To Invest in a Bank

We write occasional posts concerning investments largely because the wife and kids ask how to invest.  We don't have magic metrics that stand out from the rest. We don't have a mathematical or statistical model -- nor an intuitive secret. We do, however, have plenty of stories. They are stories of firms and markets and trends (up and down), misguided (usually) and ill-administered (commonly) government supports that burst markets followed by further government intervention to save the people from the very mess the government created. Finance, economics and politics all play a role (we are pretty thorough in our investing as well as our politics). 

Investing is as much about selling as buying. The timing of each is elusive but critically important. Consider this as a case study. 

As for why the present post, we glanced at our stock portfolio Friday, October 25, and noticed a favorite stock, Glacier Bancorp (GBCI) closed at an all time high. Glacier is a bank holding company headquartered up the Flathead Valley in Kalispell Montana, the western gateway to Glacier National Park (hence the bank name). Unlike most bank holding companies which are corporate umbrellas established primarily to address legal and regulatory requirements and constraints, Glacier Bancorp actually houses a collection of separately identified community banks. These are traditional banks performing standard commercial banking functions.

Glacier Bancorp, Inc. operates as holding company for Glacier Bank, which provides commercial banking services to individuals, small to medium-sized businesses, community organizations, and public entities in Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The company’s deposit products include non-interest bearing demand accounts, interest bearing checking accounts, regular statement savings accounts, money market deposit accounts, fixed rate certificates of deposit, negotiated-rate jumbo certificates, individual retirement accounts, and reciprocal deposits. Its loan products comprise construction and permanent loans on residential real estate; consumer land and lot acquisition loans; unimproved land and land development loans; residential builder guidance lines comprising pre-sold and spec-home construction loans; commercial real estate loans to purchase, construct, and finance commercial real estate properties; commercial and industrial loans; consumer loans secured by real estate, automobiles, and other assets; second mortgage and home equity loans; and agriculture loans. In addition, the company offers mortgage origination and retail brokerage services. 

The separately named and branded banks are located in the Mountain West. Bank operating 

divisions are Glacier Bank of Kalispell, First Security Bank of Missoula, Valley Bank of Helena, Big Sky Western Bank of Bozeman, Western Security Bank of Billings, First Bank of Montana, Lewistown; Mountain West Bank in Idaho, Utah and Washington; 1st Bank in Wyoming and Utah; Citizens Community Bank of Idaho, Bank of the San Juans in Colorado, First Bank of Wyoming, First State Bank in Wyoming and North Cascades Bank in Washington.

Going back more than 20 years we have been a fan of small bank stocks. With the exception of the 2007-08 interruption that we all know well, financial services diversification and growing credit markets drove continuous growth in the sector. Well managed small banks in growing markets experienced strong organic growth. Further driving growth, the Federal Deposit Insurance Corporation (FDIC) frequently arranges for sound banks to take over and assume 

the accounts of failing institutions. In the 1990's and through 2007, many strong local banks also were bought out by major regional or large national banks looking to increase their market footprint. Every step of the way stock prices appreciated. 

Though the numbers were small, our first purchase of equity shares in a small bank was the 1987 Maryland Federal Savings and Loan's (holding company Maryland Federal Bancorp) IPO in Hyattsville, Maryland. Maryland Federal had not succumbed to the temptation to place loans secured by excessively leveraged commercial real estate or to engage in the accounting shenanigans that caused the Savings and Loan crisis in the late 1980's and early 1990's, when more than one out of five Savings and Loan Associations failed. Throughout, Maryland Federal had stuck to the Steady Eddie residential loan business model that was safe and sound, and well understood by its management. Maryland Federal latched on to the Federal government induced inside the Beltway growth curve, took over a few branches of failing firms, and then was bought out by BB&T in 1998 (one of dozens of takeovers by the now massive regional bank). Every dollar initially invested turned into ten.

