Investing in banks used to be a much simpler and rewarding exercise than it is today. Find a bank that knew how to make and grow a quality loan book while continuing to attract deposits and grow its market share. Put that bank in the hands a conservative management team and the long-term results were likely to be very satisfactory.
I believe those same old-school banking ideals exist today with Towne Bank (TOWN), a $550 million regional bank operating in Virginia and North Carolina. The recent acquisition of Franklin Financial strengthens Towne's presence in Virginia, where the bank already commands a top position. Franklin adds approximately $1 billion in assets to Towne's nearly $5 billion.
What attracts me to Towne is not just a solid banking operation, but also a lucrative insurance business. In fact, Towne derives a healthy portion of its net income from non-interest categories such as insurance. That means the bank is better placed to withstand any hiccups in the lending market.
In 2014, Towne earned over $40 million in net income. In 2014, net interest income was $145 million and non-interest income was $97 million, respectively. Not surprisingly, the bank's capital ratios are all well above regulatory requirements.
With a return on equity nearing 10%, a figure that would be the envy of many in the banking industry, Towne surprisingly trades nearly at par to book value. That's an absurd valuation, in my view, for a bank with the track record that Towne has. Consider that 2014 marked the bank's 15th consecutive year of record earnings.
Do the math: Towne was growing its profits in 2008, 2009, and on. Today, most well-capitalized profitable regional banks trade at healthy premiums to book value; find one that has been growing profits for well over a decade, and the valuation should be on the premium end of industry multiples. A 3% dividend is also thrown in the mix.
At a very acceptable 1.5x multiple to book, Towne's shares would be nearly 50% higher than they are today. Even were the bank to remain valued at near parity to book value, the future earnings growth plus dividend should generate above-average returns.