The Solitron Proxy Battle

It's refreshing when a little sunlight is finally shines on a dark corner of the market.  Solitron Devices (SODI), a Florida chip manufacturer was one such company deserving of sunlight.  They operated in the shadows of the market for close to twenty years after emerging from bankruptcy in the 1990s.

When a management team is used to darkness they feel like they can do whatever they want.  They don't answer to investors, they only answer to themselves.  Sunlight is an incredible disinfectant and a little goes a long way towards killing harmful attitudes and behaviors.  Solitron is/was being run by the CEO/CFO/Executive-everything Shevach Saraf for the benefit of himself at the expense of shareholders.

After emerging from bankruptcy Saraf directed the company's free cash flow into Treasury bonds as an insurance policy against ongoing environmental litigation.  It's debatable whether this was necessary or not.  While shareholders received nothing Saraf paid himself handsomely in both cash and in options.  He willingly granted himself options and as far as I can tell never purchased shares on the open market.  It must be nice to be in a position where you can take wealth from public shareholders and redirect it to yourself without anyone batting any eye.  To put things in perspective Saraf takes home about 15% of the company's gross profit as a salary.  These are the sort of things that happen when companies operate in the dark.

In business school theory, a Board of Directors answers to shareholders, and company management to the Board.  It doesn't work like this in the "real world".  No one answers to shareholders, and the Board answers to management.  This is especially true for Solitron.  The "Board" consisted of Saraf and two of his friends.  One them appeared to have a background in the business and the other was unresponsive and abusive to shareholders.  It's hard for me the fathom how a Board that is opposed to shareholders can answer to them.

I've highlighted Soltron numerous times on this blog (Google "site:oddballstocks.com Solitron").  I helped get the ball rolling that resulted in the first annual meeting in decades.  What's important to note is I didn't force the meeting, all I did with this blog was start to shine a little sunlight on the situation.  An undervalued company plus a lot of sunlight creates incredible opportunities for value investors.

After that first annual meeting Solitron brought on a few more directors.  And brought back a director shareholders fired.  It was as if Saraf looked shareholders in the eye and said "yes, we'll listen to you" and then proceeded to pull out a giant stick that he stuck in our eyes.  If Saraf wants to run Solitron like he owns the company he should just buy us all out.  Let me repeat, if Saraf wants to run Solitron like his own little fiefdom he needs to tender and buy us out, with his own money!  If he doesn't then he has no right to act like this, and it's time for shareholders to take an ever bigger stick and poke right back.

Thankfully shareholders have a hedge fund that's willing to wield the stick that we're going to collectively poke at Solitron.  Cedar Creek Partners, a hedge fund run by Tim Eriksen has gone activist on the company.  Cedar Creek has filed a preliminary proxy in order to elect Tim and David Pointer as directors.

Tim has put his money where his mouth is, his fund owns 6% of the outstanding stock.  Why doesn't any of Solitron's Board outside of Saraf own that much stock?  Why do some members own nothing? How can a director with ZERO shareholder interest stand up for shareholders?  They can't, instead they take a payment from Solitron and act in management interest.  When you want to know how a director will act look at their own financial interest.  Directors with shareholdings will act in shareholder interest, directors just collecting a paycheck will act in management's interest.

Eriksen Capital (Cedar Creek's managing partner) has proposed two individuals who will stand up for shareholders and continue to shine sunlight where it deserves to be shined.

Solitron has responded to Eriksen's proxy with an attack letter.  They initiated a dividend (in response to shareholder action) and a buyback (in response to shareholder action) and then go on to attack the credentials of Tim and David.  Management is hoping that their dividend and buyback persuade shareholders that they're doing enough to keep their seats.

I have a large capacity to forgive, I believe that people can reform themselves, but I believe in actions, not words.  If someone is an alcoholic and claim they're clean, but continue to drink it's the actions not the words that tell the story.  Solitron is no different, they claim they've changed but their actions say they haven't.  They aren't listening to shareholders, they re-instated the Director that we threw out.  They've initiated shareholder friendly actions because shareholders have been putting a lot of pressure on the company.  It seems to be that if shareholder pressure is needed for these changes then we need more of it.

