Portfolio Update And, By Request, Hingham Institution For Savings

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About: Hingham Institution for Savings (HIFS), Includes: KTHN, NASB, PBBI, PKBK
by: Fred Campbell
Summary

Quarterly results have been announced for all of my recommendations, here are updates.

A reader asked me to look at Hingham Institution for Savings (HIFS) a bank headquartered about 20 miles from Boston.

HIFS is a strong bank and has about $2.5 billion in assets but it does not meet my criteria for purchase.

This analysis also identified a GAAP change which can skew the value of banks on a quarterly basis.

All four of the banks I have recommended released quarterly reports this month. In each case, the bank is heading in the right direction. Rather than listing four spreadsheets with tons of data, the following three tables should adequately summarize the current status of the investments.

Table 1: Portfolio Performance vs Benchmark and S&P 500*

Stock

Symbol

Purchase

Price

Curr Price

G/L

Gain %

Katahdin Bank

KTHN

2/6/19

$16.75

$17.95

$1.31

7.84%

North Amer Sav

NASB

5/6/19

$41.00

$42.00

$1.00

2.44%

Parke Bancorp

PKBK

2/14/19

$21.07

$20.40

-$0.53

-2.52%

Putnam Banc

PBBI

3/22/19

$11.23

$11.17

$0.01

0.09%

Total

$90.05

$91.52

$1.79

1.99%

Benchmark

Comm Bank Ind

QABA

2/6/19

$48.34

$48.45

$0.29

0.61%

QABA

2/14/19

$49.09

$48.45

-$0.46

-0.94%

QABA

3/22/19

$44.38

$48.45

$4.07

9.17%

QABA

5/6/19

$50.30

$48.45

-$1.85

-3.68%

Total

$192.11

$193.80

$2.05

1.07%

Stock Market

S&P 500

S&P 500

2/6/19

$2,731.61

$2,850.00

$118.39

4.33%

S&P 500

2/14/19

$2,745.73

$2,850.00

$104.27

3.80%

S&P 500

3/22/19

$2,800.71

$2,850.00

$49.29

1.76%

S&P 500

5/6/19

$2,932.47

$2,850.00

-$82.47

-2.81%

Total

$11,210.52

$11,400.00

$189.48

1.69%

*Includes Dividends

Table 2: Updated Bank Statistics

Symbol

Location

Price

Earnings*

P/E*

TBV

P/TB

KHTN

Maine

$17.95

1.92

9.35

$16.86

1.06

NASB

Grandview, MO

$42.00

4.28

9.81

$31.72

1.32

PKBK

Sewell, NJ

$20.40

2.60

7.85

$14.62

1.40

PBBI

Putnam, CT

$11.17

0.64

17.45

$10.97

1.02

* Annualized

Table 3: Updated Valuations

Symbol

ROA*

ROE*

P/E Value New

P/B Value New

P/E Value Original

P/B Value Original

KHTN

0.92%

10.27%

$22.33

$20.74

$22.90

$22.08

NASB

1.41%

13.33%

$49.78

$57.89

$51.17

$56.35

PKBK

1.87%

17.96%

$30.24

$26.68

$27.50

$17.48

PBBI

.88%

5.46%

$7.44

$13.49

$9.16

$15.36

* Annualized

Sources: KHTN Shareholder Relations, NASB Investor Relations, PKBK Investor Relations, and PBBI Investor Relations (first four tables).

These prices were taken about 1:30 on Tuesday afternoon (May 14) so it may be strikingly different now. Regardless, either I am barely beating the QABA index (by less than 1%) or doubling the performance of the index (2% vs 1.07%), however I prefer to market my performance. Each bank had a net increase in their Tangible Book Value for the quarter (Table 2) and solid earnings. Though note that the earnings are annualized, which can lead to some miscalculations as some banks have quarterly fluctuations due to weather or other issues

Table 3 shows the updated valuations for each bank. P/E is simply multiplying earnings by the average P/E of a community bank which is 11.63. This number is down from the 12.33 I had originally used for KHTN and PBBI so that is why their P/E valuations dropped. PKBK, though, increased based on their earnings but the value is annualized on one quarter so should be taken with a grain of salt. NASB dropped due to their annualized earnings being 12 cents less after having the additional quarter of data. P/B value is the Tangible Book Value times a multiple based on the financial performance of the bank. If the ROE is > 10% and the ROA > 1%, the multiplier is 1.86. If not, then it is 1.23. There is also a location multiplier entered into the formula as well. Although the TBV for KHTN has increased, its P/B value dropped about 6% because I had not taken out Goodwill and other intangible items when calculating the initial value. PKBK jumped about $9 because I had not considered the ROA and ROE premium when I did its initial valuation.

