$$ FOR YOUR HOLIDAY BANK ACCOUNT

In our final Market Monitor blog for our week-long theme of anticipation for the upcoming holiday season we looked at our past picks for a sell, to help you, our loyal readers, raise some cash for presents, trips, or a nice self-indulgent treat.

Here is a great article we found on MarketWatch yesterday that summarizes a report from SNL Financial about the changing retail bank consumer to mobile and internet banking and the resulting closing and or lack of ‘business’ at many bank branches.

http://blogs.marketwatch.com/thetell/2013/11/12/new-report-says-bank-branches-are-shrinking-as-mobile-banking-takes-hold/

One of the key points made in the article is that this changing market trend may actually help banks balance the rising costs of new regulations from the Dodd-Frank law. With that said that, it will be important for banks to expend capital on IT technology to make the mobile and internet ‘branch’ enjoyable and issue free for the customer. Having clear differentiation from competitors in this area could drive new business, while having a substandard experience will drive customers elsewhere.

With this in mind we took a look at one of our few financial picks from early February this year, Jefferson Bancshares, Inc. (NASDAQ – JFBI - $6.25). JFBI is up 68% since this coverage on a slow steady climb. Take the money and run. It was a great trade but may not have longer-term prospects. Here is why.

As a refresher, Jefferson Bancshares is the operational holding company for Jefferson Federal Bank. It operates nine full-service branches and two drive-through limited service facilities located in four rural and suburban counties surrounding Knoxville, TN, providing deposit and loan services to consumers and businesses.

First, the long term trend toward a ‘cool’ online banking experience may be a detriment to regional banks like Jefferson. We poked around a little on the website and noticed that they just created a new phone app. The Company may not have the resources or the inclination to develop cutting edge technology here. The argument being that the competitive advantage that regional banks have over large national banks is the personal, local touch. While this serves them well with older demographics, it does not favor them going forward.

Second, back in February we liked the stock as a potential takeover target with a good turnaround story from a margin standpoint. The stock was a good deal at the time, but has doubled in price and now carries a market-cap to close to the $40 million level, which is a hefty price tag for a company that had top-line revenue of just $21 million last year.

Like any other regional bank, mortgages are a large part of the annual income for Jefferson. Interest rates have begun to climb which could hurt the re-finance and new loan business. Also, the local Tennessee real-estate market is a mixed bag at best for 2014. According to the Realty Times, Knoxville area homes were not hyper-inflated at the start of the housing crisis, therefore did not suffer the huge drop seen around the rest of the country. This could hold back first time homebuyers looking for value.

JFBI was a nice surprise for how thinly traded the stock is, averaging about 4,000 shares per day over the last three months. With virtually no investment bank or research coverage and with the factors mentioned above, we say count your blessings and take the cash.
 

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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