Solitron attacks Tim and David saying they don't have the proper credentials or industry experience to be on the Board.  I find it ironic that an executive with title inflation (Saraf is Chairman/CEO/President/Treasuer/CFO) is saying the lack of titles is a stumbling block.  Maybe if Tim and David could hand out titles themselves it wouldn't be an issue.  Solitron sets up a straw man with this argument.  Would they really be willing to take on outside directors looking to return capital if they went to Harvard and worked in defense?  If those directors were opposed to management then I'm sure their credentials wouldn't be good enough.

I could disassemble the Solitron letter piece by piece, but by doing that I'd give credence to it.  I don't want to give credence to a company who says they've changed yet their actions show otherwise.  This is a company that has been living and enjoying it's dark space and is now cowering in the sunlight.  Shareholders aren't petitioning for job cuts.  We're asking that management answers to the rightful owners, returns excess capital, and operates in a shareholder friendly manner.  If management doesn't want to do this then they need to sell the company, or buy shareholders out.

Until management tenders for 100% of the shares, or sells to another company I have a feeling the sunlight will only grow more intense.  A little disinfectant goes a long way.

I'll be voting my shares for Eriksen Capital and I hope you do as well.

Disclosure: Long Solitron

Why Investors Fail

Almost every investing study tells us that buying stocks at a low price to anything results in market beating performance.  Even just buying a S&P ETF and doing nothing else beats most investors and mutual funds.  If out performance is a matter of doing a few simple things and nothing else then why is everyone acting so crazy? And if earning market matching, or market beating results are so simple then why don't investors earn those sorts of returns?

Fidelity released a study discussing a performance breakdown for their accounts.  The clients that did the best were the ones who were dead.  The second best performing set of clients forgot they had Fidelity accounts.  It seems like a formula to beat the market is to start an account, forget about it, then die.  Your heirs will thank you and marvel at your investing prowess.

How is it that investing is so "easy", yet so hard?  If in theory all one needs to do is follow a few simple formulas, or invest in a few ETF's why aren't more investors matching or beating the market?

It's often said that investors are their own worst enemy.  Our own emotions get the best of us.  When the market is roaring higher we get excited.  When the market hits new lows we're too depressed to even open our account statements.

I believe investors fail for a number of reasons with the biggest being the lack of patience.  There are many investing strategies that make sense on paper.  The problem is few investors have the patience to see these strategies through to the finish.  It is more exciting to watch a stock jump up and down 2-3% a day, or see a battle ground stock bantered about on CNBC compared to owning a company that trades in tenths of a percentage point most days.  The thing is those tenths add up over time, especially for companies that continue to execute operationally.

Finding a reasonable investing strategy isn't an issue, it's sticking to it.  It is very easy to find undervalued investments, but holding onto those undervalued investments for years can be difficult.  For many investors it's fun to research and watch holdings, but it's no fun to watch a stock effectively do nothing for days, months, or years.  If the excitement is in the research then we'll continually be researching new positions and throwing out the old ones.

Another reason investors fail is because they're doing too many things at once.  A few net-nets, a few growth stocks, some shorts, a turnaround or two etc.  Their portfolio is a potpourri of strategies, many of them that are complex and require dedicated skills.  Each investor needs to find their own style and stick to it.  There is a reason there are so many funds with one focus.  It's much easier to be a bankruptcy fund, or a turnaround fund compared to a general value fund.  The same is true for individual investors.  It's much easier to focus on a specific corner of the market rather than invest in any and all things cheap.

Related to doing too much is researching too much.  Some investors fail because they can't see the forest through the trees.  They are so caught up in the minutia of an investment that they miss the big picture.

I enjoy reading message board posts related to investments I'm researching.  I'm always on the lookout for what I consider the obsessive investor.  For some reason these obsessive investors often congregate in oil and gas or mining stocks.  You've probably seen these posts.  A few books worth of material detailing the pressure of well bores the company had in North Dakota in 1988.  Excited posts about how rumors are swirling that carpeting is being replace at headquarters and maybe it's a sign of a buyout.

Buried within the pages of notes are usually a few nuggets of information useful to an investment thesis.  But my feeling is that the author probably has no idea, they are too consumed with finding out everything related to the company to realize this.  The ultimate irony is that the body of knowledge an obsessed investor can accumulate is about the minimum amount of knowledge every middle level employee at the company has.  In other words outside investors are always at a significant informational disadvantage to almost any company insider, even the lowest level employees at times.