Fast forward -- we were fortunate enough to foresee the financial meltdown and the Great Recession so we dumped our modest portfolio of small bank stocks (as well as most other stocks) going into 2008. By the time 2009 rolled around we concluded that the Federal Treasury's massive financial system intervention (known as TARP) and Federal Reserve System unprecedented activism (we've seen that continue and grow massively via QE's 1 though 4) would first stabilize and then enrich banks. Jim Cramer, among others, said "Don't fight the Fed." It was time to diversify back into the financial sector. I was also looking ahead short term to retirement which implied buying dividend paying stocks to produce a stream of supplemental income, marking a change from a historical indifference to yields.

Backyard look at Fed's Quantitative Easing programs impact on stock market

Markets well understood are markets best invested in.  By 2009 we were considering retirement locations and were focusing in northern tier states ranging from the upper Midwest out to the Pacific Northwest. It made sense to focus on banks in those areas as well. Working through Yahoo Finance and using research services available gratis courtesy of our discount brokerage, we printed out lists of small cap bank stocks and drilled down.  

Glacier Bancorp caught my eye almost immediately. I riveted my focus on learning it was one of the small minority of U.S. banks that had not accepted TARP funds. Instead of turning to TARP, during the worst of the meltdown Glacier Bancorp raised additional equity capital from private investors. Glacier's move confirmed the bank's financial strength and the confidence of its management, and a sense of responsibility and accountability.

Glacier Bancorp Dividend History

We reviewed the company's income statements and balance sheet, noting that even a modest rebound would return Glacier to profitability. The firm had sufficient capital to withstand a couple more bad years if that came to pass. We noted that Glacier had maintained dividend payments without reduction throughout the meltdown. We noted that institutional investors had significant holdings and the officers had different last names, making it doubtful the bank was operated for the benefit of a select group of insiders (a not unheard of risk with small banks). The population growth trends and available economic data in the areas Glacier served indicated markets that would experience long-term secular growth. Agriculture was a large component of the economic base in many of the bank's markets. I liked that. People have to eat. I listened in on a couple of boring quarterly financial reporting conference calls, which revealed no underlying or undisclosed drama. By the time we finished our review, Glacier Bancorp was probably the easiest call we had for returning long into the stock market.

We bought large (for us) blocks of GBCI in early 2009 priced at 14 and 15 handles. When the stock malingered into 2010 we more than doubled down on our holdings, buying additional shares with 13 handles. Glacier Bancorp's stock price closed at $27.82 on the NASDAQ last Friday afternoon.

Glacier Bancorp Stock Price History

Its previous all time high was $27.72 on September 19, 2008. Glacier increased the 13 cent per share quarterly dividend maintained through the financial crisis to 14 cents per share in December 2012 and then bumped it up to 15 cents per share in July 2013. The market is behaving as if it expects another bump when the snows set in.

Note 12/04/2013: Sure enough, the snows have set in and GBCI's dividend was increased,

KALISPELL, Mont., Nov. 26, 2013 (GLOBE NEWSWIRE) -- Glacier Bancorp, Inc.'s (GBCI) Board of Directors, at a meeting held on November 26, 2013, declared a quarterly dividend of $.16 per share, an increase of $0.01 per share, or 7%. The Company has declared 115 consecutive quarterly dividends and increased the dividend 36 times. The dividend is payable on December 19, 2013, to owners of record on December 10, 2013.

Glacier's new all-time closing high is $29.96 on November 29, 2013.

Glacier stock has performed about as well or better than the big banks from pre-crisis to post-crisis. Wells Fargo is a bit ahead, closing Friday at about 5 percent above its pre-crisis high. JP Morgan, the best managed and hedged of the big banks, is about even with Glacier Bancorp, priced at 20 cents a share above its pre-crisis high. The biggest banks, Bank of America (down about 80 percent) and Citicorop (down over 90 percent) have settled likely forever well below their pre-crisis stock price highs and would have been terrible investment choices compared to GBCI.  All in all, GBCI has been very, very good to us and for us. 

By the way, the Fed's QE programs will eventually massively break down, as monetary printing press addictions have throughout history. I will be looking to get out of GBCI and most other equities before the final stages of that breakdown.  Good luck to all.