Three Banks in Georgia Poised for Growth

 | Jun 25, 2014 | 3:00 PM EDT
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Yesterday CNBC released it list of the top states for doing business. They looked at things like workforce demographics, local infrastructure, costs of doing business and the legislative attitude toward business among other things. When I reviewed the list of states last night, my first thought was that one of the smartest things I ever did was leave the northeast; in addition to snow and cold, most of those states had pretty poor grades. My former home state, Maryland, came in at 35, while my friends in New York are living in the 40th most business friendly state.

My second observation was that if a state or region is particularly business-friendly, then the economy would grow and people would be making money. They would be starting businesses and creating jobs. They would also be buying homes and cars and using credit cards. Good for business means good for banks so it made sense to me to sit down and look over the top ranked states to see if we could find any trade-of-the-decade-type cheap bank stocks that would benefit from the business friendly conditions.

Georgia came in as the number one state for business. The state has a well-educated work force that is mostly non-union. The local economy is recovering after being devastated by the housing collapse. Roads and bridges are among the best in the country, and the Atlanta airport is one of the busiest in the nation. Georgia banks are finally recovering from the housing crisis and most of the troubled institutions have been closed or merged with stronger competitors with FDIC assistance.

The list of Georgia banks contains several that fit well into a trade-of-the-decade portfolio. Heritage Financial Group (HBOS) was one the first trade-of-the-decade stocks I purchased a few years ago. It has moved up somewhat since, but I think the upside for the bank is still pretty big. The bank has been growing by acquisition over the past few years, engaging in FDIC-assisted transactions to buy struggling banks, buying smaller healthy institutions and branches in their region. The loan portfolio is in sound shape, with non-performing assets just 1.14% of total assets. The stock trades at a slight premium to book value after moving up about 30% in the past year, but the future looks pretty bright for Heritage.

Synovus (SNV) looks like it is going to be one of the great bank turnaround stories of the decade. Improving credit conditions at the bank allowed it to triple profits in the first quarter and its management sees continued improvements ahead. It recently did a one-for-seven reverse split to get the stock back on the institutional radar screen, and that could bring some buying interest during the second half of 2014. Non-performing loan balances have declined for nine straight quarters in a row and are now just 1.78%. The bank is perfectly positioned to benefit form continued recovery in the south-eastern US, with branches in Georgia, Alabama, South Carolina, Florida, and Tennessee.

My favorite Georgia-based bank remains Charter Financial (CHFN) out of West Point. It has 16 branches in Georgia, Alabama and the Florida panhandle. The bank finished the conversion process from a mutual thrift in early 2013 and is still awash in capital as a result. It has been using the cash to buy back stock, and since December has repurchased 12% of the outstanding shares at a discount to book value. Last week it announced a new buyback plan that is authorized to repurchase an additional 10%. The stock is trading at 87% of book value and non-performing assets are just 0.91%. With a sky-high equity-to-assets ratio of 19, Charter qualifies as a perfect trade-of-the-decade small bank stock. Apparently I am not the only one who thinks so, as some pretty smart bank stock investors like EJF Capital and PL Capital also have significant positions in shares of Charter Financial.

Conditions that are good for business are going to be good for banking and bank stocks. It makes a good deal of sense to look at the very best states for business when putting together a portfolio of trade-of-the-decade small regional and community bank stocks.

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