Excellent “value” opportunities exist among community bank stocks and U.S. thrifts, as they typically have low downside risk and strong appreciation potential.

The U.S. Thrift portfolio is comprised of previously converted thrifts as well as deposit accounts in mutual banks, which give Polaris valuable preferential rights to purchase stock if the mutual institution converts to stock ownership. The bank stocks in the portfolio, typically smaller thrifts and community banks, are broadly diversified geographically. Many of the portfolio holdings have footholds in multiple markets and neighboring states.


The newly-enacted lower corporate tax rate, in conjunction with expected Federal Fund rate increases, may materially impact the valuations of banks and thrifts in the coming quarters. Already conforming to the new tax reform bill, numerous financial institutions are adjusting their deferred tax asset or liability, translating into either a one-time charge or benefit to earnings. However, we note this one-time adjustment does not impact the company’s cash flows. In fact, the tax reform bill is expected to benefit banks in the long run. When the corporate tax rate drops from 35% of 21%, banks may potentially increase dividends, conduct stock repurchases and execute M&A deals.

The tax reform bill also spurred discussion within the FOMC, as members mulled over the pace of rate hikes for 2018. Although initially planning on three incremental increases in 2018, mirroring 2017 steps, the Fed may take a more hawkish approach to raising rates. Eventually those rate increases, barring a flattening yield curve, should filter through to banks’ net interest margins.

We have witnessed a unique environment in the banking sector over the past two years, when the average performance of large U.S. banks was higher than smaller, thrift banks. This stands in contrast to the long-term trend we have seen for the past several decades. For more information about the U.S. Thrift portfolio, please contact Polaris directly.

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