My favorite investments are ones where the value is obvious and the investment rests on what I consider a few pivot points.  These are general assumptions.  The larger the gap between the current price and fair value combined with a small number of pivot points makes for investment success.  This is because each assumption, each estimation, and each guess adds uncertainty to a model.  At some point endless research can blind an investor from realizing what truly matters from what they think matters.

Once I realized that I didn't need compile an exhaustive list of company information to make good investments I began to simplify my research.  I only researched what was necessary to confirm or deny the pivot points I'd identified with an investment.  By doing this I saved myself the endless research.  Maybe the carpet color does matter in a merger.  Small details can be exciting.  But it's the boring details that matter, such as the age of the CEO, or the age of the Board.  Companies with graying executives and graying boards are more likely to sell their company.

The last reason I believe many investors fail is because they don't really know what they own, or why they invested in the first place.  Cloning investments is a very popular strategy right now.  And like all investment strategies cloning works well on paper, it generates market beating returns.  Just buy what Buffett buys and sell what he sells and you'll do well the story goes.  The problem is when we buy something on someone else's thesis it's hard to hold through thick and thin.  If bad news starts to come out on a cloned investment it's easy to dump it and say "maybe this is one the guru messed up on."

Closely related is when investors purchase stocks on a story basis.  That is they feel a given company will benefit from some larger trend at some point in the future.  Many times when these story stocks are purchased investors aren't conducting true due diligence to see if the company will actually benefit from the trend.

Story stocks are a favorite of the news shows.  There's a very specific reason for this.  There are two types of stocks, stocks that are great stories, and stocks that are great investments.  As someone who writes about stocks I can say that some of my best investments have been my worst posts.  This is because there was nothing exciting to write about.  There was no narrative or story around the stock.  It was cheap, and all an investor needed to do was purchase and wait.  Some of my best and entertaining posts have been about stocks that aren't necessarily great investments.  But they make great stories.  This is the same with the financial media.  Companies that make great stories aren't usually great investments.

When we look in the mirror we're facing the enemy of our returns.  The best course of action is to pick a strategy, stick to it and move on.

Looking for more? I reveal the strategy I personally use to find undervalued companies here.

High priced stocks

For much of the market's history there was a stigma attached with buying an odd lot, that is less than 100 shares of a given stock.  In some markets like Japan investors still cannot trade in anything smaller than a round lot.  Round lot limitations create high hurdles for investors.  If an investor is required to purchase a round lot when a company's price is $250 a share they would need to have $25,000 to establish a position.  Minimum purchase sizes lock out smaller investors, or investors who don't wish to commit a sizable amount of capital up front.  They also limit investors from trimming their position size as the price appreciates.  Owning a single round lot in Japan means buying all at once and selling all at once.

When the US markets moved from round lots to enabling odd lots to be easily purchased (especially online) the dynamics of the market changed.  An investor could suddenly purchase 4 shares at $250 for a $1,000 investment rather than 100 shares at $250 for a $25,000 investment.  Companies didn't pay as much attention to keeping their share price low.  Even higher priced stocks such as Google were easily purchasable online in odd lots.

Even though round lots aren't required or preferred anymore there is a strange phenomenon that still exists at the fringe of the market.  Companies with unusually high share prices.  The flagship company for this behavior is Berkshire Hathaway with a single A share trading for $219,000.  The cost of a nice house in most areas of the country!

Lower priced shares offer investors more flexibility with their holdings.  Maybe an investor needs to sell half of their position to fund a new position, this isn't possible when a position consists of a single high priced share because while the market accepts odd lots, it doesn't accept fractional shares.

The lack of flexibility and optics of a high share price offer investors an opportunity.  If most of the market disregards companies with high prices then it's likely that companies with high prices might be selling for less compared to a lower priced company.  The price per share of an investment shouldn't matter, yet it does.  I have seen over and over that companies with high prices sell at lower multiples compared to companies with lower share prices.

Some of the stigma is due to the media.  In the Wall Street Journal, or other financial media a journalist will make special mention of a high share price as if it's something special and unobtainable for most investors.

