In Jim Cramer's latest book,
Mad Money: Watch TV, Get Rich , he describes his technique for valuing banks: "I know that banks tend to get acquired when they sell at less than two-and-a-half times their book value. ... That's the best way to evaluate banks." And even in his book Confessions of a Street Addict , published in 2003, Jim mentions that he always owned a collection of regional banks because they paid steady dividends and were stable performers for his hedge fund. So I did a screen for banks with market caps under $2 billion that are trading for less than 1.5 times book value. I also looked for things such as decreases in nonperforming loans (meaning there isn't much default risk) and increases in deposits and branches (meaning they are probably increasing their future book value). Here is the resulting portfolio of regional banks with a price-to-book of ratio less than 1.5 times. I also searched among the results to find the banks that were growing assets and decreasing nonperforming loans (meaning they were increasing the quality of their loans). An interesting anecdote is that I added this bank portfolio to Stockpickr Jan. 7, and on Jan. 8, Jim mentioned one of the banks on his show. First, I found Rainer Pacific Financial Group ( RPFG). It owns Rainier Pacific Savings Bank, which has branches primarily in one county: Tacoma-Pierce County in the state of Washington.
Here are some interesting details on Rainer Pacific:
- The company trades for 1.5 times book value.
- It's in the middle of a share-buyback program, and is authorized to buy back another 207,000 shares. In his Mad Money book, Jim mentions he likes to see these buyback programs, but even more important is whether the company is actually buying the shares or just making an announcement of a buyback. Rainier bought back 10,000 shares last quarter for an average price of $18.32. (As an aside, here are the top share buybacks announced by companies in the past week.)
- Total deposits at Rainer increased last quarter: $458 million compared with $449 million in the prior quarter, compared with $438 million at the end of 2005. The more deposits the company has, the more money it can lend. And if it has a decent interest rate margin (the spread between the interest it pays on deposits and the interest it receives on loans), then its income and book value will increase accordingly.
- Regional banks normally have good credit quality because they tend to have closer relationships with their customers. For Rainier, loans that were delinquent for more than 30 days were at 0.24% last quarter, compared with 0.28% on Dec. 31, 2005.
- Overall revenue is up: $8.6 million in the quarter ended Sept. 30, 2006, vs. $7.8 million in the year-ago period.
- Earnings for the company in the third quarter of 2006 were $1.625 million, or 87 cents per share, vs. 74 cents per share for the same period in 2005.
- Total assets went from $538.5 million in the second quarter to $549 million in the third quarter.
- Nonperforming assets (bad loans) equaled 0.78% of assets at the end of the third quarter, compared to 0.90% of assets at the end of the second quarter and 1.08% of assets at the end of 2005.