My successful approach to investing in community banks over the past two decades has been to buy smaller institutions that trade at a discount to book value (and preferably have activist investors involved). But another approach that's worked pretty well has been to "buy the buyers" -- purchase banks that are growing via the acquisition of other banks.
Active acquirers like Bank of the Ozarks (OZRK) and Home Bancshares (HOMB) have seen their stocks become richly valued since the U.S. credit crisis ended. You might want to buy them on a pullback, or "back into" them by owning stock in a smaller bank that gets gobbled up by one of these high performers.
Capital Bank Financial (CBF) is another one of my favorite growth banks. CEO Eugene Taylor and his team raised more than $900 million to start the firm in 2009 just as the banking world was imploding, using the money to snap up Southeast banks at bargain prices.
They initially purchased just seven banks, including several distressed institutions acquired with Federal Deposit Insurance Corp. assistance. But today, CBF has $7.4 billion in total assets and 153 full-service branches throughout Florida, North and South Carolina, Tennessee and Virginia.
Management is pretty upfront about its growth plans, writing in CBF's latest 10-K that "our business strategy is to build a midsized regional bank by operating, integrating and growing our existing operations, as well as to acquire other banks, including failed, underperforming and undercapitalized banks." The firm views the Southeast as its core market and is actively looking to expand there.
Back in August, the U.S. Office of the Comptroller of the Currency lifted a so-called "de novo operating agreement" put in place in 2010 as part of Capital Bank's original approval process. This freed CBF to implement its business plan with a reduced level of regulatory oversight.
Three months later, the bank announced plans to acquire CommunityOne Bancorp (COB) for $350 million in a deal that will expand CBF's North Carolina operations (especially in the Charlotte market). Capital Bank's management has shown that it's skilled at acquiring banks that add value, so I think this will be just the first of many deals.
In its most recent earning report, CBF announced that it hit one long-term goal of crossing over the 1%-return-on-assets mark. The bank also got its efficiency ratio below 60.
Likewise, return on equity has doubled over the past four years to reach 8.75%. I don't think it'll be long before CBF consistently produces double-digit ROEs and takes its place in the ranks of high-performing banks.
My core strategy in the community-banking space will always be to buy the "little guys" that pretty much need to sell (and/or face pressure from outside investors to do so).
However, it also makes sense to be a long-term investor in those banks that have solid growth-and-acquisition strategies. My "inner cheapskate" prefers to buy bank stocks that are down -- but I'll also keep an eye out for high-quality growth stocks like CBF.