Banks on my Mind: LNB Bancorp

by PlanMaestro

Banks in my Mind is a series written for the Complete Growth Investor. LNB Bancorp (LNBB) was the first one in the series and  was published some weeks ago. I want to emphasize the need to update the stock price information to current levels for all the posts in the series. I still have a position in LNBB, but it is not one of the largest. There are some unbelievable opportunities in the sector consequence of the uncertainty on the new bank regulation. Enjoy.

As a consequence of analyzing the prospects of the financial sector, I came across some potentially interesting investments. I’ll mention some of them but, given that banks are complex to analyze, the emphasizes will be on breadth over depth. If they capture your interest, we can go into more detail in a future post. I would appreciate readers’ comments, because local knowledge can be critical when investing in banks.

LNBB is a small bank from Lorain, Ohio with a strong local presence:

It appears that its credit indicators are stabilizing at a very manageable 3.8% non-performing assets to total assets (NPAs), despite high levels of unemployment (above 10%). Even more important:

Total 30- to 90-day delinquency decreased from 1.34% of total loans at December 31, 2008 to 0.75% of total loans at December 31, 2009. 30- to 90-day delinquency as a percent of loan type is under 1% for all loan types.

The 30- to 90-day delinquency is the most-followed indicator of potential future problem loans, and the low levels across all loan types piques an investor’s interest. The bank’s loan portfolio has a low 7.8% of risky construction and development loans (C&D), while the main market concern is probably the 35.6% in commercial real estate (CRE) loans, where the performance is good and improving. It’s worth remembering that CRE loans do not include CRE developments that are considered part of C&D.

Deposits have grown during the last two years from $867M to $981M, and LNBB has been building substantial liquidity, with a very low 82.7% loans over deposits.  The bank is ready to spring into loan generation as soon as the economy allows.

All capital ratios are well above what the FDIC considers well capitalized. But when it comes to banks, I’m very old school, and the bank’s 5% tangible common equity (TCE) over tangible assets (TA) looks a little thin. They have no private preferred listed on their balance sheet, and $25M in TARP, which seems about normal for a bank this size. That means that at some point, they might have the option of issuing privately held preferreds. Considering that they’re profitable ($0.14 per share in Q1 2010), well reserved, and all the credit indicators are improving, I’ll forgive the TCE issue. The probability of a large dilutive capital injection seems low.

It looks like a safe bank, but how cheap is it? Considering that its TCE is $56M, pre-tax, pre-provision earnings in 2009 was a growing $14M. Net interest margin is a very nice 3.7%, and the bank has a commanding market share in its region, $37M market cap looks very cheap indeed.

Did I mention the insider buying? CEO, CFO, HR included?

For further investigation, the bank just filed their shareholders meeting presentation

Disclosure:  Long LNBB