Smaller Banks Can Lead You To Bigger Buys

Benzinga

This past weekend, all the 13Fs were finally filed to the SEC, giving individual investors a chance to see what the largest money managers have been doing with the funds under their control. It is a particular bonus for those investors looking to cash in on the trade of the decade in smaller banks.

Figuring out which of the several hundred little banks to buy can be a challenging endeavor for individuals. Knowing which ones the bank sector-focused hedge funds and money managers are accumulating can make the stock selection process a little easier.

The firm

Castine Capital is a fund that focuses on the small bank sector and has been known to work with management to enact changes that help unlock shareholder value. Unlike some of the small bank funds, they do not usually take a hostile approach and prefer to work alongside bank executives in this endeavor. The firm made some interesting buys in the quarter that might be of interest to long-term bank stock investors.

The players

Evans Bancorp (NYSE: EVBN) has 13 full-service banking offices in Erie County and Chautauqua County, New York, with $824 million in assets. The bank has below average nonperforming assets with just 1.45 percent of total assets being labeled such. The equity-to-asset ratio is 9.43, so the bank is not overly leveraged at this point.

The bank is focused on commercial lending, with almost 70 percent of its loan portfolio invested in commercial real estate, commercial and industrial or multifamily loans. It is one of the few smaller banks that is seeing strong loan and deposit growth right now, according to its recent earnings report. The shares trade at 1.2 times book value and 12 times earnings right now.

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Peoples Federal Bancorp (NASDAQ: PEOP) has seven branches in the Boston Metropolitan area with about $1 billion in assets. The equity-to-assets ratio is over 15 and nonperforming assets are just .47 percent of total assets.

Almost 65 percent of the bank's portfolio is in the 1-4 family homes segment of the market, with little exposure to the commercial lending side of the lending business. The stock currently trades at a small discount to book value, and management has been buying back stock at these levels. The company just announced an additional 5 percent buyback of the its own shares.

Home Bancorp (NASDAQ: HBCP) of Lafayette, Louisiana, just completed the acquisition of Britton & Koontz Bank and now has more than 20 branches with approximately $1.2 billion in total assets. The merger gives the bank a foothold in the Mississippi's markets as it continues its attempt to grow the bank to compete with the larger institutions in the region. Home Bancorp has equity-to-assets ratio of more than 14 and nonperforming assets are just 2.13 percent, so the bank is in solid financial condition. The shares trade at 90 percent of book value at the current price.

Bank Mutual (NASDAQ: BKMU) has 75 branches in Wisconsin and one in Minnesota, with $2.3 billion in assets. The bank has seen solid earnings growth this year, as economic and credit conditions in its markets have continued to improve. The equity-to-assets ratio stands at 11.6 and nonperforming assets are just .84 percent of total assets, so the bank is financially solid. At the current price, the shares trade right at book value and could be very attractive to a buyer looking to move into the upper Midwest marketplace.

What it boils down to

Smaller banks are one of the most attractive long-term investment opportunities right now. The economic, regulatory and social trends are going to force many of these banks to merge with larger institutions. There is currently very little opportunity for organic growth in the banking sector, so many of the larger banks will be enthusiastic buyers for the next several years.

The smaller banks that survive and thrive will be those that have a strong presence in their local market, with above average profitability that should lead to a much higher stock price over time. Following those investors that have achieved a track record of success in this sector can help investors find those stocks that will help them best take advantage of this Trade of the Decade opportunity.

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