Originally published as a series on Rel Money
CNBC’s annual “Top States for Business” list came out this week, and it occurred to me that if a state is a great place for business, then it’s probably also a fantastic place for banks. So, let’s use my next two columns to look at promising bank stocks in the five highest-ranked states — Utah, Texas, Colorado, Minnesota and North Carolina.
I’ll look today at some good publicly traded banks in Utah, Texas and Colorado, and use a future column to run down promising financial firms in Minnesota and North Carolina.
Utah only has two publicly traded banks, and I like Peoples Utah Bancorp (PUB) , which is based in the booming community of American Fork.
PUB has 19 branches around the state and about $1.5 billion in assets. It’s a well-run little bank, with a better-than-average efficiency ratio of 0.56 and an above-average return on assets of 1.44%. The firm’s loan portfolio also skews heavily towards industrial and commercial-real-estate loans, which is a big plus for a bank that’s located the country’s most business-friendly state.
Unfortunately, PUB isn’t cheap at a 1.48x current book value. But if you value earnings, the stock’s P/E ratio is just 15. That’s eminently reasonable for a well-run, high-growth community bank.
Now, I’m not personally capable of chasing a stock higher. But PUB could make a strong addition to my long-term portfolio the next time the bank’s stock price pulls back.
Picking a good Texas bank to invest in is easy, as I’m a big fan of Green Bancorp (GNBC) , which I’ve already been buying over the past month.
GNBC operates in the major Texas metro areas of Houston, Dallas and Austin, but has recently exited energy lending and is disposing of all energy-related loans. In their place, the bank’s portfolio heavily favors commercial real estate and commercial and industrial loans. This should be a huge positive for the firm.
CEO Manny Mehos founded, expanded and sold a different bank in the past, creating outsized gains for his shareholders — and I expect this scenario will eventually play out again at Green Bancorp. Private-equity investors own a little more than 13% of GNBC’s shares, and they probably have their eye on a future sale of the bank as well.
There’s only a very small handful of publicly traded banks in the Centennial State, and National Bank Holdings (NBHC) is my pick.
The bank has 99 branches and some $4.6 billion in assets, with 1.73% of that considered nonperforming. NBHC has also done a smart job of growing by acquisition, and has also been aggressive with stock buybacks. Since 2013, the firm has repurchased 45% of its shares outstanding at a $19.87 weighted average price (the stock currently trades at around $21).
Commercial-real-estate and and commercial/industrial loans make up about 50% of the firm’s loan portfolio, while single-family mortgages account for another 22%. That’s good news in a state that CNBC’s study found had America’s No. 1 workforce.
Another potential plus for Colorado banks is the state’s legalization of marijuana sales, which currently contradicts federal law. Colorado’s legal pot shops generally can’t use the traditional banking system right now, but I believe that will change if and when the U.S. government inevitably takes marijuana off the federal illegal-drug list.
Colorado retailers legally sold almost $1 billion of marijuana last year, and that doesn’t even include smoking supplies and accessories. The second that the federal government legalizes their business, banks will want to serve the industry — and I expect a bit of a “gold rush” to get into the state’s banking market.
National Bank Holdings would make a perfect target for a larger regional bank that’s looking to move into the state. The bank currently trades at a modest 1.15x book value, but any transaction would undoubtedly occur at a much higher multiple.
On the downside, NBHC does have about $132 million of energy exposure on its books. It also earns just a 0.14% return on assets — much lower than its peer-group average of 1.03%.
It just makes sense that if a state is a good place to be in business, it’s a good place to own a bank. Choices were limited in Utah and Colorado as there simply are not that many publicly traded banks, but we came up with one in each state that should be an outstanding long-term holding. There were a lot more choices in Texas, but most of them are trading at premiums and many have a high level of exposure to the oil and gas industry. I picked my most recent bank purchase, Green Bancorp (GNBC) , as it has eliminated its energy exposure and the stock trades below book value. Today I want to look for banks in the two remaining top five states for business.
I never really thought of Minnesota as a big pro-business state, but not only is it fourth this year in the CNBC report, but it ranks seventh over the last decade. The state scores high for infrastructure, education, technology and quality of life, and the combination has kept it in the top tier of the ranking. There are not a lot of publicly traded banks in Minnesota, but there are two banks worth considering for your long-term portfolio.
TCF Financial (TCB) is a bank with $21 billion in assets and a strong, diversified loan portfolio. In addition to traditional consumer and commercial portfolios, TCB has divisions that do auto lending, inventory financing and equipment leasing. These are higher-yielding businesses and TCB does a fantastic job of underwriting the loans as its nonperforming assets are just .14% of total assets. The bank has 399 branches across the Midwest and conducts its financing operation all over the United States. The bank trades at about 120% of tangible book value but is cheap when valued on earnings, with a price/earnings ratio of just 11. The stock pays a 2.34% yield, so you do collect some income while waiting for the favorable business climate to help lift the shares over time.
