Steuben Trust Company (SBHO) is a small bank headquartered in upstate Hornell, New York. SBHO was started in 1902 and now has $354 million in assets and operates thirteen offices with 7 in Allegany County, 1 in Livingston, 1 in Monroe, and 4 in Steuben County. SBHO is one of the few banks in this country that operated with prudence and sound banking practices prior to the financial crisis. 2008 and 2009 were both record earnings years for SBHO with earnings of $3.96 million and $4.1 million.
Slow and Steady
SBHO is an unexciting and small community bank that has done very well over the years despite the considerable economic turmoil. Earnings per share doubled from $1.25 in 2004 to $2.50 in 2009. ROA has improved steadily over the past 8 years from 0.48% to 1.14%. Net interest margin is very good at 4.47%. Also, in June 2009 US Banker ranked the SBHO’s performance #44 among the top 200 community banks with under two billion dollars in assets in the United States based on its 3-year average ROE.
Though it is a tough environment for all banks due to the fact that there is low demand for loans and net interest income is declining for most, SBHO will continue to operate in its steady and stable fashion. Perhaps SBHO will even begin to acquire some other local banks that have been in dire straits these past few years.
Indeed, SBHO acquired Canisteo Savings and Loan, a small mutual thrift, on February 20, 2009. SBHO acquired assets of $6.87 million and liabilities of $6.334 million. Under the terms of the agreement, SBHO paid no consideration related to the net assets acquired from Canisteo.
Unknown and Unfollowed
SBHO is unknown and unfollowed by Wall Street, which is the big reason why I think SBHO shares are mispriced. However, it will be very hard to acquire any meaningful amount of shares given the stock is very thinly-traded. The way to go here is to put in a limit order at an appropriate prices and wait and see!
Risks
The main risk is that of another economic downturn. And even if there is another downturn, given the performance of SBHO during this most recent economic crisis, I feel there is little to worry about.
Valuation
SBHO is trading at an approximate 30% discount at current prices. Assuming average assets and ROA just remain stable at about $355 million and 1.15%, SBHO can earn 2.48 per share. Attach a more deserving multiple of 12 and you have ~ $30 per share as intrinsic value. If SBHO can grow assets just modestly and maintain its ROA, intrinsic value will be greater than $30 per share.
Also, see my spreadsheet of the bank’s historical performance condition ratios.
Summary
In summary, SBHO is a solid bank that is mispriced because it is small and unfollowed. When the economy begins to turn around, SBHO will have a lot of capital it can deploy to earn even greater profits. In the meantime, you can collect a dividend that is yielding greater than 4% at current prices, a high yield for a high quality bank.
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