Go West, Savvy Investors

 | Jul 15, 2014 | 2:00 PM EDT
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Today I will start breaking my "trade of the decade" down into smaller bites by looking at where the opportunities are in four different regions in the U.S. We will have to stay with the large banks for this exercise, but investors need to be aware that many of these opportunities lie in the region's smaller banks.

It takes little digging but, in addition to the banks I will feature in each region of the country, there are dozens of tiny little banks with market caps of $20 million, $30 million or less that are extraordinary bargains. As an example, I am going to start with the Pacific region of the country. I have a list of about 70 tiny banks -- many of which are bargains but are far too small to write about it here.

The Pacific region is made up of California, Oregon, Washington and Hawaii. Parts of the regions, particularly Southern California, were among the worst hit in the financial crisis and the price of small bank stocks plummeted dramatically. It appears that the majority of these institutions that were likely to fail have already done so. Banks in the region have been taking steps to fix their loan portfolios and build capital. The region contains some of the most attractive banking markets in the country, so banks looking to gain entry will be active buyers of some of these smaller regional and community banks.

First Financial Northwest (FFNW) is based in Renton, Wash. and serves the Puget Sound Region from its headquarters and single branch southwest of Seattle. The bank is in fantastic financial condition . Its equity-to-assets ratio is more than 18 and nonperforming assets are just 1.56% of its current total assets. The stock trades at just 86% of tangible book value so it's definitely a bargain issue at the current price.

First Financial sticks to the basic banking business: 75% of its loan portfolio is in single family and commercial real estate. Another 16% is in multifamily loans so they have very little exposure to the higher risk loan categories like construction and commercial and industrial. Activist investor Joseph Stilwell holds more than 8% of the outstanding shares. The stock yields 1.89% and management announced an additional 10% stock buyback plan back in April.

Banc of California (BANC) is based in Irvine California. The company operates 17 branches in the area and has a little more than $4 billion in total assets. When it closes on the deal to buy Popular (BPOP), its California branch network assets will exceed $5 billion. Nonperforming assets are just 1.12% of total assets so the loan portfolio is sound. The equity to assets ratio is just a little below my preferred level of 10 at 9.73%. The loan portfolio is almost 80% single family and commercial real sate so they have also stayed away from riskier loan types. The stock is currently trading at 90% of book value.

There is some interesting buying activity surround this bank of late. As a part of the Popular deal, Oaktree Capital (OAK) and Patriot Financial have committed to buy significant blocks of stock in the bank. Oaktree will own about 10% of the bank and Patriot will increase its current 7.59% stake by 10%. Banc of California CEO Steve Sugarman recently purchased 35,000 shares of his bank. Activist investor PL Capital just announced a 7.2% stake in the bank and sent a letter to the board expressing significant concerns and questions about the company's corporate governance, operating performance, financial projections and compensation plans.

Territorial Bancorp (TBNK) has 28 branches and about $1.6 billion of assets in the state of Hawaii. The bank is in fantastic shape with nonperforming assets of just .35% of total assets and an equity-to-assets ratio of $12.25. The loan portfolio is 95% single family homes so they have been a beneficiary of the state's strong housing markets. In February, the bank completed its fifth consecutive buyback program and the shares yield 2.93% at the current price. Insiders own more than 16% of the outstanding shares of the bank so they are sitting on the same side of the table as their investors.

These are just of the few of the Pacific region banks that are currently trading for book value. Candidates must also have plenty of capital and solid loan portfolios. These three make the cut but there are many more in the region, especially among the smaller banks. The trade of the decade in small regional and community banks is under way and investor should be looking to get on board.

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