Chevy,
Thank you for the private message and I apologize for not getting back to you quicker. I don't know how much our mutual friend told you about me but I have an MBA in Banking and Financial Institutions and have worked in the industry since I got out of college, a whole six years ago.
I have had a lot of success in investing in Community Banks over the past couple of years and some of the discounts, like MFBP, are still intriguing. I agree with your premise, that small community Banks are going to have to go into "self preservation mode" and merge or be acquired by a larger Community Bank or a Regional Bank. The reason is that the Compliance costs and low interest rate environment will really put a strain on earnings. Rather than Directors getting a smaller yield on their investment, they will choose to sell to a larger Institution that will give them, in my opinion, at least book value (as long as the acquired bank is profitable). Of course, some Banks can still command almost 2x book, but they must be in really good shape in order to get that premium.
Now the reason for my message. MFBP should repay TARP so that they don't have to pay 2% dividend to the Treasury and here is why: On the annual report there is an "average balance, interest earned or paid..." table. Please refer to that chart. The cost of deposits MFBP pays is .38% -- .15% for savings, .08% for demand deposits and .52% for time deposits and .38% for all interest bearing liabilities. TARP is needed to maintain capital levels and reserves for those deposits; however, the loan to deposit ratio is only 72% as of 12/31/2013, so that indicates to me that the Bank is not in a very high need for liquidity. The industry benchmark is if the loan to deposit ratio is over 80% there may be an issue with liquidity... The tier one capital ratio is currently 11.87%, and the "well capitalized" industry standard is 5% (also found on the annual report). So why does this Bank want such high capital levels? Their assets are improving, the Treasury (I assume) has allowed the Bank to pay a dividend and their ALLL looks like it is covering the potential losses in the loan portfolio. So my point is that there is no need to have such a high tier one capital when the preferred shares are yielding 66% of total earnings.
Historically, a 2% yield is low. But compared to a 1 year CD yielding, say .2%, I think management has an easy decision on which one to borrow. Additionally, if the Bank does need liquidity in the future, the Bank can purchase Fed Funds (up to a certain amount)to shore up liquidity in which this Bank does not need currently.
Thanks,
James
