Over the last few days I've been discussing states expected to see increased bank merger and acquisition activity, based on an article in Barron's. Florida, Virginia and Pennsylvania were among the five states identified. One state that did not make Barron's list of those that should see increased takeover activity is California. While it might not be on their list, it's near the top of mine.
California has the largest economy in the U.S. and is incredibly diverse. The Golden State has agriculture, energy, entertainment and, of course, it's the high-tech capital of the world with Silicon Valley. Tourists flock there and leave tens of billions of dollars at popular attractions such as Disneyland, Yosemite and San Francisco. It is also at the forefront of the renewable energy movement, which could become another top growth industry for the state. The legalization of recreational marijuana could also provide another high-growth area.
That's not to say all is perfect in California. The state's legislature makes counterparts in places like Albany and Annapolis look sane. Tax rates are ridiculously high, illegal immigration is a huge issue and an ongoing drought has negative implications for the agricultural industry. California is a big state with big problems. But it has overcome difficulties before and will probably continue to do so in the future in spite of the state and local governments.
I am not sure I could ever move back to such a highly regulated, highly taxed state but I have no problem owning stocks of some of the hundreds of banks located within its borders. I've done very well with California banks and profited from several takeovers there. In addition, I own shares of other small California banks that have recovered from the credit crisis and enjoyed a sustained period of rising profits, which has given their stocks a substantial lift.
Wall Street, apparently, did not like the recent earnings report from Banc of California (BANC) but I think the stock will recover nicely. The Irvine-based bank is still in the process of assimilating the branch network it bought from Popular (BPOP) but should do just fine in the future, in my view. In the last quarter, it had record loan originations and net profits as a result of the branch network acquisition and I see it getting better from here.
CEO Steven Sugarman seems to share my enthusiasm for his bank as he said in last week's earnings release, "We are seeing continued progress realizing the financial returns from the investments we have made in our people, products and infrastructure over the past few years. We continue to remain optimistic about our position as California's Bank and we are committed to realizing increasing returns for shareholders."
The stock is trading just above book value and after the recent price decline is back at what I consider bargain levels. The bank is in solid financial shape, with nonperforming assets comprising just 0.66% of total assets. The shares also yield about 4% so you are being paid a decent dividend while you wait for the stock to start climbing higher. And you'll have good company as a shareholder as Oaktree Capital (OAK), Patriot Financial and PL Capital have large stakes in the bank.
I also like Redding-based Bank of Commerce Holdings (BOCH) at recent prices. The bank has four branches and about $983 million in assets so it is not a huge bank by any means. But it is in good financial shape, with nonperforming assets of just 1.87% of total assets, and the stock is cheap at 90% of book value. Once again, you'll have good company as an owner of the bank as Wellington, Banc Funds LLC, LSV Asset Management and Maltese Capital are all shareholders. What's more, you get paid to wait for good things to happen as the stock yields about 2.07%.
I like both of these banks, especially if there is a substantial pullback in the overall market. However, the real excitement in California is in much smaller banks.
There are banks serving specific ethnic minorities, including the Hispanic, Chinese Vietnamese and other fast-growing populations, trading between 75%-85% of book value with solid financials and growing rapidly. There are aslo banks serving specific industries such as entertainment and vineyards that are cheap and very profitable. And there are dozens of small-town banks with strong local market shares available at 85% or less of tangible book value.
For the more adventurous, there are a bunch of little banks that suffered mightily in the real estate meltdown but are making huge strides toward a full recovery and can be purchased at very low valuations. Although it takes some work to uncover them all, you should be richly rewarded for your efforts.