Bank of McKenney

Bank of McKenney (BOMK) is a small bank located in Virginia and serving customers within the counties of Dinwiddie, Chesterfield and Prince George and the cities of Colonial Heights, Hopewell and Petersburg. The bank has been in operation for more than 100 years: it was established on June 5, 1906.

At year-end 2014 the bank had assets of $216 million and shareholders equity of $23.7 million. Bank of McKenney (company website) had record earnings in 2014 of $1.87 million (EPS: $0.97). In 2013 earnings were $1.69 million (EPS: $0.88). The return on assets has hovered around 0.7%-0.8% over the last five years and return of equity has been around 7% in this period. Non-performing assets have averaged 2.0%. The bank well exceeds the minimal capital requirements. Their Tier 1 Capital was 10.8% at the end of 2014. One thing that could cause some concern is the fact that commercial real estate makes up almost half of the total loans of the bank. Commercial real estate loans tend to be bigger and riskier than residential real estate loans. The efficiency ratio was 75% for 2014, which is typical of many of the small banks that I have looked at.

Insiders own 11.1% of the outstanding shares. The company has not repurchased shares in the last few years unfortunately. BOMK does pay a $0.28 yearly dividend, currently giving it a 2.8% yield.

Although I’m not an expert on banks, I think BOMK has had a reasonable performance over the last five years. I think it can be summarized as stable and unspectacular. I thought this boring performance, and the valuation, made it a good candidate for inclusion in a basket of banks. My average cost per share is $8.57.

BOMK has 1,894,102 common shares outstanding. The bank deregistered from the SEC in 2009 by reclassifying 33k common shares held by 171 individuals into preferred shares. This was a way for them to get below the required 300 holders of record for their common stock and allowed them to deregister and save costs. That is the reason you’ll see some preferred stock outstanding when you look at the balance sheet. It is not a material amount. Since a preferred share can be converted into 1 common share, I’ll treat the two as equivalent. The adjusted share count then becomes 1,926,656.

Share price: $10.00
Outstanding shares: 1,926,656
Market cap: $19.3m
Shareholders equity (and tangible book value): $23.7m

Shares are currently trading at 81% of tangible book value and ~10x earnings. The company trades over-the-counter and shares are illiquid. Annual reports are published on the company website and quarterly results are published there as well. Even though the shares have moved up a bit since my purchase, the company still looks pretty cheap at 81% of book and 10x earnings. I don’t have a great sense of the value of Bank of McKenney, but I think that book value is a reasonable target. That would give the company a P/E multiple of 12.6 which does not seem excessive.

Disclosure: long Bank of McKenney (OTCMKTS:BOMK)

Posted in Community banks, Pink Sheet stocks and tagged .

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