Good Things In Small Packages
Progressive young voters and officeholders, like my college students, are the generational victims of the 2007 economic meltdown and subsequent recession. Their stories break my heart. Lost houses, abandoned condos, bankrupt family businesses, and broken homes. They ineluctably equate banks with robber barons. It is little wonder their sympathies and investment decisions, now they are entering the workforce, are in the camp of sustainability.
In my classes, we speak about banks and investing money. I make a distinction between global investment banks and small-cap regional community banks. The former are purveyors of power and set the rules. Berkshire Hathaway (BRK.A) (BRK.B) is bullish about the former and increasing investments in these banks. The latter survive by fishing in community streams and are supported by insiders and local investors.
I personally dealt with small-cap regional community banks for our business deposits, lines of credit, commercial real estate mortgages, and payroll management for over some four decades. Four years ago, I recommended buying shares of BankFinancial (BFIN) in my Seeking Alpha article, and I am still bullish on the stock. BFIN is an excellent role model for investors looking to profit from local community investments.
Going Strong Sticking To The Plan
BFIN is a survivor from the meltdown. It remained independent throughout. It serves Chicago and its collar counties. The share price was ~$11.60 when I recommended BFIN in 2015. The price steadily rose to touch a high +$18 over the next three years then bounced around closing in April 2019 ~$15.10. BFIN has a market cap of almost $250M. Trading is slow but that helps avoid volatility. There are strong upsides:
- Dividend yield (FWD) is 2.65%.
- Headquarters and 19 full-service branches are staffed and located in target market service areas; large banks are shuttering branches and encouraging customers to interact with ATMs and bank chat service responders.
- BFIN offers banking services, investments, insurance, and trust solutions.
- It holds $1.6B in assets.
- The insurance business is expected to rise by 5% to 10% in 2019.
- Full range and efficient tech services are available as an option that I employ when teaching abroad and to manage my multi-million dollar business revenues and payments when I was a CEO.
- Insiders (I was a major borrower and depositor when the company went public and a member of the Board of a competing bank) own a healthy slice of shares, but being a small-cap bank, institutions seem to still overlook BFIN.
Growth for the bank in 2018 came from commercial & industrial loans, and management is pursuing the same line of growth in 2019. Management is not confident there is a vibrant future market for BFIN in multifamily and retail housing. Both areas are currently stable, but management plans to keep real estate lending to about six percent of its portfolio. This reticence reflects a downside to BFIN's Chicago area service market.
Consistently the yield performance in Chicago is materially worse than in other markets. And the underwriting is getting tougher (because of politics and rising taxes in Illinois unlike) Colorado, Texas, Florida, South Carolina…
BFIN is a substantial lender to nursing home owners and healthcare investment groups associated with this industry: physical and occupational therapy companies, food services, ambulance transportation, hospice care, and more. BFIN loans focus on financing accounts receivable, inventory and equipment but not real estate, which is tied to HUD programs. The healthcare lending priority target market, though increasingly competitive, helps BFIN keep a relatively safe risk in the stewpot of liabilities.
On January 22, 2019, BFIN reported Q4 GAAP EPS of $0.44, beating by 21 cents. Revenue of $21.37M (+42.4% Y/Y) beat by $6.57M. Customer deposits largely fund the bank’s loans. Net income for FY '18 totals $19.3M.
Headwinds Call For Conservative Choices
The hallmark of community banks is personal customer service. It translates into greater overhead, including occupancy costs, absorbing upticks in utility rates, property taxes, and on-site staff. Compensation expenses for BFIN are expected to be flat in 2019. The bank’s recent earnings are above the industry average, but maintaining a healthy earnings growth rate will be a bit of a lurching work. The one-year earnings growth rate significantly exceeds its five-year average and that of the US bank industry. BFIN may err on the side of caution in this market by maintaining a total deposit of 97% of total liabilities, topping the charts compared to a 50% level in other financial institutions. This conservative attitude is further reflected in the bank's attitude about real estate lending considering concerns about millennials.
In Q3 ’18, analysts were cautioning investors to keep an arms-length relationship with bank stocks. This changed after earnings reports appeared around the turn of the year. One major concern for investor security that is given short shrift is the amount set aside for loan losses. Every investor needs to consider this factor as part of the investment strategy. The general consensus is “BankFinancial has a sufficient allowance for bad loans,” but considering the bank’s size and assets, BFIN is correct to operate more conservatively rather than as a risk taker. “The bank’s bad debt only makes up a very small 0.11 to total debt…” while others allow for up to 3%.
The overall picture for BFIN leaves the impression the bank's management is cautious and conservative. This approach helped BFIN survive the seminal economic meltdown and subsequent economic volatility when so many other banks were subsumed in federal initiatives or bit the dust. BFIN pays an excellent dividend and is positioned well for the long term. It is a community bank in every sense of the term. Its commitment and experience in C&I, healthcare lending and minimizing real estate lending suggests praxis is the manner BFIN engages the changing world, applying its own insights prior to any overzealous lending. I believe these conditions make for a good long-term investment for relatively risk-averse retail investors.
BFIN Positioned For Growth & Acquisition
Times and conditions are changing, and BFIN investors might benefit from the re-emerging M&A activity swirling in the small-cap regional community bank segment of the financial industry. A major competitor in the Chicago community banking market is completing a sale agreement to be bought by a Cincinnati bank. The new big bank is planning on closing fifty branches, leaving BFIN to enhance its image and service as a more relevant consumer commodity. BFIN might appear equally appealing to another financial institution interested in the bank's deep community roots.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.