Scottdale Bank and Trust (SB&T) is the cheapest bank I own at 41% of TBV. You would think the bank was a basket case at these levels but it is profitable but a bit quirky. Like FTFS, SB&T is dark, never filed with SEC and has a similar market cap at $18 million. However, the liquidity of SB&T shares is even less than FTFS, if you can imagine that. You are probably asking why even bother writing it up. While not a big position, I have had fun researching SB&T. It was like doing a Sudoku puzzle, filling in the missing numbers. I like SB&T as an investment but my write-up is more educational in nature. I will probably start a general topic to delve more into process oriented things but the heart of most investment ideas is what I call information arbitrage: I know something that others don’t.

Background: Dark companies force you to hunt for information and, in a way, that makes it easier. Take a well-researched company like DELL and you can find massive amounts of information about the company and a dozen different opinions. The problem becomes too much information that you cannot filter down in a coherent way. SB&T is quite the opposite. The facts are pretty simple and the information pool is shallow. Anyway, let me walk you through my journey in Scottdale.

Since SB&T is dark, I doubt that I would have ever found it on my own. I came across it while perusing information put out by Tom Thiel at McAdams Wright & Ragen (MWR), which is a market maker in many community banks, including SB&T. Not making a recommendation, just noting my source. There are other specialists in the field, as well, and they all provide information in the hopes that you trade with them. The MWR Quarterly report marries bank subsidiary information from FFIEC to stock information that they keep. It’s flawed because it is using a subset of information, but is still a decent way to do some prospecting for ideas.

I ignored SB&T at first because it only had 52,000 shares outstanding and I wasn't looking to corner the market in tiny banks located in Westmoreland County, Pennsylvania, but curiosity got the better of me. I checked out the FFEIC data and saw that non-performing loans were low and it was making a profit. At 40% of TBV and well-capitalized, I took the Graham-Dodd plunge and mentioned it to a few friends. One friend found that there is a holding company called Lawrence Keister & Co. listed as the bank’s holding company.

http://www.ibanknet.com/scripts/callreports/getbank.aspx?ibnid=usa_1069273

This company showed $23 million in equity investments and the bank has about $43 million in equity, so it looks like the majority of the bank is controlled by this one company. But what was this company? Off to the search engines.

The bank’s web site has a brief history of the company, including a mention that it was one of the few banks to survive the panic of 1933. Then I happened to find additional historical information online in a fall festival guide for the town of Scottdale that included listing all of the bank’s previous presidents.

http://www.scottdalefallfestival.org/assets/PDFs/2010%20fesitval%20book.pdf

Scottdale Bank and Trust was established on February 25, 1901. It is one of the oldest banks in Westmoreland County and one of the few banks in western Pennsylvania that did not fail after the moratorium in 1933. The first offices were in the Hill House Hotel and remained there until a new three-story bank building was complete, located at 161 Pittsburgh Street, Scottdale. In 1971, the bank moved to its present location. In January 1979, the Scottdale Saving and Trust company changed its name to the present name of Scottdale Bank and Trust. 1984 marked a significant milestone in the bank’s 83 year history by acquiring two additional offices, one in Connellsville and the other in Mt. Pleasant. The two offices were formerly Yough Valley National Bank. Presidents that have served are: J.W. Ruth (1901-1905), J.S. Parker (1906-1930), B.C. Fretts (1931-1933), B.F. Keister (1934-1938), D.C. Keister (1939-1964), Ray. E. Kiefer (1965-1984), Marilyn K. Keifer (1984-2002) and Donald F. Kiefer (2002-present).

There were a variety of names initially but there were two named Keister that ran the bank from 1934 to 1964, but none appear to be Lawrence Keister. From 1965 to present, there have been three presidents, all with the last name of Kiefer. It seems to be a family-run business.

I did some internet searches on Kiefer (had the last name been Smith, I would have had a hard time finding anything) and eventually found an obituary for Marilyn K. Kiefer, who was president from 1984 until her death in 2002.

http://triblive.com/x/pittsburghtrib/obituaries/news/s_76712.html#axzz29Bgr645l

Among the details were that her father was Donald C. Keister, who was president from 1939 until his death in 1964 (the year that the holding company was set up). Her husband was Ray Kiefer, president from 1965 until his death in 1984. I chuckled to myself that the bank was killing its executives! Her son Donald is the current president and another son, Lawrence, is treasurer. Finally, the name Lawrence appears but not as a Keister.

More searching led me to a historical archive that noted that the Keister brothers and Andrew and Richard K. Mellon had been initial investors in the bank.

http://www.livingplaces.com/PA/Westmoreland_County/Scottdale_Borough/Scottdale_Historic_District.html

The Mellon family is well-known in the Pittsburgh area and I learned that Richard Mellon was a noted financier and investor who was born in 1899, two years before the bank was started. Further digging found that a German farmer named Solomon Keister moved to Scottdale in the 1840’s and started a coking operation. He had ten children, including a number of sons.

http://www.njshantz.ca/MyProject/p594.htm

One of them was Benjamin Franklin (B.F.) Keister, who was born in 1850. Thus, he became bank president at the age of 84, which would indicate unusual circumstances. Benjamin had a brother. Lawrence Keister, who became a minister and then a college president. Lawrence rescued the college from financial hardship by paying down its debt. The next Keister to serve as president after B.F. was Donald, son of Lawrence and nephew of B.F. My guess is that the bank recapitalized itself in 1934 and that the Keisters were major backers.

I did not really gain much info but it does help explain the history, and possibly the motivations behind management. The bad news is that the bank is likely majority controlled by the Kiefer and Keister families. It is a small town institution, so it is unlikely to ever be sold. Family-controlled businesses do deserve to trade at a discount but 41% of TBV seemed excessive. Let’s look at the balance sheet next.

Balance Sheet: You will note that SB&T has a different sort of balance sheet for a bank. The loan book is small and has been relatively steady. Over the past four years, deposits has increased dramatically and the bank has mainly invested the new money into bonds with maturities of five years or less.

The loan book is conservative, with a mix of residential mortgages, consumer loans and most of the commercial loans are owner-occupied. The relatively large chunk of OREO stems from an ice rink that the bank purchased in 2010:

http://triblive.com/x/dailycourier/news/s_674215.html#axzz29Bgr645l

Most of the securities HTM are muni bonds. The AFS securities are about 2/3rds corporate bonds, 1/5^th agency MBS and the rest Treasuries. Hard to tell whether the SB&T is a bank or a levered bond fund.

Income Statement: On the income side, earnings for the 9 months of 2012 were $1.8 million for an annualized ROA of 0.94% and ROE of 5.6%. Not surprisingly, tangible equity to tangible assets is high at 16.4%. On the positive side, from the Call/Thrift reports, SDLJ does pay an annual dividend in the 1^st Quarter. The 2012 dividend looked to be $6.83/sh up from $5.85/sh last year.

Trading: You know a stock is illiquid when it only trades 323 shares – in a year. Here is the 10-year chart:

Risks: Illiquid, family-owned, bank – the ultimate trifecta.