Three Banks FSI Group Invested in Last Quarter

 | Nov 08, 2016 | 2:00 PM EST
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My plan coming into today is to check the markets to make sure there is no "buyable" collapse and then find something else to do. If yesterday was a set up for today then a lot of really stupid stuff will be said by the pundits and promoters who worm their way onto the financial networks. I am sure we will see every possible version of an exit poll before the day is over as well. Yesterday was a surge of deafening noises and I expect today will be worse. The dog is going to get a lot of exercise today as long walks will the order of the day. As a longtime political junkie I have laid in a stock of wine and popcorn to watch the results of this fascinating election very closely, but until the polls close it is all just noise best ignored by serious investors.

It is going to be a good day to review a couple more 13F filings that were sent to the SEC well before the deadline. They are not due for another week, but several firms prefer to just file them and be done with the process rather than wait until the last minute. Fortunately for me many of these early filers are bank stock specialists and activists that help me find ideas to fill out my Trade of the Decade portfolio of small bank stocks.

Cincinnati-based FSI Group has been investing in financial stocks using a long/short approach since 1995. The fund is managed by John and Steven Stein and while they don't talk to the media much they do have to communicate with the world via their 13F filing each quarter. Both have been involved in the banking industry since the 1980s and have compiled a solid track record as bank stock investors. 

The fund made some interesting purchases in the quarter. Their largest purchase was a share of The Bancorp (TBBK) , the somewhat troubled Wilmington, Del.-based bank. The Bancorp has had issues with the regulators, and in December settled with the FDIC over allegations of unfair and deceptive practices. In June they appointed a new CEO, Damian Kozlowski, and he began the process of turning things around at the bank. The sold their health savings account business, raised capital and is now focusing on expense control.

There is a lot of work to do in this area. The Bancorp has an efficiency ratio of 96 right now. which is one of the highest I have seen recently. Kozlowski recently said, "We believe we can substantially lower our operating run rate by 20% to 25% without significantly affecting revenue and, ultimately, have a healthy operating leverage with double-digit business revenue and single-digit expense growth." If he is right and they can achieve that goal the stock is worth at least twice the current stock price. The risk here, of course, is that they struggle to cut costs and continue to experience difficulty getting cash to the bottom line.

FSI Group was also a buyer of Banner  (BANR) , a Walla Walla, Wash., based bank with 197 branches in Washington, Oregon, and Idaho and total assets of about $9.8 billion. The price-to-tangible-book-value is a little rich for me at 1.45, but the bank is in solid financial shape right now with non-performing assets just 0.35% of total assets and an equity-to-assets ratio of over 13. Management has made some smart acquisitions to grow the bank in the last few years, and it will be interesting to see what they do when, sometime next year, they creep over the $10 billion mark that brings increased regulatory scrutiny and costs. I will not be surprised to see them make another deal to gain further scale to lessen the regulatory cost impact.

Nashville has been one of the hottest banking and real estate markets in the country and FSI Group initiated a position in shares FB Financial (FBK) in that city. The bank had its IPO in the quarter and raised $129 million as it became a public company. This is a very clean bank with an equity-to-assets ratio over 10 and nonperforming assets that are just 0.65% of total assets. While the stock is a little rich for me at 1.39x book the shares trade at less than seven times earnings right now. The bank is earnings above average returns on equity and assets and should continue to see strong operating results.

Tomorrow we will wake up to another furor of news and analysis about the election results and once again I will do my best not to let them distract me when it comes to the search for bargain bank stocks.

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