Three Stocks You Can Bank On
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.
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.
MB Financial was formed in 1999 out of a merger of equals between Avondale Financial and Coal City Corp. and is the parent of Chicago-based MB Financial. The bank has nearly 100 branches and almost $15 billion in assets.
MB Financial is Chicago's third-largest bank, has a $2.3 billion market cap and has broad-based exposure to the region's middle market. MBFI has grown both internally and via acquisition, buying six banks/thrifts, a leasing company and an asset manager.
Linked loans were flat in the first quarter vs. 2014's fourth quarter. Higher operating expenses and pressures on net interest margins have slightly reduced the 2015-16 outlook, but annual EPS growth nonetheless should be approximately 12%. Other factors:
- MBFI's dividend only provides a 1.9% yield, but an offset to that is a lower relative PE multiple and more-rapid EPS growth (12% E).
- The outlook for MBFI's commercial and industrial loan growth is excellent: first-quarter growth was 11%, which augurs well for 2015 EPS.
- MBFI's core fees represent a large 41% of total revenue, providing good diversification from net interest income.
- Noninterest-bearing deposits are now approaching 40% of total deposits, which will fuel the aforementioned loan growth.
- Shares trade at only 13.5x my 2016 forecast.
My price target out 12 months implies a 10% price appreciation.
FirstMerit is a well run Ohio-based bank with over $25 billion in assets and a market cap of more than $3.1 billion. The bank operates in 385 branches in Illinois, Pennsylvania, Michigan, Wisconsin and Ohio.
FMER reported a slight beat to expectations in the first quarter, reflecting lower provision and operating expenses. Spread and fee income pressured results slightly relative to expectations, but loan growth was solid. Other positives:
- FMER provides a 3.2% dividend yield.
- I view FMER as a 9%-to-10% EPS grower.
- FMER trades at 170% of tangible book value.
- As opposed to some of my more "nichey" banks like MSL and SONA, FMER trades actively (around 750,000 shares daily).
- FMER serves a stable and diversified banking market.
- The bank gives me exposure to economic growth in the Midwest and away from my heavier exposure to the large money-center banks (primarily in New York).
- The bank is an active acquirer.
My price target implies about a 10% appreciation one year out.
Clarification: This column has been revised to more fully and clearly explain the difference between Southern Financial Bank and Southern National Bancorp of Virginia.