So, to sum up with a final table:

Table 4: Bottom Line

Symbol

Price

Low Value

High Value

Low Gain

High Gain

KHTN

$17.95

$20.74

$22.33

15.53%

24.40%

NASB

$42.00

$49.78

$57.89

18.52%

37.84%

PKBK

$20.40

$26.68

$30.24

30.80%

48.23%

PBBI

$11.17

$7.44

$13.49

-33.36%

20.80%

I guess they all look good except PBBI, but remember I bought this because they are just now eligible to be bought out and I expect them to make a push for better results in the next few quarters.

I will begin the second half of this report with an accounting question for those of you that enjoy looking at community banks. My favorite bank investment of all time is Bank of Utica (OTCPK:BKUTK). Although it still sells at half of price to book, I would never recommend it now as it has been in the same family for three generations and the current President has made it clear that he has no intention of selling or buying back stock. But I was fortunate to get in at a good price several years ago and it’s been good to me. Anyway, Mr. Sinnott sends out a very informative yearly newsletter that is only available to shareholders. Here is the year over year data from 2018 and 2017.

Table 5: Bank of Utica Financial Data

2018

2017

Net Interest Income

$20,632,677

$21,349,968

Provisions for Loan Losses

$1,804,784

$1,775,460

Non Interest Expense

$28,497,209

$9,909,978

Total Noninterest Income

$16,386,355

$5,153,613

Income Taxes

$480,438

-$4,320,028

Net Income (Total)

$6,236,601

$19,138,171

Earnings/Share

$24.95

$76.55

Source: BKUTK Annual Report, available only to shareholders (Tables 5 & 6).

In his newsletter, Mr. Sinnott said the performance in the two years was almost identical, yet look at the difference in net income and earnings How can that be true? Look carefully and try to answer prior to looking at the solution below. The other thing you need to know before solving the question is that BKUTK has a large bond investment portfolio, so much so that loans are only 10% of the assets and most of the rest are investments.

Answer: In previous years, banks have only reported investment gains and losses as income in the year the asset was bought and sold. As of this year, banks are required to start reporting the change in value in investment assets in the income section. Thus, if the value of the bank’s investment portfolio goes up, it is listed as non-interest income. If it goes down, it is non-interest expense. As you see, there is a large non-interest expense in 2018 and that was caused by the drop in price of their bond portfolio. This value would not have been listed in the income statement in previous years. If you take out this loss, here is how the statement would look with previous accounting methods:

Table 6: Bank of Utica Financial Data (Previous GAAP)

2018 (Restated)

2017 (Restated)

Net Interest Income

$20,632,677

$21,349,968

Provisions for Loan Losses

$1,804,784

$1,775,460

Non Interest Expense

$8,723,519

$9,909,978

Total Noninterest Income

$536,291

$430,854

Income Taxes

$480,438

-$4,320,028

Net Income (Total)

$10,160,227

$14,415,412

Earnings/Share

$40.64

$57.66

Then look that BKUTK had a one-time > 4 million dollar tax credit (I assume due to the new tax law but don’t remember) in 2017. Take that away and the 2017 EPS is now around $40, which is, as Mr. Sinnott explained, almost identical to 2018.

To further explain this phenomenon, this is a quote from Hingham Institute of Savings (HIFS) 2018 First Quarter Press Release:

Effective January 1, 2018, the Bank adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall, (Subtopic 825-10), which requires changes in the unrealized gains on certain equity securities, net of deferred taxes, to be recognized through the income statement. Prior to the adoption of ASU 2016-01, these changes were recorded in stockholders’ equity through accumulated other comprehensive income (OCI), and only realized gains on sale of securities were recognized through the income statement.

And to further illustrate the impact of the new accounting standards, this table is borrowed from a briefing on the topic (emphasis with italics and bold is mine):

Table 7: New GAAP for Equity Investments With Readily Determinable Fair Values

Legacy US GAAP

ASU 2016-01/2018-03

Impact

Measured at fair value with changes in fair value recognized in OCI if classified as AFS.

Measure at fair value with changes in fair value recognized in net income

Greater volatility in earnings.

Source: KPMG

Why do I start this section talking about BKUTK and Accounting Standards? Because these standards have a direct impact on our valuation of the above mentioned HIFS, a $2.5 billion dollar asset bank near Boston that a reader graciously asked that I look at. I didn’t do a real deep dive, but here are the initial figures:

Table 8: HIFS Financials

HIFS (Thousands)

2019 (Annualized)

2018

2017

2016

Assets

$2,497,389

$2,408,587

$2,284,599

$2,014,599

Liabilities

$2,275,708

$2,196,011

$2,098,441

$1,853,575

Shareholder Equity (Total)

