Avoid the Noise

 | Jul 30, 2012 | 3:30 PM EDT  | Comments
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Stock quotes in this article:

hbos

,

fubc

,

shbi

I am told we have a busy week ahead for announcements and earnings reports.

Tim Geithner is heading to Europe to see if he can instruct them how to operate the printing presses. Mario Draghi will be approaching the Bundesbank looking for the cash to make a substantial policy change. It is a Fed week, so we look for some important decision form them later this week as to their take on the economy and likelihood of QE3. We will get a jobs reports, consumer confidence data and even some numbers from Case-Shiller. Lots of people will be wagering lots of dollars on the flow of information out of D.C., Berlin and Brussels this week. As usual, I won't be one of them.

I have plenty of dry powder to respond to what the market does, but for me, predicting the movement is just a waste of time and money. I am not fully invested, but the mix of safe and cheap stocks will do very well if the central bankers of the world announce the definitive solution to all our problems and the market skyrockets. If the market decides the solutions are less than perfect and tanks, perhaps I will get a chance to be a buyer. Whatever happens I will be reacting to, not predicting, what the stock market will do.

The numbers I will be tracking this week have to do with my community bank stock Trade of the Decade. Earnings reports have been flowing in and I want to see how earnings and asset quality trends are developing for these institutions. There are many banks on my list that trade well below book value but had very high loan losses. I am searching for those that have gotten a problem under control and are seeing a substantial decline and improving trend in loan quality. We have heard rumors and discussions of firming in some real estate markets and that should help the asset quality of many of these smaller banks.

I want to find more banks that are performing like one of my favorite first-half stock picks. Heritage Financial Group (HBOS) has seen a steady decline in nonperforming loans over the past few years. Nonperforming assets peaked back in the first quarter of 2010 and have declined every quarter since. Currently they are just 1.08% of total assets. The stock has moved higher this year but is still remarkably cheap given its asset quality and solid earnings improvements. At today's price the shares trade at just 94% of tangible book value. With a tangible equity to assets ratio of 11.9 the bank has more than enough capital to be considered safe as well as cheap.

I am keeping a close eye on some of the Florida-based banks. First United Bancorp (FUBC) of Boca Raton seems to be getting its loan portfolio under control. Nonperforming assets actually rose for the past two quarters, but have declined a bit in the second quarter. Nonperformers are now down to just 3.1% of total assets. The bank has a lot of capital with a tangible equity to assets ratio of more than 14, so loan quality has improved to an acceptable range for long-term investors. The bank is selling its largest impaired asset and the sale of loans associated to a chain of gas stations should close in the third quarter. With the stock at 1.2x tangible book value I would be a buyer in a market decline of this improving South Florida community bank.

Long-time holding Shore Bancshares (SHBI) is still going in the other direction. Nonperforming assets were below 3% when I first bought the shares back in 2009. Today they stand more than 8% and increased again in the second quarter of the year. The tangible equity-to-assets ratio has remained fairly stable and is currently about 9. Management is focusing on concessionary workouts and loan disposals to improve the over quality of the portfolio. If they can achieve a measure of success, the shares are cheap at 40% of tangible book value. At that valuation I am willing to add a little to my position as they need to either get it fixed or get it sold over the next few quarters.

The noise flow will be higher than normal this week. Try to keep your head down and focus on what is important, like bank-by-bank fundamental changes. It is far more profitable in the long run.

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