Bank Stock Investors' Mecca

 | Jun 26, 2014 | 3:00 PM EDT
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When I look at the most business-friendly states I find my wife's home state of Texas once again up near the top of the list. I have written about Texas before as a great place to invest simply because it is business friendly and, in addition to the energy industry, they have thriving technology and agricultural economies. There is a lot to like about The Lone Star State, but it does lack one quality, at least from a stock picker's point of view: although it has a bunch of publicly-traded banks, it doesn't have any publicly-traded banks that are cheap. All the ones I have found trade at a premium to book value right now, so there's just not much to do in the Great State of Texas for bank stock investors right now.

There is even less in Utah. All of the banks in that state except Zions Bancorp (ZION) are subsidiaries of some big banks or are publicly held. An admittedly quick search of Utah banks showed no other publicly-traded banks in the state right now. I would love to own some shares of a quality bank on the cheap in this business-friendly state, but there is no inventory just now.

Fortunately North Carolina, at Nr. 5 still close to the top, has been a little bit of a mecca for bank stock investors, with plenty of good banks available at good prices. My favorite right now is HomeTrust Bancshares (HTBI), which I just acquired in a merger with one of my little banks. HomeTrust is committed to growing via acquisition and seems determined to become more of a regional than local player in the Southeast banking market. In addition to buying Jefferson Bancshares recently they have purchased some branches in Virginian and opened a loan production office in Roanoke. The stock is trading at just 80% of book value and they have plenty of capital, as the equity to assets ratio is over 17. Non-performing assets are a little high at 3.23% of total assets, but they have been trending down.

HomeTrust Executives are presenting today at the KBW Southeast Bank Conference. Their presentation is already posted to the IR section of the website. Management sates that they plan to keep growing across the Carolinas, Tennessee, and Virginia. They also told analysts that they want to expand their business operations organically and acquisitively in high-growth, larger metropolitan markets. The bank has done five acquisitions and one branch buy since the credit crisis began, and doubled its asset base since 2008 by smart buying. Some fairly successful investors, including Michael Price, activist Joseph Stilwell and bank-focused hedge fund FJ Capital, like the prospects for the bank and are shareholders of HomeTrust.

Peoples Bancorp (PEBO) is located in Newton, North Carolina, and has 23 branches and about $1 billion in total assets. The bank is trading right around book value at the current price, and is in solid financial shape right now. Non-performing assets are just 1.44% of total assets and the equity-to-asset ratio is 10.14. There is nothing spectacular about the bank. It is just a solid financial institution in a region that is showing economic growth. The shareholders list shows the usual suspects: smart investors like EJF Capital Management, Arbiter Partners and Banc Funds LLC, who are owners of the bank and expect solid progress and a higher stock price in the future.

As is the case in just about every industry and market segment that I investigate of late, the real bargains in North Carolina banks stocks are in the micro and nano cap stocks. A quick screen shows about a dozen smaller banks that are in reasonable financial shape and trade for less than 85% of book value in the state. They are far too small to mention here, but it is probably worth the time for trade-of-the-decade investors to dig deep and find the ones that are bargain-priced and financially sound.

Investing in banks in business friendly states just makes sense to me. As the local economies strengthen, banks will see profits and assets grow at an above-average rate. Banks from outside the state are going to want a presence in the state and will be willing to pay premiums to gain access to healthy markets. Choosing trade-of-the-decade cheap community banks in these states should have a big payoff for patient investors.

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