• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Financial Services

Small Banks, Big Buying Opportunity

Preaching the community-bank gospel, once again, after reviewing this Fed survey.
By TIM MELVIN Oct 09, 2015 | 11:27 AM EDT
Stocks quotes in this article: SHBI, CHFN, ESSA, NBN, RBCAA, BNCL, FNWB, KRNY

If you are bullish on the economy, you should avoid the Saint Louis Fed community bank survey at all costs. Bankers are the feet-on-the-ground of the U.S. economy, and their comments are a great way to measure economic activity. To say that most of them outside major urban areas are less-than-excited about global growth prospects is something of an understatement. I have been somewhat benign on the grand overview of the economy, and have maintained a better -- but not good -- view of the world for some time now, but this report made me feel like a Philadelphia Eagles fan questioning my baseless optimism, and searching for cheap tequila.

Major cities are seeing some decent activity and loan demand, according to the state-by-state Town Hall surveys the Fed did as part of its report. But the rural and suburban areas were seeing very little business improvement. In Alabama, bankers reported that new business development is limited-to-none. Arizona bankers told the Fed that the state's rural communities have seen only limited growth in new businesses. In the Northeast, Connecticut bankers reported that an uncertain business environment is creating a fear of job losses among major businesses, and the housing market is seen as unprofitable. I could go on, but it really doesn't get any better as you work further into the alphabet.

As I discussed yesterday, the bankers in the survey almost universally cited the costs of complying with all the new regulations as their biggest concern. They are also concerned about the rising costs of cyber security. This is a huge issue for banks, and these costs will just go up, as criminals -- and even hostile governments -- continue to hack away at bank databases in search of sensitive information. Bankers also expressed growing concern about competition from nonbank lenders that do not have the same regulatory costs and pressures as insured institutions.

While all this sounds pretty bleak, it is actually creating the best investment opportunity many of us will see in our lifetime. Banks are faced with weak economic conditions that make organic growth very difficult, and the smaller banks are finding it challenging to keep up with the rising costs of doing business. This is creating merger and acquisition activity -- as we have one group that needs to buy and another that needs to sell. According to a recent J.P. Morgan report, there have been 205 deals involving about $93 billion of bank deals done so far in 2015. There is every indication that this is picking up steam, as last week we had five deals announced on Monday, alone, and there have been several more since then.

According to the same report, the average multiple for a takeover deal is currently 1.37x book value. Although the bulk of the action is in the smallest banks, with the average deal size around $30 million, there are plenty of banks that are large enough to easily buy and tuck away for a trade-of-the-decade portfolio. Banks like Shore Bancshares (SHBI), Charter Financial (CHFN), ESSA Bancorp (ESSA) Northeast Bancorp (NBN) and Republic Bancorp (RBCAA) all have market caps over $100 million and trade for book value, or less. So do 2015 thrift conversions Beneficial Bancorp (BNCL), First Northwest (FNWB) and Kearney Financial (KRNY). All of these should be very rewarding additions to a long-term community-bank stock portfolio.

The best community bank hunting is going to be in the much smaller banks. It takes more work to dig out these little banks, and you surely will not be trading them. They are illiquid in nature, and will not fit well with anyone who is a fan of the current average holding period of 17 weeks for common stock positions. It can take weeks to buy a position, and you will never be able to sell the shares for a margin call or unexpected expense, so don't put short-term money in these banks. What they are is incredibly rewarding. In the past two weeks I have had two of these little banks receive takeover offers both resulting in gains of more than 70%.

I shout the small-bank gospel often, and I feel a lot like a an Old Testament prophet wandering the desert to point the way to milk, honey and profits to a populace more entranced by golden statues, high technology and ascending wedges. You don't have to just take my word for the opportunity in small banks. The Saint Louis Fed has spelled it out, chapter and verse, in its latest report on the community bank sector. Overlook this opportunity at your own peril.  

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin was long SHBI, CHFN, RBCAA, ESSA, FNWB, KRNY, BNCL and NBN, although positions may change at any time.

TAGS: Investing | U.S. Equity | Financial Services

More from Financial Services

The Best House in This Neighborhood Is on Sale

Brad Ginesin
Jun 24, 2022 12:15 PM EDT

The buying opportunity here below book value is compelling.

Affirm: Will Investors Buying Now, Pay for It Later?

Bruce Kamich
Jun 22, 2022 3:12 PM EDT

Let's see what the charts and indicators suggest.

American International Is Breaking a Longer-Term Uptrend Line

Bruce Kamich
Jun 13, 2022 1:51 PM EDT

Is there more risk than reward?

Investors Are Losing Interest in Mortgage Lenders as Interest Rates Rise

Ed Ponsi
Jun 9, 2022 8:30 AM EDT

The charts of a number of the nation's largest mortgage lenders indicate more pain to come for holders of those stocks.

Looking to Lehman for Lessons About Today

Ed Ponsi
Jun 2, 2022 10:00 AM EDT

Let's review what happened to this financial giant in 2008 and what it could tell investors about the current market.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:41 PM EDT PAUL PRICE

    First Half Results - Putrid Second Half Results - Likely to Be Much Better

    It's great that we're done with June. 2022 marked...
  • 04:51 PM EDT PAUL PRICE

    We Should Be in for Better Starting Soon

    Window dressing Thursday, the last day of the...
  • 11:56 AM EDT STEPHEN GUILFOYLE

    Stocks Under $10

    Check out what's going on in the Stocks Under $10 ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login