Hills Bancorp (HBIA)

Hills Bancorp (HBIA) is the holding company for Hills Bank and Trust Company of Hills, Iowa. The shares are only thinly traded over the counter.

Here are some of the more important metrics for the bank:

• Cost of funding is 2.25% and net interest margin is 3.34% – not great, but not terrible, but I think its certainly better than a lot of banks out there
• ROA is 0.86% and ROE is 9.49% – pretty good considering the environment; in years past ROA has been above 1% and ROE in the 12%-14% range
• Efficiency ratio is pretty good at 57.78%
• Loss allowance to loans is a pretty generous/conservative 2.03% because I think Hills Bank has a good loan portfolio with a noncurrent loans to loans ratio of 0.74%
• Hills Bank is definitely well-capitalized
• Assets: cash is 3.12%, securities 11.14%; and loans 81.3%
• Tangible Book Value per Share – by my calculations, TBV/share has gone up throughout this financial crisis
  • Sept ’09 – $38.15
  • Sept ’08 – $35.46
  • Sept ’07 – $33.09
• Price/TBV
  • Sept ’09 – about 1.28 (current price is $49)
  • Sept ’08 – about 1.41 to 1.49
  • Sept ’07 – about 1.86
• Loans
  • a pretty good mix of loans with the basic home loans making up the bulk; nothing to worry about here

If you are interested in thinly-traded stocks of healthy banks, I think Hills Bank is worth your attention. If one thinks Hills Bancorp’s intrinsic value is equivalent to a P/TBV of 1.8, the shares would be worth $68.67, meaning the shares are currently trading roughly at a 29% discount tointrinsic value.

As one might be able to tell, I have continued to study the FDIC data and SEC filings of many small banks. I feel that I have found a significant number of opportunities and have definitely increased my understanding of what good banks, bad banks, and mediocre banks look like. One thing I would love to be able to do is to put together an investment partnership devoted to investing in the stocks of the small and micro-cap community banks of this country.