (OTCQX: OTCQX:KTHN) is a Maine based community banking institution primarily serving the far eastern and northern reaches of the state. The company operates primarily in smaller rural communities with localized small business based economies.

In some respects, Katahdin is an unusual bank on which to focus since its operating metrics have historically been lackluster. The company’s return on assets and return on equity over the last five years have remained stuck around a relatively modest 0.7% and 7.5%, respectively. The company’s non-performing asset ratio has been elevated for some time – generally in the 1.75% range – and the allowance for loan losses relative to non-performing loans has been below average for several years. In addition, the company’s efficiency ratio has similarly been stuck in the 70% range. However, look past these generalized metrics, and it’s possible to see some very compelling positives. Deposit and loan growth has been strong and remarkably consistent over the last several years for a community bank serving rural areas. Earnings per share, although flat, have also been consistent, as has the positive upward march of the company’s book value on both a basic and tangible basis. Katahdin in itself may not be an especially remarkable bank, but it has remarkable potential. The shares also have remarkable potential – at the right price.

This article focuses on our view that Katahdin has several compelling attributes which warrant consideration for focused long-term investors which could yield superior long-term results. In particular, despite the relatively lackluster bottom line performance compared to peers such as Bar Harbor Bankshares (NYSE: BHB) and Camden National Corporation (NASDAQ: CAC), there are unique opportunities available to Katahdin which may prove significant, especially in light of the company’s relatively modest valuation in comparison to its acquisitive larger peers.


Maine’s banking

This article was written by

Carlton Getz, CFA profile picture
The author writes on behalf of Winter Harbor Capital, a private fund, and oversees private portfolios for individual and institutional clients. The author founded an investment company in 1995 with the view that a value oriented investment philosophy focused on intrinsic value and long term opportunities could generate superior absolute returns over time, leading to portfolios with unusual investment tenure sometimes exceeding 10 years. In addition to stints in micro and small capitalization research at Wasatch Advisors in Salt Lake City and in private banking with J.P. Morgan Private Bank in New York City, the author is a registered investment advisor, licensed professional engineer, and graduate of the Darden School at the University of Virginia.

Analyst’s Disclosure: I am/we are long BHB, CAC, KTHN. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (13)

Brent Barber profile picture
A couple of things interesting in the quarterly report out today. Again, earnings were good and YTD ROE is up 1.2% to almost 12%.

1. The new senior notes are included in liabilities and, as such, now have the interest being tax deductible as opposed to the old preferreds which were paid as dividends.
2, The buyback is moving forward more quickly than I would have though given the low trading volume in the stock - As a follow-up regarding the announced Stock Buyback Program, Bankshares has purchased and retired a total of 31,160 shares during the third quarter at an average price of $17.49 per share.
Brent Barber profile picture
Nice to see the new Senior Notes at 5.375%, being used to redeem the preferreds which are at 8.75%.

Round number of $300,000 a year in savings, which is $0.088 per share before tax, so some incremental value.

Good management is doing some things to help shareholders - this seemed like an obvious one given the bank's good financial situation and the high rate they were paying on the old Preferreds.
Carlton Getz, CFA profile picture
Brent Barber -

We're pleased to see the bank redeem the preferred shares - we've discussed this with management on several occasions - although we're somewhat less enthusiastic about the issuance of $14.5 million in senior notes. We'd have preferred to see fewer senior notes issued to redeem the preferred shares. The net impact on the company, though, is closer to $0.04 to $0.06 per share since the company issued $14.5 million in senior notes and only redeemed $10 million in preferred stock, so the senior note interest is only $95,000 less than the preferred dividends. The majority of the benefit comes from deductibility of the interest.
Brent Barber profile picture
Thanks - missed the increase. Hopefully they have a plan to do something useful with the extra $4.5 million. it does not look like they have any higher interest rate debt they could pay off, so will be interesting to try and see where it goes.
Carlton Getz, CFA profile picture
GrayhawkAZ -

We continue to like Katahdin and, in fact, significantly increased our position in the last few months during which some larger blocks became available. The company's shares have risen faster than we'd anticipated but corporate tax reform changed the earnings power quite substantially so while the share price has approached our estimated range, that range needs to be adjusted to reflect the benefits from lower corporate income tax expense. Maine also has an unusual taxation approach to financial institutions. We've communicated with management in the meantime regarding the potential redemption of the preferred shares in the coming year and our thoughts on the financing of a redemption. The rising share price improves the potential economics. We also still believe Katahdin would be a compelling acquisition opportunity, especially for Camden National Corporation, but don't feel the need to count on that possibility to maintain our holdings. The company is moving in the right direction regardless, so we're watching to see if the momentum is sustained over the coming year.

We appreciate the comment!
GrayhawkAZ profile picture
Nice run so far.