I've never taken the time to look at every company trading above $1,000 per share, but for the few I've looked at I've come to the conclusion that if an investor were to limit their portfolio to only companies trading for more than $1,000, or even $500 a share they would crush the market.

Right now there are 83 (the number is potentially skewed high due to some dark names) companies trading for more than $1,000 per share.  It appears the majority of these are dark companies where an investor needs to own a share before they can get an annual report.  A number are banks, and some are even fully reporting companies such as Seaboard (SEB).

It probably won't be a surprise to many long time readers, but I'm familiar with about 40-50% of the names on the list.  These are classic pink sheet names such as, Avoca, Queen City, CIBL, LICT, LAACO, Merchants National, Beaver Coal, Hershey Creamery, Tower Properties and on.  The names I'm familiar with are indeed good values.  There are compelling investment cases to be made for all of the companies I mentioned above.

The caveat to searching for stocks only trading above an arbitrary high price is that information might be unreliable, and it might be hard to obtain.  I found a few companies on the screener list that have had their bid walked up significantly over the years, but it looks like shares haven't traded in eons.

This post might just be a very long way of saying that investors who look in corners of the market neglected by other investors will likely find an abundance of opportunities compared to the market at large.  In terms of high priced stocks this is simply a behavioral phenomenon, there is nothing different between a company with 1,000,000 outstanding shares at $10, or one with 10,000 outstanding shares at $1,000.  Yet investors treat the companies differently, and therein lies the opportunity.

Polonia Bank; small, undervalued and five activist investors involved

I recently wrote an article at Seeking Alpha detailing Polonia Bancorp (PBCP).  Polonia is a small Pennsylvania bank with five activist bank investors on their shareholder register.

Here is an excerpt from the post:

The acquisition valuation model is simple, but it gives a good estimate of what an acquiring bank might see in a small and unprofitable bank. It's also likely that this is what the five activist hedge funds see in Polonia bank as well.

Polonia's proxy statement shows that Stilwell Value Partners, Homestead Parners, Maltese Capital Holdings, PL Capital, and Lawrence Seidman collectively own 38.4% of the company. All of these funds are known to invest in mutual conversion IPO's and then actively "encourage" management to sell the bank to a larger bank.

The company's management owns 11% of the bank, and executive management is nearly retirement age. Many bank executives look at a sale as a way to fund their retirement. They worked hard for years and now it's time to sell and play golf.

Investors have an opportunity to invest along side well known bank activist hedge funds that will do the heavy lifting required to convince a bank's management to sell.

You can read the full write-up here. 

On a related note some of you might be wondering why I've decided to write about banks on Seeking Alpha instead of on Oddball Stocks.  The reason for this is I don't want Oddball Stocks to become a banking blog.  I've decided to write a majority of my bank related posts on either the CompleteBankData Blog, or on Seeking Alpha, with a few posts mixed in here and there.

If you're looking to drink from the firehose of bank write-ups I'm going to be starting a new project soon on the CompleteBankData Blog.  I will be covering every bank in the KBW Regional Bank Index by writing up and valuing one bank a day.

Interested in learning more about banks? Buy my book The Bank Investor's Handbook (Kindle and paperback available)

Disclosure: Long Polonia

Video: Opportunities in Banking; My talk at the Fairfax Shareholder Dinner

I recently had the opportunity to attend and speak at the Fairfax Holdings annual shareholder dinner in Toronto.  What started as a small group of Fairfax shareholders meeting in the back of a restaurant to talk about value investing has grown into a large charity dinner that this year hosted 180 investors and investment professionals.

My talk focused on opportunities in bank investments and specifically highlighted two ideas worth further consideration, Eastern Virginia Bankshares (EVBS), and Fifth Third Bancorp (FITB).

The video is on YouTube and can be watched below.  The slides are a little hard to see in the video so I've included a link to the PDF version below.

Slides can be viewed and downloaded here.