North Carolina does come to mind when I think of business-friendly states. The state has strong financial, agricultural and manufacturing sectors and the presence of major universities in the research triangle of Raleigh, Durham and Chapel Hill has spurred growth in biotechnology and high-tech industries. Here we have a lot more choices to consider.
I am a big fan of Asheville, North Carolina-based HomeTrust Bancshares (HTBI) . The bank has been in growth mode since completing its conversion from a mutual thrift to a shareholder-owned bank. Since then, HomeTrust has added five markets and grown assets from $1.6 billion to more than $2.7 billion. It also has been active buying back stock and has repurchased about 25% of its shares outstanding since it was allowed to begin buybacks in 2013.
HomeTrust management is focused on growing the bank in its home market of North Carolina as well as in eastern Tennessee, South Carolina and Virginia. The stock is trading at book value and is in solid financial condition, with an equity-to-assets ratio of 11.77 and nonperforming assets that are just 1.08% of total assets. HomeTrust either is going to continue to grow and drive earnings and its stock price higher or someone is going to decide it is too attractive of a franchise and make an offer for it. Either would be a huge win for investors.
Also based in Asheville is ASB Bancorp (ASBB) . This bank has been under fire from activists, and one noted bank activist, Lawrence Seidman, currently has a representative on the board. The stock is trading at tangible book value and I would not be shocked to see the bank sold at a decent premium to a larger competitor. ASB has about $786 million in assets and is in good financial shape, with an equity-to-assets ratio of more than 11 and nonperforming assets that are just 1% of total assets. The loan portfolio is a nice mix of residential real estate and commercial real estate loans with limited exposure to commercial and industrial loans or construction loans.
After last week’s madness, it was nice to have a quiet weekend before the great rebuild begins this week. A Dumpster is being dropped off this morning and I am looking forward to lots of noise and clutter.
It was not a quiet weekend in the news with failed coups, police shootings and vice-presidential madness dominating the airwaves. For a political junkie like me, the GOP convention is going to be high theater and I expect lots of low comedy as well before the week is over. With all the madness swirling around this week, I am just going to keep my head down as the week starts and look for more banks to buy in the nation’s most business-friendly states.
Washington comes in as the sixth most business friendly state, thanks in large part to high scores for technology and innovation as well as a strong economy and easy access to capital. It has been a long time since I was out in Washington, but I do have some great friends out there and have become a fan of the Gonzaga basketball team as a result. I also own a few banks based in the state that should continue to benefit from the business-friendly atmosphere.
First Northwest Bancorp (FNWB) operates 10 branches with just shy of $1 billion in assets in northern Washington. First Federal underwent its conversion from a mutual thrift to a stockholder-owned institution in January 2015 and has been a favorite holding since the offering was completed. It still has most of the cash and the equity to assets ratio is over 13. Nonperforming assets are just 0.4% of total assets, so the loan portfolio is in solid condition. The bank services the north Olympic Peninsula region of Washington and is the only community bank headquartered in the region. The loan portfolio is heavily tilted toward residential loans but it does have a decent amount of commercial real estate and multifamily loans on the books as well.
First Northwest has a shareholder list that looks a lot like a bank investors hall of fame. PL Capital, Joseph Stilwell, EJF Capital, Michael Price, Seizert Capital and Wellington all have a position in the bank’s shares. That could eventually lead to some pressure to deploy capital to benefit shareholders by buying back additional stock or initiating a dividend payout. Either would be fantastic for us as long-term shareholders of the bank. The stock is trading at just 90% of tangible book value, so it’s a great buy for patient investors at the current price.
I also own Anchor Bancorp (ANCB) in southern Washington state. This bank has 20 branches and a little over $400 million in assets. It is also in great financial shape with an equity to assets ratio of almost 14 and nonperforming assets that are just 0.73% of total assets. The loan portfolio is tilted toward commercial real estate and multifamily housing and about 20% of it is in single-family housing to residents of the business-friendly region. The stock trades at 96% of book value, so it is cheap at the current price.
