Hibernia Bancorp

After Trump’s election win, many financial stocks have been flying high, but I’m still finding a reasonable number of cheap micro-cap community banks that have been left behind.

Since early 2015 I’ve slowly built a basket of these small banks. I’ll highlight one more in this post.

Quick update on BOMK and PFOH

Two other banks were the subject of posts in March and April of 2015: Perpetual Federal Savings Bank (PFOH) and Bank of McKenney (BOMK). Both are still in my portfolio today and I think they are still cheap as well.

PFOH seems to be a very well run bank, with an efficiency ratio of 30% in fiscal 2015 and 2014 and a return on assets of 1.4% in fiscal 2016 and 2015. Although the stock is up ~24% since my post, PFOH is still only trading at 91% of tangible book value. I’ve looked at a lot of small community banks and I don’t think I’ve found any that are trading below book value when the bank was consistently earning a ROA well north of 1%. I still don’t understand how the bank can operate at an efficiency ratio of 30-40%, when community banks of this size that I normally see are operating at 70-80% efficiency ratio’s. The company pays a solid dividend to boot.

BOMK has hardly moved and trades a little below 80% of tangible book value, a valuation you don’t find as easily anymore in the current market, compared to a year or two ago. At least not for a small bank that seems to be clean and that has not had a very tough time during and following the financial crisis.

Hibernia Bancorp (OTCBB:HIBE)

Hibernia Bancorp IPO’ed in January 2009 when it converted from a mutual to a stock form of organization. In 2012 the company deregistered with the SEC and is no longer required to file with them. HIBE still provides investors with an annual report, proxy statement and quarterly earnings announcements on its website. The company operates through its three branches in New Orleans and Metairie, Louisiana.

HIBE fits some of the characteristics of the two other community banks I just mentioned, but is different in a few ways as well. One thing it has in common is that the bank is overcapitalized. On September 30, 2016 Hibernia showed an equity to assets ratio of 16.7%.

The balance sheet shows $100.4m in loans. About 50% of the loans on the books in December 2015 were characterized as One-to-Four Family Residential, with the other large category being Commercial Loans Secured by Real Estate (41.4%).

One thing you’ll quickly notice when looking at Hibernia Bancorp is that the bank is only marginally profitable. The company only earned $180k (EPS: $0.22) in 2015 and just $105k (EPS: $0.12) in 2014. This is by no means a high quality bank like PFOH appears to be, or a solidly profitable bank like BOMK. So it is quite different in this regard. To make things worse: the company does not pay a dividend either, so you are not getting paid to wait for something to eventually happen.

But there are two ways to win by investing in small community banks. You can profit from improving sentiment for bank stocks from investors; we’re seeing some of that happening right now in the market after the election of Trump. I don’t think HIBE as a small, boring, very illiquid, non-dividend paying stock offers a lot of hope in this regard. That said, I have been able to sell my HIBE shares in the past when it briefly approached book value. This is the second time I own shares in the company.

The second way to win as an investor in small bank stocks is when another, larger bank acquires the small bank you invested in. There is a long trend of consolidation in the community bank space, a trend that looks sure to continue. A figure that is regularly mentioned by other investors and small bank CEO’s is a minimum of $1 billion in total assets to effectively do business as an independent bank in the future. Compare that to Hibernia with assets of just $122 million. This is a major problem for them obviously and an important reason for their terrible earnings. The company simply lacks the scale to overcome their fixed costs. This problem is not going away either. I think there is steadily increasing pressure for banks like HIBE to sell their bank to a larger competitor. I think sub-scale banks like HIBE could prove to be good investments for this reason.

Besides the lack of scale, there are a few other factors that make me think a sale of this particular bank is likely in the next few years:

  • High insider ownership: officers and directors of Hibernia Bancorp owned 25.1% of the outstanding shares as of April 2016. This is a large ownership stake that I have not seen much at other small banks. The way for insiders to cash in on the full value of their stake is to pursue a sale of the company.
  • Insiders are getting quite old. The Chairman, Mr. Browne, is 82 years old and owns a 7.1% stake. Mr. Bush, the CEO, is 71 years old and holds 6.6% of the outstanding shares. Another director, Mr. Bethea, is 70 years old and holds 3.4%.
  • This one is just my personal theory. HIBE has an extremely low percentage of non-performing assets. As of September 30, 2016 non-performing assets were just 0.3% of total assets and NPA have been around this number for years. At the same time the bank is very overcapitalized. The goal of a bank is not to reach the lowest NPA possible. There should be a balance between earnings and the risk taken to reach those earnings. I think that the management of this bank has been overly conservative in making loans. One reason they could be overly conservative is that they are looking to sell this bank in the next few years with a clean balance sheet. I think it is probably easier to sell a bank that hardly has any problem assets to speak of than one that has some problems. It just looks to me that the bank is being run extremely conservatively by an aging management that is executing a low risk strategy to cash out their stake sometime in the next few years.


Hibernia Bancorp has consistently bought back shares since its IPO. This table shows the number of outstanding shares from the date of the IPO to the latest quarterly period:

Date Shares outstanding
01-29-2009 (IPO) 1,113,334
12-31-2010 1,032,667
12-31-2011 1,026,116
12-31-2012 995,884
12-31-2013 987,331
12-31-2014 955,194
12-31-2015 878,994
09-30-2016 847,943

The number of outstanding shares has decreased by 23.8% since the IPO. In October the company announced the approval of a sixth stock repurchase program.

Hibernia Bancorp has never paid a dividend to shareholders. Management has been able to increase their ownership level by letting HIBE repurchase shares from shareholders at pretty depressed prices. It’s no surprise that shares have often traded below 80% of book value in the past. Shareholders find themselves holding very illiquid shares in a micro-cap bank that is trading over the counter and that has never paid a dividend since its IPO, even though there is plenty of capital available. It’s no wonder that many shareholders have given up and sold their shares to the company. The only way for outside shareholders to realize value is by holding their shares and wait for the day that management decides to sell the bank. When that will happen is unknowable, but I do believe it will ultimately happen.

I have no good idea what an appropriate multiple for Hibernia Bancorp would be in the event of a sale. Also, I don’t know if there are other banks looking to acquire a small bank like this in Louisiana. It is clearly a below average bank in terms of profitability, but a lot of costs could be cut fairly easily by a larger entity. I don’t think HIBE would fetch a large multiple above book value, but I don’t think it would go for anything below book value either. Something like 1.1 – 1.2x book value seems like a reasonable guess to me.

Book value at September 30, 2016 was $24.10. The last trade took place at $21.00, or 87% of book value. I don’t think that price is a very attractive entry point for a bank like this, but it’s certainly not terrible either. I bought a small position at $20.00 which is about 83% of the last reported book value and relatively close to the 80% of book value that I’m usually looking for in the community banks in my portfolio. The bid-ask spread is also unusually wide currently. Limit orders should always be used for stocks like this. With some patience it could be possible to pick up some shares around 80% of book value sometime in the future.

Disclosure: long Hibernia Bancorp

Posted in Community banks, Pink Sheet stocks and tagged .

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