It’s been a wild month in the stock market, with purchases being made by us Diplomats earlier on, I was able to scoop some capital to deploy. This time, however, I wanted to use my work experience to my advantage – I audit financial institutions or lack of better words – banks. I have been watching a bank for some time now and I felt like right now, the time was right – let’s see who I purchased on the 28th…
Well, since I am an auditor in the financial institutions (FI) realm, auditing banks that are from a smaller $100M total asset size up to approximately $2.3B in asset size clientele (we measure the size of bank via assets and not necessarily revenue or income), as you probably see from my journey page. The clients between the $500M to $1.5B are in a spot to either be acquired or to do some sort of acquiring – as the FI industry is in consolidation mode, as banks are learning how difficult it is to grow organically, i.e. – originate new loans to new borrowers. Therefore, they are left to either be acquired or to acquire another bank to grow the total asset size and capture the interest income in that method. Further, I have had 4 clients be acquired from me in the last 18 months… with 3 of them being public in the $800M to $1.23B range – and that is the spot that I’m looking at… Additionally, I primarily audit in Ohio & Pennsylvania, so that was my focus and I had to steer away anything that sounded like they could be a client of ours. Also — you definitely won’t be finding these stocks in article such as our upcoming February dividend increases, that’s for sure!
Citizens & Northern Stock Purchase
Citizens & Northern (CZNC) is a $1.2B bank in total asset size and has great fundamentals when looking at their balance sheet from their most recent earnings release.
- Impaired loans have tremendously decreased from last year.
- Provision diminished even further, with only recorded of just about $476K vs $2M in the prior year (this is the expense recorded to build up an allowance for loan losses, a bank’s biggest estimate)
- They continue to repurchase shares and are authorized to repurchase back 5% of total shares outstanding, I definitely get excited for share buy back plans.
- They still have $36M in cash with borrowed funds declining $20M from prior year (advances taken at extremely low interest rates)
- Return on Assets (ROA) is at 1.38% which is unheard of amongst financial institutions. My best client probably returns 1.06-1.08% ROA and any client/bank that is returning over 1% ROA is very strong, as most banks I see somewhere around 65-85 basis points.
- Dividend yield is currently at $1.04 per share and I purchased them at $19.96 or a yield of 5.21%, which is greater than the yield in my portfolio.
- Earnings per share for the year ended was at $1.38 which provides a P/E of 14.46 (not the cheapest by any means) and a payout of 75%, a little high for my liking
Why did I make this Stock Purchase?
It’s funny, I asked myself that before I purchased it. I believe it is this – they’ve had a few years of dividend growth and they provided a strong dividend yield, backed by extremely high capital amounts (regulatory capital is through the roof with CZNC). Now, I don’t purchase stocks to simply hold and wait until their stock price pops – no, that isn’t what this is. This is my first action event of understanding the knowledge and understanding of what I’ve been doing for 4 years. Banks are being acquired, at a heft pace – my office alone has seen 4 of their clients become acquired in the last 3 months. Premiums on the clients have been astronomical as well in them. Therefore, my plan was a two pronged approach – to buy a local community bank that provides a decent dividend yield and will grow it moderately as the yield is much higher than others. Additionally, this bank will be paying me to wait for what they do next – to acquire a bank or become acquired – and that is something that I am excited about with the work that I do – so I am sort of intertwining the two = FI Knowledge + Dividend Investing. I’m very excited for what is to come with Citizens & Northern going forward! They are based in a small town in Pennsylvania – which I am used to small towns there, such as Clarion, Clearfield, Warren, Emlenton, to name a few. I have a strong feeling that if this bank cannot grow organically, they have two choices – to acquire a bank around $300M to $600M in asset size – OR – to be acquired at a premium of 175-200% over book value of the entity (my last client was acquired for almost 200%!). I’m pumped!
Stock Purchase Conclusion
Though this is vastly different than my normal investment into stellar, blue chip, you know the name company – the purchase of 35 shares of CZNC added $36.40 to my annual/projected dividend income total for the year and with fees – total capital deployed was a small $705 investment (not even 0.50% of my portfolio haha).
What are your thoughts with the purchase? Make moves during Wednesday’s downturn? Let me know and we appreciate the comments! Talk soon.