Southern National Bancorp, MB Financial, FirstMerit: Doug Kass' Views

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Three Stocks You Can Bank On

 
Posted at 7:39 AM EDT on Wednesday, May 27, 2015
 
I have previously promised to update my regional bank holdings, and this morning, I wanted to deliver a brief synopsis and explain the merits of Southern National Bancorp of Virginia  ( SONA), MB Financial  ( MBFI) and FirstMerit Corp. ( FMER):

Southern National Bancorp of Virginia

SONA is a small 23-branch bank located in Virginia and Washington, D.C., with nearly $1 billion of assets.

SONA's appeal is as a potential acquisition target, although I think this is several years out. The bank was founded by Georgia Derrico and Roderick Porter, man and wife and ex-Chemical Bank executives, who founded an earlier company called Southern Financial Bank about 30 years ago. Infusing less than $5 million, the couple grew Southern Financial into a $1.4 billion-asset institution that was sold for over $325 million (375% of book value and 23x earnings) to Provident Bank of Baltimore in 2004. Southern Financial is now owned by M&T Bank.

On its own fundamental merits, SONA is well-run and has grown through multiple FDIC-assisted acquisitions of small-sized commercial lenders in its market.

Recent Results
SONA met expectations and reported 16 cents a share in the first quarter despite two pennies of OREO impairment charges. Though net-interest margins and fee income were pressured, expenses and credit costs were well controlled. Linked loans grew by 4% and net-interest margins fell by six basis points from the fourth quarter. Other positives:

  • SONA pays a 32-cent dividend and the shares yield almost 2.8%, providing a reasonable return as I await an ultimate takeover transaction;
  • Current book value approximates $8.50/share;
  • SONA is well managed, with a strong 58.9% efficiency ratio that comes in far better than its community-bank peers;
  • Earnings growth is projected at about 11% to 13% annually in 2015-17.

My price objective based on fundamentals over the next 12 months is for a 15% gain from the current share-price level.

SONA trades by appointment (market cap is only $150 million), so I would be using limit orders.

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