Thoughts on risk

I was 12 and the hill looked enormous.  I'd done it in the past with success, so much success that I could almost taste the thrill.  The thrill of riding a bike down a steep hill on a rutty dirt path and then flying through the woods.  The sense of completion from doing something dangerous, and the sensation of my stomach in my throat.  I went first and my friends watched.  Everything started well until my front tire hit a root.  Suddenly I was going faster than my bike, except I forgot to let go of the handlebars.  My bike and I were flying through the air before we finally landed in a jumbled mess on the ground.  The landing left a mark, a scar that took years to fade away.  My friends rode down without issue, they enjoyed the thrill.  At 12 I didn't want to look like a wuss, so I got on my bike and slowly followed through the woods.

The hill wasn't any bigger than it had been in the past, and others navigated it with ease on the day I crashed.  Risk is unfair.  That hill was too risky and I knew it, but I was too young and dumb at the time to not ride.  I took a risk and felt the literal pain of that decision for weeks.  Just because my friends made it down the hill without incident didn't mean the risk was nonexistent.  It just hadn't shown up yet.

The markets are full of risk.  Some might even content that the only thing that matters is risk.  Investors who are riskier earn more, investors who earn less took less risk.  Risk is the storyline academics use to explain market movements.

One thing markets do incredibly well is hide risk.  Millions of investors might buy and sell a company without issue before the company suddenly announces their largest product failed.  If you're the unlucky investor sitting in those shares on that day risk appears in a large way you could face a significant loss.  What was a safe company is suddenly risky with investors running to the exits.  Questions about the company's viability begin to appear.  Investors question themselves on whether they want to continue to hold.

I'm convinced that humans are terrible at assessing risk.  True risk, not the statistical likelihood of failure.  If there is a large enough sample size we can estimate failure.  But even then failure doesn't always happen the same way.  And an exogenous event might increase the failure rate in a way we never understood.

Many investors pride themselves on their ability to predict the future.  I read the recent interview with Stanley Druckenmiller and he calls this one of his greatest assets.  The ability to see a future event clearly and bet the farm on it.  If one has that ability, and judging by his returns he seems to, it would be foolish to not bet the farm.  But not only your farm, the neighbor's farm, the farms of relatives and anyone else's capital you can get a hold of.

I'm terrible at predicting the future.  I can do alright with softball predictions like "more people will use phones in the future compared to now."  But those aren't actionable insights.  Some macro trends are very predictable but impossible to act on.  Like the high school football player trumpeting their success 30 years later I have one prediction I made in college that was 100% spot-on.  I predicted in 2001 that in 10-15 years the internet will fill the air and we'd be able to connect everywhere.  I had imagined some sort of wifi system, but it was the phone system that filled the gap.  I was right, but there was no way to capitalize on it.  Most of the wireless companies at the time are gone now, and the technology has dramatically changed.

While I'm not good at predicting the future I am good at one thing; determining the worst case scenario.  I have a wild imagination and it's not too hard for me to start thinking about driving somewhere for a vacation and end up imagining a collapse of civilization and me sleeping in a tent on the side of the road.

I prefer to view risk in terms of the worst case scenario for a company.  Obviously the survivalist societal breakdown storyline might be entertaining, but it's not a true worst case for investors.  If we are reduced to drinking from streams and eating berries I don't think we'll care much about stocks.

For some companies a worst case scenario is a loss of confidence by their customers.  Business isn't build on the premise of the highest quality item for the lowest price.  It's built on relationships.  A company might work with a higher cost supplier because they like the sales rep, or the supplier is more flexible with some aspect of their process.  Another worse case for a company could be the loss of a critical supplier.  A piece so critical that without it production ceases.

Every business has one or more critical failure points.  Some companies need water, others types of metal, some reliable servers.  The list is endless.

Assessing risk means looking at the worst case scenario and then determining the likelihood that the company can overcome that issue.  If a brewery loses their water supply they can't make beer.  But do they have enough cash that they can pay to have it trucked in for a period?  If they are living paycheck to paycheck the loss of water for a week due to a water main break could be the difference between making interest payments and missing an interest payment.

The riskiest investments are ones where if the worst case scenario were to take place the company could end up in bankruptcy court or in liquidation.  A loss of a critical supplier when no replacement is available, or the loss of consumer confidence due to a fatal error can cripple a company forever.

Companies have the ability to rebound from a variety of problems.  When I was looking at Japanese net-nets there were companies that could last for 20-30 years without another cent of revenue.  Outside of a Japanese Yen devaluation or outright fraud those companies were almost risk-proof.

