I'm Buying Two Very Different Banks

Their names are Citigroup and MidWest One Financial Group.

Apr 2, 2014 at 7:13AM

Citigroup (NYSE:C) is over 1,000 times larger than MidWest One Financial Group (NASDAQ:MOFG).

Citigroup is arguably the most global U.S. bank, with more assets and revenue outside the U.S. than inside it; MidWest One's name overstates its reach.

Citigroup is in over 140 countries; MidWest One is in 15 counties (all in Iowa).

You get the idea. Citigroup is huge, with far-flung, complex operations and MidWest One is a rounding error.

But I think both are undervalued, so I'm buying shares of each in the real-money portfolio I run for the Motley Fool.


Since August of 2011, I've been adding to my position in Citigroup. In fact, this'll be the fifth time. My basic thesis has remained the same throughout.

Namely, that Citigroup is an underestimated turnaround story.

Don't get me wrong -- Citigroup is scary. Unlike Bank of America (NYSE:BAC), which can point to the Countrywide acquisition for its problems, Citigroup's problems are entirely homegrown. And this is round two of me giving the benefit of the doubt to a clean-up crew management team that wasn't the cause of the financial crisis problems. First, it was Vikram Pandit as CEO. He's since been replaced by Michael Corbat (with Chairman Michael O'Neill pulling the strings to some extent).


Different CEO's, but Citi's Fed stress test results are the same: failure.

In 2012, Citi's capital plan (which included buybacks and increasing the penny per quarter dividend) was rejected by the Fed.

The rejection helped precipitate Pandit's ouster and Corbat's ascension.

So I was happy to see in Citigroup's first post-Pandit stress test in 2013, they played it conservatively: asking and getting approval for a $1.2 billion buyback but holding tight on raising dividends.

Honestly, I thought 2014 would be Citigroup's year on raising those dividends. Turns out, fellow cellar dweller Bank of America eventually got authorization to raise its penny per quarterly dividend to a nickel, but a similar request by Citigroup was rejected. It was also rebuffed on increasing buybacks.

This is despite Citigroup actually doing quite well by the numbers. In the "severely adverse" stress test scenario, a bank must maintain a minimum tier 1 common ratio of at least 5%. Citigroup's was 6.5%. Compare that to 6.1% for Wells Fargo, 5.5% for JPMorgan, and 5.3% for Bank of America.

No, Citi was rejected "on qualitative grounds." The Fed pointed out Citi's failure to improve previously cited problems.

The Fed noted: "Practices with specific deficiencies included Citigroup's ability to project revenue and losses under a stressful scenario for material parts of the firm's global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."

While the Wall Street Journal noted that, "One [Fed] official noted that the objection to Citi's plan wasn't a grade on the bank's ability to manage risk generally," it's certainly not comforting given that one of my biggest fears with Citi is that it's too big and complex to manage effectively.

All that said, I still believe in the track record of Michael O'Neill (who led the spectacular turnaround of Bank of Hawaii a few years ago), I still believe Citigroup is making steady progress, and I still believe a price-to-tangible book value ratio of 0.9 is a good value on both an absolute and relative basis.

MidWest One Financial Group 

In 2008, a merger of equals brought MidWest One to its present size.

Still only 25 branches strong, it seeks to provide "an appealing alternative to the 'megabanks' that have resulted from large out-of-state national banks acquiring Iowa-based community banks."

MidWest One uses its deposits primarily to fund commercial real estate loans and commercial and industrial loans. It fills out its loan portfolio with residential real estate, agricultural, and consumer loans. Recent housing bubble aside, you could argue that the commercial business is riskier than the residential side.

On a portfolio level, that doesn't bother me much because I let diversification take care of loan mix issues. Looking at MidWest One on its own, I note that it doesn't have an unreasonable amount of risky commercial construction loans and that its allowance for bad loans fully covers its non-performing loans.

A number that stands out for MidWest One is its excellent efficiency ratio of 57, which is down significantly from last year's 67. This low number means that MidWest One is containing its costs well. Due to the large drop, though, we'll want to keep an eye on it in the future.

Looking at other numbers, its net interest margin of 3.46% is fine as are its return on assets of 1% and return on equity of 10.6%. It's also pumping out a dividend yield of 2.3%.

On the valuation side, we're getting this solid performance for a bit over 11 times earnings and 1.2 times tangible book value.

All in all, it seems like a solid little bank for a reasonable price.

One caution as you look into it further: at a market cap just over $200 million, MidWest One is a small cap stock with limited trading activity. Be sure to set a limit order if you ultimately end up buying shares.

If you enjoyed this write-up or would like to see the rest of my picks, follow my real-money portfolio here.

Another stock idea
I'm bullish on Citigroup and Midwest One , but there are other stocks out there. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Anand Chokkavelu, CFA owns shares of Bank of America, Bank of Hawaii, Citigroup, Citigroup, JPMorgan Chase, and Wells Fargo. He also owns warrants in Citigroup, JPMorgan, and Wells Fargo. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Bank of Hawaii, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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