I heard from a bunch of people after Monday's column in which I suggested that community bank stocks might offer the same type of opportunity today that Warren Buffett found in net-current-asset-type bargains back in the 1950s.
Most of the calls and emails took one of two tacks. The first questions wanted to know how I compare anything that I, as a mere mortal, might do with what Warren has done? While I am no Warren Buffett, I emphasize that of the numerous bank takeovers I have participated in over the past couple of years, the average gain has been more than 40% of what I paid.
As the sector continues to improve and the pace of mergers accelerates, there will enormous of amount of money to be made. I am nowhere near as smart as Warren or Charlie Munger, but I am smart enough to see that this is a terrific opportunity for investors to take advantage of our time and size advantages.
The small community banks are overlooked, cheap and many of them have strong balance sheets and loan portfolios. I believe they are very much comparable to net-net stocks and cigar-butt stocks with the possible difference of having more than a just a puff or two left.
The second most popular question, of course, is which ones do you like right now? While my current buy list is about 40 stocks, most are too small to talk about on Real Money. My most recent to purchase has a market cap of a whopping $12 million. There a few, however, that make the grade and are just large enough to mention.
One of my favorite "Trade of the Decade" stocks right now is Cape Bancorp of New Jersey (CBNJ). The bank has a strong presence in the Atlantic City area and nobody likes Atlantic City right now. The casinos are struggling, and that has depressed the local economy.
Cape is on the verge of closing a deal to buy Colonial Bancorp (COBK) in a deal that allows them to expand their current operations in Atlantic and Cape May Counties to neighboring Cumberland and Gloucester Counties in New Jersey. They have also opened loan offices in the Philadelphia suburban area and just added a lending team in downtown Philly.
The bank has exited the mortgage production business and is allowing their current residential mortgage business to run off. They are focusing on commercial real estate and Cape already has a solid commercial loan portfolio. In their home region they have very productive relationships on the barrier islands of New Jersey with loans to entertainment and seasonal businesses along the shore as well as hotels and Bed and breakfast properties.
They also have strong relationships in the commercial fishing fleet in South Jersey and do mortgage loans for fishing boats and business loans to the fourth largest fleet in the U.S.
Cape just hired a 35-year veteran of the commercial lending business to drive the expansion of their commercial activities. Arthur Birenbaum was executive vice president of commercial lending at The Bancorp (TBBK) and oversaw a period of strong growth in the commercial loan portfolio. He will help them as they expand further into the Philly area he has contacts with the region's top entrepreneurs, business leaders and real estate developers.
I went over the proxy for the upcoming deal with Colonial and I like what I see. It's a good combination and allows Cape Bancorp the potential to continue building their commercial lending business in a new market area.
They will continue to focus on that part of the business and will let the acquired residential portfolio run off the books over time. The pro-forma book value following the closing of the deal is $11.53, so Cape shares right now are trading at 77% of book value.
Michael Devlin, the CEO of Cape Bancorp, has a definite direction he wants to lead the bank and he is taking steps along his chosen path rather aggressively right now. In the last few years, he has cleaned up the loan portfolio and nonperforming assets have fallen from more than 4% to just 1.25% now. Post-merger, the equity- to-assets ratio will be 10.25, so the bank continues to well-capitalized.
Cape Bancorp is a great example of a "Trade of the Decade" stock. It is cheap, the balance sheet is strong and the loan portfolio is solid. Management is growing the bank organically and by acquisition. Should they stay independent, the stock price should move higher over time. It is quite likely, however, that as they continue to grow, they will attract the attention of a larger bank that makes an attractive takeover offer.
I am not as smart as Warren Buffett or Charlie Munger and never will be. However to earn high rates of return over the next decade I just have to be smart enough to recognize the low hanging fruit that is the "Trade of the Decade" in small bank stocks.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline on this article.