NEW YORK (
) -- Long-term growth investors need to look beyond the largest bank holding companies and consider profitable, growing community banks.
With saturation media coverage for the largest U.S. bank holding companies, in the midst a year-to-date pop in share prices, community banks are getting lost in the shuffle. There are excellent buys out there right now, for investors who can go in for several years.
Many investors are understandably focused on a quick return in a volatile market.
Bank of America
, for example, has seen its shares rise 44% through Monday's close at $7.99, but last year the shares plunged by 58%.
The 52-week return on Bank of America's shares through Monday's close, was a negative 44%. BAC could be an excellent choice for a long-term investor with a strong stomach for headline risk, but it looks like a rough ride for the next couple of years, as the company continues to work through its mortgage putback demands.
Bank of America's shares were trading for a heavily discounted 0.7 times tangible book value at Monday's close, according to HighlineFI, and but for a rather high (in the current market environment, compared to other large holding companies) 11.5 times the consensus 2012 earnings estimate of 69 cents a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.19.
Are you a day trader? If so, the volatility for the largest banking names is your friend. If not -- if you are truly a long-term investor who can commit for several years -- the "big four" U.S. banks may still be good investments, because of their relatively low price ratios, but you should also consider smaller names with greater growth potential.
Keep in mind that most sell-side analysts' price targets are 12-month targets, which, in the eyes of many analysts and members of the financial media, is considered "long-term." But one year is not a long-term horizon for an investor looking to go along for the ride as a strong bank expands its revenue.
On the following pages we discuss five profitable, growing community banks that analysts see as good long-term plays.
Sterne Agee analyst Matthew Breese has made three of the recommendations, and says "the difference between the megacap banks and these three is we get away from all the headlines, we get away from Greece and dive into traditional community banking, which is growing loans, gathering deposits, and making money off of the spread.
"These are profitable, growing community banks that don't fall under the limelight that all the banks subject to Federal Reserve stress tests are going through right now."
Even though he has no current "Buy" ratings for any of the banks he covers, John Rodis of FIG Partners has listed two long-term choices for growth investors.
Rodis says "the bigger banks get all the press, especially with all the new regulations, and even though the regulations trickle down to the smaller banks, there's less of a direct impact. The smaller banks have more room to grow and take market share. There's not a whole lot of room for Bank of America to grow, for example."
These five names have all had relatively flat returns over the past year.
Here are the
, ordered by descending price-to-tangible-book ration. Data was provided by HighlineFI.
5. Investors Bancorp
of Short Hills, N.J., closed at $14.53 Monday, returning 8% year-to-date, following a 3% return during 2011.
Investors Bancorp is part of a mutual thrift holding company structure, with
Investors Bancorp MHC
holding 58.7% the common shares as of Dec. 30. According to Sterne Agee analyst Matthew Breese, if Investors Bancorp were go through a "second-step conversion" to full stock ownership, the company's fully converted book value would be $16.50.
"The shares trade for about 0.9 times the fully converted book value, and that compares with other recently converted thrifts, trading for around 1.15 times book value."
Breese thinks that Investors Bancorp is "close to converting" to full stock ownership "over the next 12 to 15 months," as the company's capital is "getting to a level where they would need another round of capital to grow loans and do acquisitions."
The company's tangible common equity ratio was 8.71% as of Dec. 30, according to HighlineFI.
Sterne Agee rates Investors Bancorp a "Buy," with a $17 price target. Following the completion of the company's acquisition of Brooklyn Federal in early January, Sterne Agee said on Feb. 17 that "We believe the company will stick to its recent acquisition strategy focused on mutual savings banks, distressed institutions, and deposit/branch deals, and that Investors "remains one of our top Northeast bank ideas."
Investors Bancorp's quarterly returns on average assets (ROA) ranged between 0.76% and 0.79% during 2011.
The shares trade for 1.8 times tangible book value, according to HighlineFI, and for 17 times the consensus 2012 earnings estimate of 85 cents a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 99 cents.
Interested in more on Investors Bancorp? See TheStreet Ratings' report card for this stock.
4. BancFirst Corp.
of Oklahoma City closed at $40.73 Monday, returning 9% year-to-date, following a 6% decline last year.
Based on a quarterly payout of 27 cents, the shares have a dividend yield of 2.65%.
FIG Partners analyst John Rodis rates BankFirst "Market Perform," with a $43 price target, and says that the company's "only market is Oklahoma, which has held up relatively well, with energy exposure." The analyst also says that "banks in Texas and Oklahoma learned their lessons in the 80's during the energy depression."
Rodis ads that BancFirst has "high insider ownership, so you are running with management."
The analyst's neutral rating for BancFirst is based on valuation, and the shares trade for 1.3 times tangible book value and 13.5 times the 2012 EPS estimate of $3.02. The consensus 2013 EPS estimate is $3.13.
Rodis is slightly behind the consensus, estimating that BANF will earn $2.96 in 2012, but matches the 2013 consensus estimate. The analyst sees the company facing some pressure on its net interest margin over the next year, because of excess liquidity. "At December 31 ~ 30% of the Company's assets were in cash or interest bearing deposits with banks earning just 25 bps," he said in a recent report.
