Saturday, September 13, 2014

SFB Bancorp, Inc. Call Report For Q2 2014 $SFBK

Wrote about SFBK in July - a small community bank in eastern Tennessee. At the current market price of $23, that is a market capitalization of $8.8 million. At year end 2013, the book value of the company (assets minus all liabilities) was $13,892,000. That was $36.26 per share.

The company does not file reports with the SEC and does not send quarterly reports to shareholders (just an annual report). However, we can obtain an FDIC report ("call report") showing the quarterly results of the company's regulated bank subsidiary. For the first quarter of 2014, net income was $136,000, up from $120,000 in the first quarter of 2013. According to the Q2 call report, net income was $155,000 compared with $175,000 the prior year.

Book value of the bank should now be about $37 per share. The price-to-book is still about 62%. The annualized return on equity right now is an anemic 4.2%. Factoring in the discount to book value, you are earning about 6.8% (earnings yield).

Assets almost unchanged year over year, at $56 million. Loans are also roughly unchanged at $38 million. However, a significant amount of cash was shifted from interest bearing deposits to the available-for-sale securities portfolio. The biggest increase was $5 million in munis. SFBK likes the same muni trade that I do! And they were buying in the 5-15 year duration bucket, the same part of the curve that I have liked!

There's been an uptick in past due and nonaccrual loans year over year. If management has reserved properly, then this should already be reflected in the financial statements. I would not ordinarily give a bank management that much credit, however management seems to make conservative loans, judging by the profitable years during the housing crash and also by investments in munis at the top of the economic cycle instead of growing the loan portfolio.

31 comments:

Anonymous said...

Have you talked to mgmt? I dont see the muni duration quoted in annual report.

tldr said...

He did say that it was in the call report.

Anonymous said...

Didnt realize they broke out maturities in the call report. Youre right, its there.

Still curious if anyone has talked to the CEO. He just inherited the job in 2012 after the death of the well-aged founder.

This thing is definitely cheap, and it will be hard to lose a ton of money. However, based on my quick readthrough of the financials this weekend (came in the mail on Saturday), I think there is no argument for why this thing should continue to exist on its own.

I also dont know what to make of the fact that this small community bank is taking on significant duration risk through munis and MBS. Perhaps this is another argument for why they should be sold?

tldr said...

The only "duration risk" is not owning duration. As we descend towards a Japanese flat 0% yield curve the opportunity to make risk-free money with money is disappearing until the next civilizational flourish.

Maybe they've been reading their Credit Bubble Stocks?

Anonymous said...

Thats the dumbest thing Ive ever heard. Its a levered vehicle...

I doubt they have anyone sophisticated picking their munis & MBS holdings. They probably loaded up on Chicago munis for the excess yield, for all we know.

When you are levered 10x with deposits that cost you nothing, arent you better off simply holding floating rate & amortizing loans? These little commercial banks shouldnt be in the business of making levered duration a& macro bets.

Maybe im crazy, but I just want them to keep making their 5ish % levered return on equity, clean up their balance sheet, and sell this thing.

Thats a free 2 bagger right there, without having to bet on a carry trade.

TLDR, have you ever managed a levered fixed income vehicle before?

Anonymous said...

CP,

Im the above anonymous commentator, and currently own some of the equity.

Was wondering if we could compare notes on this name. Do you have an email address or something that I can use to contact you directly?

Thanks

CP said...
This comment has been removed by the author.
CP said...

http://www.vulturesroost.com/showbank.php?bank_id=29331

"It is really a pretty well run little thrift except for the excess equity."

Anonymous said...

Highly recommend you speak to the CFO. Spoke with him twice over the last couple days.

He is new to the company, having only been there a year, and is much more sophisticated than I had anticipated.

I was very pleasantly surprised. I will be writing this up on SA, unless CP has an objection.

Anonymous said...

You should post your notes on what you learned here first since you got the idea here.

Anonymous said...

Sure will. Need to write them into a digestible format first, however. May take a few days

Anonymous said...

Here's the very abbreviated version to give you guys a head start:

- COmpany was 1-man show until 2 years ago. Founder died.
- Founder's son became CEO, he had held other mgmt positions at SFBK for 10+ yrs
- New CFO came on board 1yr ago. He worked at a credit union down the street, until it was acquired.
- Comapny suffered from a very competitive local loan environment, and loan balances declined over time; while cash on BS increased significantly.
- Company is no longer 1-man show
- CFO helped come up with a strategy going forward.
- 3 part strat: 1) get fully invested and stay that way (accomplished by buying munis and MBS); 2) implement mobile banking (currently in process); 3) grow into a new market for loan production purposes (they will open a 3rd facility in Johnson City; capex will be sub 500k for this project with a 2yr timeframe to get running).
- Munis - almost entirely TN munis for double tax benefit. Aggregate tax-equivalent yield of 4-4.5%.
- MBS - aggregate yield of 2-2.5%
- New CFO is aware of the discrepancy between book and mkt value of shares. Bringing up the issue at board meeting.
- Dividend policy going forward will be $150k aggregate cash sent from the Bank Sub to HoldCo, annually. More special dividends unlikely.
- ***15,000 shares repurchased since FYE13 at prevailing market prices. This is a huge acceleration from prior years, and equivalent to ~4% of outstanding shares***
- Fantastic core deposits. They are paying 10bps less for their deposits than the banks down the street.
- They have had several M&A offers for the bank in the past, but did not accept due to combination of: 1) price not high enough; and 2) community mindset. (My guess is they probably wouldnt sell at any price based on the tone to which they responded).
- Lastly, I tried to plant the seed for even more share repurchases by by emphasizing that it was a much better use of capital than special dividends due to the massive discount to book, equivalent to printing free money for the equity owners, etc. CFO gets it, but the rest of the managing members are not there yet.

