Capital Ideas in Regional Banking

 | Feb 07, 2013 | 3:00 PM EST  | Comments
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Stock quotes in this article:

zion

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sasr

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mbrg

Before I move on from looking at banks that are based in what the Milken Institute judges to be the best-performing cities, I want to look at one more region and share some general thoughts.

On the Milken list, the dominant state is Texas, as the combination of high tech around Austin, oil and gas in Houston, low taxes and a business-friendly government has made the state one of the best places in the U.S. to do business. I wrote about Texas banks not long ago, and banks that operate there should be on your watch list for an opportunity to buy at a decent discount to tangible book value.

Utah is also very well represented on the list, to the delight of our resident mountain man, Bob Byrne. A combination of oil and gas, agriculture and tourism has kept the state economically vibrant throughout the current slowdown. Unfortunately for investors, most of the state's banks are industrial banks owned by corporate giants such as Morgan Stanley (MS) and American Express (AXP).

The best play in banking for Utah to going to be Zions Bancorp (ZION). The bank has 107 branches with over $11 billion of deposits in Utah, and it is the eighth largest by market share. The stock has staged a nice recovery over the past few years but still trades at just 90% of tangible book value. I have set up a news feed for bank IPOs of thrift conversions in Utah to see if we get any opportunities to take advantage of future growth in the state.

The last region I want to review is my old stomping ground. The Washington, D.C., economy has been somewhat impervious to the economic pullback for obvious reasons. The federal government is the largest employer in the region, but every defense contractor, nonprofit organization, union and technology company also has a strong presence in the region. Several major universities and research hospitals in the area provide yet another stable source of jobs.

It is also one of the more overbanked regions in the U.S. Seven of the top 10 wealthiest counties surround the nation's capital, and that attracts financial services companies like honey does bees. I am hard pressed to think of a major money-center or regional bank that does not have a presence inside the Beltway. Back in the early 1990s, the region saw massive bank consolidation in the aftermath of the savings-and-loan crisis, but de novo banks popped up on every corner as the decade progressed, and once again the region has too many banks, and consolidation is likely over the next few years.

Sandy Spring Bancorp (SASR) transformed itself from a small bank in the region to major presence by taking advantage of acquisition opportunities. Since 1993, the bank has purchased five institutions and engaged in two branch transactions that increased assets by close to $750 million. The bank has also purchased several insurance agencies and investment offices to expand its offerings in financial services. Sandy Spring currently has 49 offices throughout the D.C. region and $3.9 billion in assets. The stock is a little high right now at 1.3x tangible book value, but it is near the top of my list of regional banks to buy on a market decline.

One of the more intriguing stories in the area is Middleburg Bancshares (MBRG). The bank has branches in the region surrounding the Capital as well as locations in the Richmond the Newport News areas of Virginia. The bank has 11 branches with a total of $1.2 billion in assets. It also offers trust and investment-management services throughout its service area. The stock is currently trading at 1.2x tangible book value, and the company has adequate capital with an equity-to-assets ratio of over 9. The real story here is that David Sokol, the investment manager once thought to be Warren Buffett's successor, has been steadily accumulating the shares and now owns a little more than 1.5 million shares. I own a tiny bit of this one and would love to see it pull back below book value and add more.

As with so many other regions of the country, the real story in the Washington, D.C., region is in the small banks that are too small to cover here. There are dozens of them in the District, Maryland and Virginia that trade at a discount to tangible book value with pristine balance sheets and strong capital accounts. It is worth the time and effort for long-term investors to find the safe and cheap bargain banks in the Capital region.

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