BancFirst's quarterly ROA ranged between 0.77% and 0.92% during 2011.
Despite his current neutral rating for the shares, Rodis calls BancFirst "one of the better performing regional banks in our coverage."
Interested in more on BancFirst Corp.? See TheStreet Ratings' report card for this stock.
3. First Midwest Bancorp
First Midwest Bancorp
of Itasca, Ill., closed at $11.50 Monday, returning 14% year-to-date, following a 12% decline during 2011.
Rodis has previously called First Midwest "one of the premier Chicago-based franchises growing both organically and through strategic acquisitions," and has called the company an attractive target for potential acquirers.
The analyst in late January lowered his rating on First Midwest to "Market Perform," with a price target of $11, from "Outperform," since the shares had returned 20% since he initiated his coverage on the company in mid-November.
During the fourth quarter, First Midwest saw an increase in nonperforming loans, which made up 3.86% of total loans as of Dec. 30, compared to 3.47% the previous quarter and 4.24% a year earlier. Rodis said "the Company is moving in the right direction as it relates to credit" but that its fourth-quarter results "remind us that the improvement will not be linear and one or two bigger credits can sometimes have a material impact on the results."
First Midwest's quarterly ROA ranged between 0.34% and 0.53% during 2011.
The shares trade for 1.3 times tangible book value and 16 times the 2012 EPS estimate of 72 cents. The consensus 2013 EPS estimate is 96 cents.
Looking ahead, Rodis said that First Midwest's regulatory capital ratios "remain solid," and that he sees the company growing its tangible common equity "in excess of 9% by YE12," and that "if no deal activity materializes we believe the Company will be in a position to increase its common dividend."
First Midwest is currently paying a quarterly dividend of a penny a share, and Rodis's "FY13 estimate assumes an annual dividend of $0.20/share with a target payout ratio of 20-25%" of earnings."
Interested in more on First Midwest Bancorp? See TheStreet Ratings' report card for this stock.
2. The Bancorp
of Wilmington, Del., closed at $8.77 Monday, returning 21% year-to-date, following a 29% decline last year.
According to Breese, The Bancorp is a solid play on prepaid cards, as the company "issues cards for Green Dot, NetSpend and Western Union." Unlike large banks which saw their card interchange fee revenue decline from an average of 42 cents per transaction to 21 cents, under the Durbin Rule, as required by the Dodd-Frank banking reform legislation, The Bancorp is not affected, since it has less than $10 billion in total assets.
"As all these program managers comply with Dodd-Frank, they will look to gain as much fee business as they can, looking for smaller banks to issue their cards," says Breese, who adds that "there are 60 million unbanked or under-banked consumers in the U.S, and that number's growing."
The traditional "free checking" business model, with banks deriving the bulk of their fee revenue from overdraft fees charged to a minority of customers is "gone," according to Breese, who also says the large banks "don't want these customers any more, since they are not profitable."
So The Bancorp is in a prime position to keep growing this fee business, which "is not fully understood by investors," according to Breese.
The Bancorp's quarterly ROA ranged between 0.10% and 0.41% during 2011.
The company has "spent the last couple years building the platform to support a deposit base growing at 20% a year," according to Breese, who thinks "they are at an inflection point to ramp up earnings now that the infrastructure is in place," and grow its prepaid card revenue from 30% of earnings, to 50% of earnings.
Sterne Agee rates The Bancorp a "Buy," with a $10 price target, and sees "full year 2012 and 2013 ROAs of 0.76% and 1.19% as 20%+ revenue growth continues to outpace 10% -12% operating expense growth."
The shares trade for 1.1 times tangible book value and 14 times the 2012 EPS estimate of 62 cents. The consensus 2013 EPS estimate is 98 cents.
Interested in more on The Bancorp? See TheStreet Ratings' report card for this stock.
1. Fox Chase Bancorp
Fox Chase Bancorp
of Hatboro, Pa., closed at $12.68 Monday, returning 1% year-to-date, following a 7% return during 2011.
Based on a quarterly payout of
The shares trade for 0.9 times tangible book value and 30 times the 2012 EPS estimate of 42 cents. The consensus 2013 EPS estimate is 50 cents.
Sterne Agee rates Fox Chase a "Buy," with a $15 price target, which Matthew Breese says " is a slight premium to book," adding that "we think 105% tangible book value is a reasonable price goal."
Breese describes Fox Chase as "grossly overcapitalized," and says that "when you have this much capital
tangible common equity ratio of 18.5%, earnings get skewed because they have so much unlevered capital," so the shares trade for a very high multiple to earnings. The analyst thinks investors should focus on the discount to book value.
Fox Chase's quarterly ROA ranged between 0.41% and 0.47% during 2011. Sterne Agee sees "profitability as measured by ROA improving to 0.55% - 0.60% over the next two years."
Sterne Agee expects Fox Chase to deploy some of its excess capital though "the repurchase of 14% and 10% of total shares in 2012 and 2013."
Interested in more on Fox Chase Bancorp? See TheStreet Ratings' report card for this stock.
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Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.