When looking at risk from a portfolio perspective it's important to dig into the worst case scenario of each holding.  But a potential danger for investors is that they will become too pessimistic and never invest in anything.  I temper my worst case evaluation with my optimistic belief that humans are creative, inventive and resourceful, and when put in a tough situation usually find a way to get out with the least pain.

When considering a new investment I like to think about potential worst case scenarios and their implications for the stock.  Am I comfortable with the downside in each of those scenarios?  If I am and the stock is undervalued then it's very likely I'll buy a position.  Is my risk analysis as precise as mathematical models?  Absolutely not, but I also believe it captures a lot of situations models fail to catch too.  One of the keys to making money in small undervalued stocks is avoiding losses.  While my risk assessment methods might be unorthodox they do seem to work with avoiding losses.

A banking survey of Alaska

What often classifies as an "oddball stock" is simply a company that not many investors have an interest in truly investigating.  Typically these are stocks that are too small for most investors or companies where information is hard to obtain.  Another situation where stocks could be classified as oddballs is when they operate far off the beaten path.  In the US there is one place about as far off the beaten path as possible, Alaska.

Alaska is an enormous state filled with plenty of wildlife, mountains, oil, cold weather and hardy individuals.  The state is more than double the size of Texas.  If the state were a country it would be 33rd in terms of total size, or roughly double the size of Sweden.  The state is disconnected from the rest of the continental US.  An American needs to drive through Canada to access Alaska by land.

The exposure most Americans have to Alaska is a series of shows in the Discovery channel featuring "crazy" individuals who live off the land, drive trucks on ice, or mine for gold.  Alaska in many ways is still considered the frontier and isn't generally thought of as a business destination unless you're working in oil & gas, mining or something related to wildlife.

Even though Alaska isn't  a hot bed of business there are still people who live and work there who need loans and have money to deposit.  In general the state is overlooked, and I imagined their banks would be even more overlooked.  It turns out I was right.

The state has five bank headquartered there and three are publicly traded.  The banks headquartered in Alaska are shown below:

Outside of the five banks headquartered in the state Wells Fargo and KeyBank also branches in the state.  Statewide there are only 130 total bank branches with Wells Fargo claiming the most at 50.  Runner up in the branch count is First National Bank Alaska with 30 braches.  The other six alaskian banks all have 16 or less branches.

The easiest way to look at all of the banks in Alaska is to divide them up between the non-traded and traded banks and look at each.

Traded Banks

Here is a simple comparison showing the historical returns on equity for all three traded Alaskan banks from CompleteBankData.com (Bloomberg Terminal: APPS BANKS <GO>):

Alaska is set apart from the US and their banks appear to be as well.  All three are very healthy and avoided problems during the financial crisis.  Both Northrim and Denali Bancorporation are earning returns on equity above the national average.  All three banks are profitable as well.  And lastly all three have more than 10% equity to assets with low to non-existent non-performing assets.

These are safe and profitable banks.  Is it any surprise that once an investor leaves the mainstream opportunities suddenly present themselves?

Northrim Bancorp (NRIM)

Northrim is a $1.4b bank headquartered in Anchorage, AK founded in 1990.  The bank recently purchase and integrated Alaska Pacific Bankshares (formerly AKPB).

The bank has $966m in loans with the majority of them lent to residential borrowers.  The bank has been profitable since 2003 and sailed through the financial crisis without any issues.  Their Tier 1 capital has remained above 10% since 2004 and non-current loans to loans peaked at 3.66% in 2008.

The bank trades for 1.11x TBV and 12.25 times earnings with a $167m market cap.  Shares are fairly liquid with about 15,000 trading daily.

Our CompleteBankData valuation model (available on the Bloomberg Terminal version) has the bank's estimated intrinsic value at $30.81 compared to the most recent close of $24.44.  The valuation model is shown below:

If Northrim were to be acquired, or to trade in line with the bank index multiples shares should trade higher.  Even without multiple expansion the bank looks attractive.  They are conservative but have been growing steadily over the past decade.  The bank's equity has more than doubled in a decade.