Qtrly numbers were pretty encouraging. Any additional thoughts over the last year?
Jeremy Blum profile picture
The reason for the discount to peers and book is the trading volume, 331 shares a day. It would take most investors months if not years to get a full position. They would then have to go through the same excruciating process to get out. I in fact did do this once acquiring stock in an even more lightly traded bank stock in Indiana over a year period. I was able to sell out after a nice run up, which I probably was partially responsible for, to the bank's ESOP. I got lucky. I do agree they are buyout bait at the current price, but I usually don't play the buyout game, and this is too hard.
Carlton Getz, CFA profile picture
Jeremy -

We appreciate your comment - your observation is correct for most investors. In our case, our time horizon for portfolio holdings is exceptionally long, occasionally measured in decades. The company's earnings, even without any improvement in the business metrics, provide a relatively low risk annual return through a combination of dividends and growth in underlying value of around 8.5% per year with the potential for better outcomes whether or not immediately recognized by the market. It's not stellar relative to what many have come to expect from the market, but given a focus on absolute rather than relative returns, an highly consistent 8.5% annual rate compounded over decades remains compelling as a portfolio component. In time, the value will be recognized in one way or another.
Brent Barber profile picture
I agree with your approach with a stock like KTHN. Buy and be patient and collect the dividend and increasing value in the company. There will be a good time to sell, but could be a long time.

The valuation given to KTHN compared with most other small community banks is still somewhat surprising. Many other community banks have poorer profitability and had more trouble with the financial crisis trade at much higher valuations than KTHN. But this is just an opportunity for patient investors like us to accumulate shares on the cheap!
Catahoula profile picture
A fine article...a nicely balanced assessment. I have looked KTHN several times over the last two-three years. I have also found Matt Nightingale responsive my questions. I'm glad that the author dedicated so much effort to addressing and running scenarios on book value. The overhang from the preferred shares has kept me from pulling the trigger...so far...
A great analysis on KTHN! I am worried that you are letting the cat out of the bag as I have been acquiring shares over the past two months based on a number of factors you mentioned. I was hoping to acquire more shares in the future but it is thinly traded and I am careful not to escalate the price.

It is difficult to find banks trading at such a discount to their TBV. I also acquired some shares in CRZY as it also has low cost deposits, trades less than TBV, and has little competition. Like KTHN, many of its metrics have room for improvement. Eventually management will fix these companies or the market will demand they be sold.
Brent Barber profile picture
Thanks for the detailed article - this is very valuable for a small, thinly traded company.

I have a couple of points/questions:

In their income statement, dividends for Preferred Shares are deducted from Net Income to give the Net Income Available to Common Shareholders and the calculation of EPS. So redeeming the preferred shares would increase the EPS earnings. I calculate the EPS increase at $0.21 per share. You say getting rid of Preferreds won't affect EPS, so am I missing something here?

I had the following email exchange with Katahdin Investor Relations, which shows they do think about these things:

Question: Can you please explain to me the rationale of continuing to have the Preferred D shares outstanding? They are expensive at an 8.75% interest rate and I think there should be cheaper funding sources of borrowing available to the company. One alternative would be to issue common shares. If you issued 700,000 shares at $14.00, you could pay off the preferreds and increase EPS by $0.21. Perhaps the plan is to just pay these off in the next couple of years, as the company easily meets capital requirements and generates enough profit after dividends to pay this off in about 4 years, which would avoid common share dilution. Is getting rid of this expensive source of financing a goal of the company?

Response: You’ve raised good questions/observations here. The Preferred Series D shares are callable by the company, but not until June 27, 2019 – five years after original issuance. I can’t say whether we will make a change here, but capital efficiency is important to us and we periodically discuss options.

The other thing I have been thinking about is prior to the financial crisis, KTHN generated an average ROE of over 16% for the years 2003 to 2007, granted a very good environment. Additionally, the traded at P/B's above 1.7 for at least 2 of those years and had an average year-end p/e of 13.

So being optimistic, if KTHN can improve its profitability as you suggest and net interest margins improve with rising rates, and they get a better valuation because of this increased profitability, I can project stock prices in the mid $30's:

EPS with 15% ROE $2.43
p/e of 13 gives Stock Price = $31.53
BV in 3 years = $23.39 (remove $1.20 for 3 years dividends)
If P/B can get back to 1.7 range
Stock Price = $39.77
Average $35.65
Carlton Getz, CFA profile picture
bbarberayr -

We appreciate the comments and questions. In regard to the preferred, our comment related to issuing common stock to raise the equity capital to redeem the preferred shares, in which case the dilution to earnings per share caused by issuing new common stock would be offset by the additional contribution to earnings per share by allowing the preferred dividends to drop to the net income available to common shareholders - thus, there would be essentially no net impact on earnings per share under this redemption scenario. We don't see a way the company could increase earnings per share by $0.21 while also issuing new common stock - the number of shares required would be about 750,000 while the dividends are $875,000, which happens to be equal to last year's earnings of $1.16 per share.

In regard to share valuation, your observations are correct, although we consider it unlikely the company would be able to achieve those margins and valuations (aside from P/E) in the current (or likely future) regulatory and economic environment. We generally take a more conservative view to projected valuations - when we can achieve a good long term compound rate of return on conservative valuation, anything beyond is simply icing on the proverbial cake.
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