At least one investor thinks the stock is too cheap. Activist Stilwell owns 9.8% of the bank and thinks it should be sold to maximize shareholder value. In a 13d filed last week, he revealed his latest letter to the board. He wrote: “This letter serves to formalize our June 15 meeting and to re-emphasize our belief that Anchor should be sold. When we met with you two years ago, your plans to work diligently and improve bank operations sounded reasonable to us. We believed you when you promised you were making sincere efforts to position Anchor to maximize shareholder value. We understand that you have done your very best. However, continued poor performance highlights the reality that Anchor should now be sold. At our June meeting, your statements on further improvement to Anchor’s return on equity by the end of 2018 sounded unrealistic to us. In our view, it is not in shareholders’ best interests for management and the board to work 2½ more years toward a marginally better, but still inadequate, ROE. Now is the time for Anchor to find a suitable merger partner.”
Stilwell has had a great deal of success over the years in pushing back into a sale, so I will not be surprised to see Anchor Bancorp announce a merger in the months ahead. A deal could be worth something on the order of $33-$35 a share based on recent deal multiples.
let’s look at interesting banks in Georgia, which came in eighth place on CNBC’s list.
The Peach State has a vibrant economy and has recovered nicely from the credit crunch’s messy aftermath. Financial services have boomed in Atlanta, and the state has a strong defense-and-aerospace industry as well.
Agriculture likewise remains strong, with thriving production of soybeans, peanuts, cotton, blueberries and broiler chickens. All told, the state got great scores from CNBC for infrastructure and workforce quality, but the network found that Georgia could do a little better on education and quality of life.
As for banks, Georgia hosts some of the better growth names, like Ameris Bancorp (ABCB) , United Community Bancorp (UCBA) and a bunch of little banks that look vulnerable to takeover offers. But to me, there’s really only one Georgia bank to consider: Charter Financial (CHFN) .
Charter has been a favorite pick of mine for some time now, and I’m excited about the bank’s future and its current stock price.
Charter is what I call a “bubble bank.” Its recent purchase of CBS Financial means that CHFN now has $1.4 billion in total assets, passing the magic $1 billion mark. The firm now also has a total of 19 branches in west-central Georgia, east-central Alabama and the Florida Gulf Coast.
Charter is committed to using both M&A and opportunistic organic growth to expand into the strong Metropolitan Atlanta region. For example, the bank plans to open a new location in Atlanta’s upscale Buckhead area later this summer.
CHFN has also done a great job of transforming its loan book from that of a thrift to a commercial bank since the firm completed its conversion from a mutual thrift to a stockholder-owned institution.
For example, the firm has done well increasing commercial exposure. Commercial-real-estate loans currently make up about 40% of CHFN’s total portfolio, with residential real estate accounting for about 29%.
Charter has also been on a buyback binge since 2014, purchasing a little more than 35% of its shares outstanding. However, that’s going to slow because CHFN shares are currently trading at about 1.05x tangible book value.
CEO Robert Johnson recently told shareholders: “We are pleased with the results of our stock repurchases over the past 10 quarters, but with our stock consistently trading above book value, we intend to focus our efforts on enhancing shareholder value through leveraging our expense structure, improving our noninterest income and realizing the anticipated growth in earnings as a result of our recent and pending Atlanta expansion.”
If management can execute its growth plans, Charter should maintain a double-digit rate of book-value growth that will drive the stock price higher. Shares could also trade at a higher multiple if the bank can maintain or grow its current 1x return on assets.
However, we can’t rule out Charter catching the eye of a larger bank that wants to expand into the bank’s growing, business-friendly region. I think any takeover would have to price the bank at 1.4x book value to succeed. That’s around $19 a share vs. CHFN’s current price of around $13.
Either outcome — a buyout or continued organic growth — should be good news for shareholders. I think you can buy the stock at current levels and add to your stake if the market is kind enough to give us a sell-off.
Owning banks in business-friendly states is just common sense. Locations where businesses can thrive have low unemployment rates and lots of people buying homes and cars. There will be stable deposit bases and good loan demand. Commercial and residential real estate markets will be strong. When we can find reasonably priced banks in these areas, long-term ownership should be very rewarding.
Note that I am planning to close Banking in Profts ot new member soon. You do have to act now to join. Because we deal with a lot of smaller stocks we have decided to limit the number of members to make it easier for all of our member to buy these little banks and share in the outsized profits. We are going to accept 38 new members and then close this product to addional members.
Those that join now will get 50% off the usual price as I want to get this done and closed so I can focus on picking stocks and not marketing. That’s 50% off for the life of your subscription not just the first year. You also get the monthly Community Bank Stock Investor every month free with your Banking on Profits membership.
The money will be made in community bank stocks as M&A picks up. The only question for you is are you going to join us on this profit rich adventure in community bank stocks? Click here to join Banking on Profits at 50% off for life and a free subscription to The Community Bank Stock Investor. Use coupon code 50OffBoP.
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