First National Bank Alaska (FBAK)

There is a stigma attached to companies whose stock price is over $100 a share.  An even greater stigma exists for companies with share prices higher than $1,000 per share.  First National Bank Alaska takes it a notch further with their $1,550 share price.

The company is publicly traded, but is closely held.  The bank is the largest of the Alaska banks with $3.3b in assets.  They trade for slightly more than book value and 15x earnings.  The bank has experienced loan and deposit growth in the past three years as shown below (deposits in red, loans in blue):

According to our model the bank is considered fairly valued to slightly overvalued for both our acquisition valuation model and the dividend discount model.  If the bank is valued relative to banking index multiples they are undervalued by 13%.

The advantage that First National Bank Alaska has is that they are the largest bank in the state and they're growing.  Scale in banking matters a lot and First National Bank Alaska has built scale and a brand in their region.  They are consistently growing and pay a nice dividend.  If one wished to have some exposure to Alaska in general a single share of First National Bank Alaska might fit the bill.

Denali Bancorporation (DENI)

Denali Bancorporation is much smaller than the other two, but equally attractive.  The bank trades for slightly more than TBV and 13x earnings.

The bank has $266m in assets and $133m in net loans.  They earned $1.86m this past year, or about $.68 per share.  They have an above average net interest margin and a 16% Tier 1 ratio.

The bank's assets appear to be in check outside of a curious line item in their last two financials.  The bank recorded 44% of 2014 Q3 and 68% of 2014 Q4 US Government guaranteed loans as non-current.  The bank doesn't have any government loans on their books.  This would indicate that the non-current government loans are most likely government backed bonds that have stopped paying interest.

Besides the small size of Denali Bancorporation and their inefficient operations (85% efficiency ratio) there isn't much to not like.  As you can see below they have never earned less than $1.2m in the past 11 years.

The bank has grown strongly over the past decade much like Northrim has.  The bank's size makes it an attractive acquisition target for a larger Alaska bank, or a bank that would like to enter the Alaska market.  Absent an acquisition investors own a nicely growing bank with an attractive dividend yield at 3.45%

Non-traded Banks

The state has two non-traded banks, First Bank, and Mt. McKinley Bank.  Both of these banks are less profitable compared to their public peers.  The reason for the lower profitability is both of these banks are overcapitalized with Mt. McKinley Bank coming in on top with a 39% Tier 1 ratio.

There isn't much to say about either of these banks.  Both are solid performers currently and have been historically.  Neither of these banks lost money during the financial crisis.

Mt McKinley Bank

The bank has $344m in assets and earned a 5.37% return on equity in the last year.  They've remained profitable since their start.  While they've been profitable they haven't experienced much growth.  Their equity has grown from $43m in 2006 to $73m today.  Total loans have fallen from $151m to $130m.  As loans have decreased security holdings have increased.  The bank owned $80m in securities in 2006 and owned $179m in securities at the end of 2014.

First Bank (First Bancorp)

The bank was founded in 1924 and prides itself on being locally owned and operated.  Their branches are located in Ketchikan and around Juneau.

They have $486m in assets and $215m in loans.  First Bank earned 7.34% on their equity.  The difference between Mt. McKinley's ROE and First Bank's ROE is that First Bank only has a 16% Tier 1 ratio compared to the monster 39% Tier 1 ratio that Mt. McKinley Bank has.

The bank could improve their operations some, their efficiency ratio stands at 82%.  Non-current loans to loans are under control at 1.24%.

Summary

A dive into Alaskan banks didn't turn up any banks trading for 25% of book value, which is unfortunate.  But what this exercise did turn up was a set of conservative and growing banks that avoided the housing crisis.  Investors might worry about the energy production drop harming Alaskan banks, or maybe a mining drop.  These are valid concerns, and there will always be dark clouds lurking on any investment horizon.  Alaska is physically separated from the rest of the US and their banks appear to be separated as well.  On a relative basis all are undervalued and all have experienced growth in a flat no growth environment.  Alaskan bank shares might be the perfect investment to make and tuck away in a drawer for a few years.

Want to find more information on how to find and research bank equities on your Bloomberg Terminal with APPS BANKS <GO>?  We recently put together a short video with a walk through and posted it to YouTube here.

Disclosure: Long DENI