The macro news just gets more difficult to interpret from an investing point of view. The Russian hike in interest rates has done little to stop the fall of the ruble, the China manufacturers report was not as good as expected, and oil just keeps falling. Greek stocks are collapsing again, and the prices of my Greek banks, Alpha Bank (ALBKY) and Eurobank (EGFEY), have fallen sharply. I would like to say that I don't have to worry about this stuff but I do. I own some Eurozone stocks, and of course I was way too early on energy-related stocks and have some impressive beatings in those names so far.
Given my positions in some of the worst sectors in the world, you would think I was depressed. I would be, if not for the community bank stocks, which have more than bailed out my mistakes so far. In just the last two days, we have seen buyouts of two stocks in my portfolio at impressive gains. I have owned them both for a couple of years, and the overall returns have been fantastic. Heritage Financial Group (HFG) was one of my favorite stock picks back in 2012 and it is being taken over by Renasant (RNST at about 2.5x my purchase price. LNB Bancorp (LNBB) is a small Ohio bank I bought back in late 2011 that is being bought at 1.5x book value by Northwest Bancshares (NWBI) at about three times my buy price.
The slide in oil prices and turmoil in Greece is hurting, but because I use small position sizes and small banks are hugely over represented in my portfolio, it is not hurting as much as it might have. I am not going to sell these now even more undervalued securities. At some point, I will probably buy more if this turns into a 1998 type event, with a credit crunch and collapsing prices.
As I look forward to 2015, I have no idea what will happen to stock prices, crude oil, or what will happen in Russia. I can say with certainty that I will continue to increase my exposure to small banks that have adequate capital, solid loan portfolios, and that trade for less than book value. Those that have recent insider buying are even more attractive candidates for putting in the portfolio. I was asked how many of these little banks we should own. My answer was simply as many as we can find and afford.
Cape Bancorp (CBNJ) is a great example of a "trade of the decade" stock. After announcing the merger with Colonial Financial (COBK) earlier this year, its share price has fallen back to the level where it makes sense to start buying the stock again. It probably has not helped that the bank is in the Atlantic City market, which has been very weak as a result of casino closings. The bank has been expanding towards the Philadelphia market with loan production offices. The Colonial acquisition should help them make deeper inroads into the South Jersey market as well.
The bank has exited the residential mortgage markets and is focusing on the commercial side of the business. The existing residential real estate portfolio, as well as the one acquired at Colonial, are going to be allowed to run off the books. Cape Bancorp also has a solid business making mortgage loans for boats and business loans to the large commercial fishing industry in the region. It has a solid presence in the hotel and bed-and-breakfast market, as well as seasonal businesses like amusement parks and other amusement-related businesses along the barrier islands of New Jersey and have been picking up commercial and industrial loans as a result of the expansion into the Philadelphia suburbs. This is giving them a solid start to become more of a business banking institution.
The bank has done a fantastic job of cleaning up its loan book after the credit crisis. Nonperforming assets have bene reduced by about two thirds in the past three years, and are now just 1.2% of total assets. The bank is pretty conservative in its approach to dealing with potential problems, as loan loss reserves currently exceed nonperforming loans by 27%. The bank has plenty of capital, with equity-to-asset ratio above 12. At 80% of book value, the stock is cheap again.
I am not the only one who thinks Cape Bancorp is too cheap. CEO Michael Devlin and two other directors have been buyers of the stock recently. This bank should do very well, no matter what happens in Russia and Europe, and it is a great fit for a sleep-well "trade of the decade" portfolio.