I talked on Monday about the overwhelming evidence supporting ownership of community bank stocks. The stocks are cheap with many of the small banks still trading at substantial discounts to book value in spite of dramatically-improved balance sheets and loan portfolios.
Activist investors such as Lawrence Seidman, Joseph Stilwell and PL Capital are buying stocks and attempting to influence management to improve the stock price, or sell the bank outright. They also are having a great deal of success. Checking their 13d filings and 13f reports and riding their coattails to profit is a no-brainer right now. Finding takeover targets is something like shooting fish in a barrel at the moment.
Do not overlook, however, another source of potential profits. Those banks that are skillful acquirers of other banks are also going to see tremendous asset and earnings growth. The poster child for this Bank of the Ozarks (OZRK). The stock is too rich for me to buy at over 20x earnings and over 3x book value, but this just might be the best bank management team in the country right now.
The bank just closed a deal to buy Intervest Bancshares, a deal we profited from in a big way. It also has done several other deals over the past several years. I cannot bring myself to buy the stock at this level, but it is a well-run bank with a history of smart acquisitions. OZRK is in my top ten of the "buy in a crash list" I keep on my desk.
HomeTrust Bancshares (HTBI) is also doing a good job of acquiring banks to expand its footprint and to grow assets. The bank did several mutual thrift mergers prior to the 2012 conversion IPO. Last year, it closed on two bank purchases and one branch purchase deal to further grow the bank.
HomeTrust has more than doubled its asset base since the credit crisis began in 2008. Their IPO assets have gone from $1.6 billion to $2.7 billion with most of the growth the result of acquisitions. The bank hopes to continue to grow by pushing into Tennessee and Virginia, while continuing to increase its presence in its home state of North Carolina.
They are being careful and smart as they go about building the bank, and they could grow into a much larger regional presence over time. It is not out of the realm of possibility that their attractive branch network and deposit base catch the eye of a larger regional bank. Then, they could get acquired at some point in the future. The stock trades below book value and is cheap enough for long-term investors to buy around the current price.
Bank of the Cascades (CACB) CEO Terry Zink recently told the Central Oregon newspaper The Bulletin that his bank intends to double its asset base via acquisition over the next three years. The bank closed a deal last year to buy Idaho- based Home Federal and is looking for more opportunities to expand in the region.
The bank is at $2.6 billion in assets and Zink thinks they are halfway home at that level. He told the paper "We're kind of halfway to where we stated we wanted to be, and we're continuing to look at ways to get there via organic growth or continued acquisition."
The stock is about 1.1x book value ,so we need to see a little pullback to start buying. But their growth plans make a lot of sense and should lead to higher profits and stock price in the years ahead.
Republic Bancorp (RBCAA) has not yet begun its buying binge but they are looking. CEO Steve Trager of the Louisville bank told shareholders last March, "We have deployed, and will continue to deploy, a large amount of resources to finding the right bank with which to partner.
"Our primary focus in the traditional mergers and acquisitions market has been on banks with total assets of $1 billion or less, with acceptable credit quality metrics in markets that are synergistic with our existing markets, and with balance sheets that will supplement our own existing balance sheet. We will continue to search hard until we find the right fit for our Bank and our shareholders."
The stock is cheap enough to buy right now as it trades at just 88% of book value. As a bonus, the shares yield 3.17% , so you get paid to wait for the bank to start buying growth in its region.
There is opportunity on both sides of the consolidation wave. The target banks will be taken over at a premium to current prices, and the smart buyer should see excellent long-term asset and earnings growth over the next decade.