High Country Bancorp is a small, 4 branch bank located in Salida, Colorado. It has offices in Salida, Buena Vista, and Canon City, Colorado. HCBC started out as a Savings and Loan institution and was originally called Salida Building and Loan Association. In 1997, it converted from a locally owned savings and loan to a publicly traded stock. Since then, HCBC has returned a CAGR of 8.58% a year for 23 years with dividends reinvested. The S&P has returned 8.15% over that same time.
I believe HCBC presents and attractive opportunity to invest in a small, well run bank in a growing community with a good deposit base. The bank primarily engages in residential mortgages, commercial real estate, commercial loans, and construction.
On 2/24/20 HCBC sold $4.3 million of stock in a private placement to accredited investors at $41.50 a share. This was in response to Covid. Now the company has an authorization to repurchase up to 5% of shares outstanding. However, CEO Larry Smith gave the impression that it is unlikely for that to be completed. They won't buy shares above book value and the illiquidity of the stock makes it difficult to find the shares.
Below I will break out the pros and cons of this opportunity as I see it.
Pros
- High insider ownership. Insiders own 28.59% of the bank. The CEO owns 5.2%.
- ROE is around 14% and has grown over the years. Return on assets of around 1.5%
- Dividend yield of around 5%.
- Located in rural Colorado. The state is seeing strong population growth. With Covid, there are lots of people flocking to the area who can work from home. HCBC is well positioned as the local bank to write mortgages and provide its services.
- The CEO has been with the bank since the 1970s and has been CEO since 1991. I caught good vibes from him over the phone.
- The stock trades at 1.16 P/B and 8.7 P/E. This is not screaming cheap but it is also not expensive. Many banks have taken off lately. HCBC has not participated so much in the rally and I think that it has some room to run. It has benefited from juiced earnings and PPP loans like every other bank.
- Prudent with buybacks. They have a history of buying back shares ever since they have been public. After they IPOd they were flush with cash. 9/11 gave them an opportunity to retire shares and get their equity-to-assets into shape. They won't buy back stock above book. If the stock gets too undervalued in the future, I think they will step in and buy shares.
Cons
- With $365 million in assets and a market cap of $42 million, the bank is small. At sub-scale, it will likely not perform as well as a larger bank.
- While the bank is growing, it is paying out 5% in dividends. Not a bad thing but it puts a cap on the amount the bank can grow.
- HCBC is traded OTCQX. The volume is low - around 10.5 million shares trading a year, or about 0.25 share turnover. This is an off the radar stock. It likely will not have big gains any time soon. I doubt this will ever get over-valued. More likely to be a slow, but steady compounder.
Conclusion
Overall I like the stock. I think it is a well run bank that will grow and perform well over time. At 8 times earnings I think that this will do a solid, steady return for many years to come. In a time where the market is going crazy and everything is charging up, it may seem silly to buy a stock that is unlikely to do the same. For some reason I am attracted to investments like this. I feel they are easy to hold and stick with, knowing that they will probably be slow, steady performers.
As I am sure you know, bank stocks have taken off lately. The KRE (regional banking etf) trades 23% higher than it did pre-covid now. HCBC is still 9% below its pre-covid levels. This may be a nice way to catch the trend in a stock that has not run as much as it probably should. This is very off the beaten path so it may take time for investors to catch on. Cheers!
Disclosure - Long. Do your own due diligence. I am a Rook.
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