$221,681

$212,576

$186,158

$161,024

Intangible Assets

$0

$0

$0

$0

Total Loans Outstanding

$2,092,313

$2,020,192

$1,843,792

$1,614,193

Impaired Loans

Provision for Loan Losses

$1,700

$1,270

$1,505

$1,135

Deposits

$1,555,323

$1,573,154

$1,505,862

$1,366,109

Shares Outstanding

2,132,750

2,132,750

2,132,750

2,132,750

Net Interest Income

$63,376

$65,785

$63,798

$58,384

Non Interest Expense

$20,568

$20,051

$19,576

$19,215

Total Noninterest Income

$12,648

-$1,735

$1,410

$1,735

Income Taxes

$14,460

$12,330

$18,370

$16,346

Net Income (Total)

$39,296

$30,399

$25,757

$23,423

Earnings/Share

$18.43

$14.25

$12.08

$10.98

Dividends/ Share

$1.52

$1.92

$1.66

$1.56

Share Price at Close of Period

$172.01

$198.15

$207.00

$196.78

Yield

0.88%

0.97%

0.80%

0.79%

Shares Repurchased

0

0

0

0

FINANCIAL RATIOS

Shareholder Equity/ Assets

8.88%

8.83%

8.15%

7.99%

Book Value

$103.94

$99.67

$87.29

$75.50

Tangible Book Value

$103.94

$99.67

$87.29

$75.50

Efficiency Ratio

27%

31%

30%

32%

Net Interest Margin

2.58%

2.80%

2.97%

3.09%

Price/Earnings

9.34

13.90

17.14

17.92

Price/Book

1.65

1.99

2.37

2.61

Tangible Price/Book

1.65

1.99

2.37

2.61

Dividend Payout

8.25%

13.47%

13.75%

14.20%

Return on Equity

18.10%

15.25%

14.84%

15.67%

Return on Assets

1.60%

1.30%

1.20%

1.24%

Impaired Loans/Total Loans

0.00%

0.00%

0.00%

0.00%

Stock Valuation

P/B

$189.46

$181.68

$159.10

$137.62

P/E

$214.28

$165.77

$140.45

$127.73

Source: Hingham Investor Relations (Tables 8 & 9).

This analysis indicates the price, as of the last quarter, is worth somewhere between $189-214. This is annualizing the results of one quarter so one must take this with a grain of salt, but it’s the best I can do without doing an in-depth study of their quarterly history. At a current price of around $192, that’s about a 11% gain at the high end. I prefer larger than that, and its yield isn’t as high as I like. But they are on the low end of the value range so I might take a longer look.

Then I noticed the change in accounting standards in the quarterly press release cited above. To the bank’s credit, they are very open about the new accounting standard and provide two sets of numbers, one using the old standards and the other using the new. Here are the restated values using the older accounting methods:

Table 9: HIFS Financial Data (Previous GAAP)

HIFS (Thousands)

2019 (Restated)

2018 (Restated)

Assets

$2,497,389

$2,408,587

Liabilities

$2,275,708

$2,196,011

Shareholder Equity (Total)

$221,681

$212,576

Intangible Assets

$0

$0

Total Loans Outstanding

$2,092,313

$2,020,192

Impaired Loans

Provision for Loan Losses

$1,700

$1,270

Deposits

$1,555,323

$1,573,154

Shares Outstanding

2,132,750

2,132,750

Net Interest Income

$63,376

$65,785

Non Interest Expense

$20,568

$20,051

Total Noninterest Income

$3,700

$642

Income Taxes

$14,460

$12,330

Net Income (Total)

$30,348

$32,776

Earnings/Share

$14.23

$15.37

Dividends/ Share

$1.52

$1.92

Share Price at Close of Period

$172.01

$198.15

Yield

0.88%

0.97%

Shares Repurchased

0

0

FINANCIAL RATIOS

Shareholder Equity/ Assets

8.88%

8.83%

Book Value

$103.94

$99.67

Tangible Book Value

$103.94

$99.67

Efficiency Ratio

31%

30%

Net Interest Margin

2.65%

2.97%

Price/Earnings

12.09

12.89

Price/Book

1.65

1.99

Tangible Price/Book

1.65

1.99

Dividend Payout

10.68%

12.49%

Return on Equity

14.88%

17.55%

Return on Assets

1.27%

1.48%

Impaired Loans/Total Loans

0.00%

0.00%

Stock Valuation

P/B

$189.46

$181.68

P/E

$165.49

$178.73

Now both of my stock valuations indicate the bank is overvalued and I am comfortable with sitting this one out. But I will caution this is my investment style, and your analysis may show something different.

I do appreciate the recommendations and I am learning a lot as we go along. Hope everyone else is as well.

Disclosure: I am/we are long KTHN, NASB.

Additional disclosure: I own 500 shares of KTHN, which was bought on Jan 23 at $16.50. I also own 300 shares of NASB, which was bought on May 9 at $41. I don't have any holdings in the other banks.