These Small Banks Are Seeing Big Asset Growth

 | Oct 06, 2016 | 1:00 PM EDT
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Last night while I flipped between that incredible pitcher's duel in New York and the latest storm projections, I was talking with one of my old trading buddies out in Chicago. He had read yesterday's column on banks that are struggling to grow assets, and wondered if there are any small banks that are doing a good job of growing assets. Were there any that could get past the $1 billion survival level, and start pushing towards that $5 billion sweet spot without selling? It is a great question, and I sat down this morning and ran some screens to see what I found.

I found several banks that have been growing at a decent clip, primarily through acquisitions where they bought smaller banks to push their asset level higher. The problem comes when we look at valuation, and it becomes evident that we have to use a combination of my book value approach and the price-to-equity multiple approaches that John Allison of Home Bancshares (HOMB) favors for valuing growing banks. There a few I think you can buy now, but most of the banks on the list are going onto my list of those to watch in a weak market -- and then consider loading up on these well-run institutions list.

Bancorp of New Jersey (BKJ) is one that I think you can just buy at current prices. The Fort Lee, New Jersey-based bank has grown from one branch to nine, since opening 10 years ago. The bank now has about $821 million in assets and appears to be well on its way to the $1 billion mark. The bank has focused on the commercial market, and more than 50% of the loan portfolio is in commercial real estate loans.

The bank is doing a solid job of underwriting its loans, and nonperforming assets are just 0.99% of total assets. It is currently well above the CRE-to-total-risk-based-capital guidelines of 300% suggested by the FDIC. Bank management is comfortable with its exposure and is pushing forward with growing its commercial banking relationships. As long as the New York/Northern New Jersey market stays healthy, the bank should do well. The stock is currently trading at 95% of book value and less than 15x earnings. The shares also yield over 2%, so you collect some cash while you wait for the market to reflect the actual growth of the bank over the past few years.

I have owned shares of Eagle Bancorp of Montana (EBMT) for a long time, and with the stock, at 15x earnings, I would be willing to buy more around current levels. The Helena, Montana-based bank has used smart acquisitions and organic expansion to grow assets by an average of 16% a year over the past five years. It has a balanced loan portfolio, with single-family homes and owner-occupied commercial real estate making up about half of the total portfolio. It is doing a solid job of underwriting loans, and nonperforming assets are just 0.41% of total loans. The stock is yielding 2.25%, and the company just announced another buyback program of 100,000 shares.

Charter Financial (CHFN) of Athens, Georgia, remains one of my favorite growth banks. The bank just completed the acquisition of CBS Financial in the Buckhead region of the Atlanta marketplace. The deal not only helped the bank advance into the prosperous Atlanta market, but also caused assets to jump from $1 billion to over $1.4 billion. The bank is in great markets, and most of its locations have manufacturing, universities or military facilities nearby -- and are seeing strong job growth. Since converting to a thrift in 2013, Charter has bought back over 35% of its outstanding shares, so management is focused on improving shareholder value. Nonperforming assets are just 0.46% of total assets, and the equity-to-assets ratio is 13.24, so this bank is in fantastic shape. The stock is trading at just 1.1x book value right now, which I think is reasonable given the bank's growth plans and prospects. Should someone decide that Charter's franchise fits their plans, I think a takeover would take place at a significant premium to the current stock price.

I have a long-standing preference for buying the underperforming banks, but there is money to be made buying the banks that are growing their assets at a rapid pace and trade at reasonable multiples of assets and earnings.

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