Hope this helps.
-KK

Anonymous said...

Also, from a liquidity prospective, the Company regularly buys back shares from local community members off-the-market.

6,000 of the 15,000 shares this year came from a single individual who needed liquidity.

These buybacks do not appear on the OTC volumes reported.

Company is willing to repurchase your shares at current mkt price if you call them (may not be applicable if the price moves up significantly).

-KK

james river said...

A 15,000 share repurchase at say $23 would have led to a (15k*($37-23)) = $210,000 increase in book value. So BV is now probably closer to $38 per share.

KK what is your interest here? Why do you want them to buy back stock instead of just buying more yourself.

tldr said...

That's interesting about the expansion. What do they think that the ROI on the expansion is going to be?

If it was me running the bank I'd probably be much more aggressive about buying back shares at these discounts. And then take it private at a modest discount to BV.

Anonymous said...

They have far more capital to buy shares than I do.

I have strict risk limits that I stick to, and Im capped out on this name currently.

I would argue that they actually get a higher return on the marginal share repurchase than the marginal muni/MBS purchase.

Im looking at total return. I think these guys have a viable business and will keep paying me my 2%ish divi. I will happily wait for the stock price to correct, and it seems like the CFO wants to see that happen as well. I just want to make sure I wont be waiting forever.

-kk

Anonymous said...

TLDR, I agree 100%.

I was the only "finance-type" owner that he has spoken with, apparently. Some of what I was saying about capital allocation was foreign to them.

Highly recommend, if you are an equity owner, to start by calling Chris at the main line to get your questions answered. She can put you in touch with David, the CFO. I think more people sharing the same value creation thesis would be helpful here, because they havent really thought about it much as a firm.

-kk

Anonymous said...

Regarding the expansion - I dont know the expected ROI. I dont think the company does either.

It wont be another branch to build deposits. It will strictly be a demographics play to build the loan book back up to/beyond what it was before. The tri-city area obviously has a much more dense population (and personally, I think the demographics there would make them more likely to borrow).

-KK

tldr said...

How do they not notice that they are a big cash pile of $38 that they can buy for $24??

Anonymous said...

If they continue to earn about 4% ROE and the gap with BV closes within a couple years, this trade will have a huge IRR.

Anonymous said...

TLDR, I get the feeling that the mgmt team (in aggregate) is not exactly sophisticated.

I think there is hope for the right decisions to be made in the board room with the CFO.

If you are an owner & want to see them make the right decisions, I would recommend you call and voice your opinion as well. Like I said, up until now, I was the only one who has talked to them from this viewpoint.

-KK

Anonymous said...

Also, here is the FYE13 filing for those without access. I got permission from the company. Scanned it myself.

https://db.tt/DyCV1QyS

-kk

Anonymous said...

What's the CFO's name? I thought the CEO was "Carmella Price"?

http://www.elizabethtonchamber.com/join.php?page=board

tldr said...

What I don't understand is why anyone would be selling at this price? If you took your shares off the market, the market would probably trade a lot closer to book and then you could sell directly to the company at a better price because they couldn't point to your low offer price hanging on the market!

Anonymous said...

TLDR, I dont get it either.

Anonymous said...

Sorry, I thought I answered the question about who the CFO was - apparently it didnt go through.

His name is David Leveaux. You should be able to get him if you call the main branch line (on their website) and ask for him.

-KK

Winchester said...

One thing to beware of:
http://archive.tennessean.com/article/20140302/NEWS01/303030012/In-Carter-County-fighting-meth-dirty-dangerous-business

This is probably why they buy munis and MBS instead of making loans. Let the big national banks that don't know their customers lend to the meth heads.

Anonymous said...

Thanks Winchester, thats a fun story.

Also probably explains why they want to open the new loan production branch.

Anonymous said...

They wouldn't be able to get away with not lending to poor blacks, but nobody cares if they don't lend to poor whites.

Jante said...

http://seekingalpha.com/article/2536115-sfb-bancorp-a-cheap-bank-with-catalysts

CP said...

http://www.creditbubblestocks.com/2015/12/update-to-sfb-bancorp-inc-sfbk.html