More Small Banks for Your Research List

 | May 31, 2013 | 3:00 PM EDT  | Comments
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As we move into the weekend, I want to suggest some more little bank stocks that do not necessarily fit firmly into the "perfect bank" category. These banks aren't in perfect condition, and they are fighting through the cleanup of their loan portfolios and super-slim net interest margins.

Bankers are among the few groups of people who would like to see higher interest rates right now. Richard Lashley of PL Capital told me earlier this week that most bankers would like to see higher rates across the curve to widen interest margins and make it easier to produce lending profits. He says a perfect world would be a cost of funds at 2% and loan rates around 5.5% to 6%. Until that happens, profits will be compressed, and in the income-statement-focused world of Wall Street, that may keep the profits lower than normal into next year. That gives us value types time to accumulate these stocks at favorable prices.

One bank that catches my eye at the current price is Newbridge Bancorp (NBBC) of Greensboro, N.C. The bank has 30 branches in the Piedmont and coastal regions of the state and has total assets of $1.7 billion. The bank recently repurchased the TARP warrants it had issued to the Treasury, and its TARP preferred was auctioned off in the first week of May. The bank disposed of more than $160 million of troubled assets in 2012 and raised $56 million in new capital to shore up the balance sheet.

The lack of losses related to problem loans caused Newbridge to see a huge jump in earnings in the first quarter, and it is positioned to continue that trend. It is seeing organic loan growth, and it has added an experienced commercial banking team to help expand that business in the Charlotte and Raleigh regions of the state. The shares are cheap at 70% of tangible book value, and the equity-to-assets ratio currently stands at 10. After disposing to troubled assets, nonperforming assets are now just 1.21% of total assets. This is a very cheap bank in one of the strongest economic regions in the state, and it is an excellent addition to a Trade of the Decade portfolio.

I touched on Simplicity Bancorp (SMPL) in early April, when I reviewed California banks. This bank used to the credit union for employees of Kaiser Foundation Hospital, and it concerted to a mutual saving bank in 1999. In 2010, it converted once again to a stockholder-owned institution. Simplicity functions as a community bank that has nine offices and $882 million of assets. It still has plenty of capital and an equity-to-assets ratio of more than 15. While the stock trades at 80% of tangible book value, management has been buying back stock and paying shareholder dividends of 2.2%. Nonperforming loans are 2.72% of total loans and have been improving over the past few quarters. Given its presence in the Los Angeles market, I would not be surprised to see a takeover offer for this bank early in the M&A cycle.

MutualFirst Financial (MFSF) is another bank I have discussed. PL Capital has a large position in the bank and owns more than 5% of the stock right now. Former hedge fund superstar Jeffrey Gendell has more than 4% of the shares as well. The bank is moving to add commercial and consumer lending to its loan portfolio, as it is overly exposed to residential real estate. The Muncie, Ind.-based bank has 32 branches and $1.4 billion in total assets. If we see a proxy fight between outside investors such as PL Capital and current management, it could get interesting. The board and officers are fairly young and own a good deal of stock, so they may choose to fight back. Shares trade at 80% of tangible book value, and it is a decent buy for a long-term bank stock portfolio.

I was asked yesterday if I worry about market direction when I buy bank stocks. Other than my insistence on not buying up days I really do not. I am buying these for what is going to happen over five to 10 years, not next quarter or even 2014 for the most part. Any weakness that is market related just gives me a chance to buy more at better prices. I firmly believe that buying community banks today will help me pay for my book and wine collections well into the 2020s.

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