Smart Money Bets Big on Small Banks

by Tim Melvin | November 15, 2013 12:15 pm

A few weeks ago[1] I wrote about activist investors[2] and their increased activity in the banking sector[3]. One of the investors I talked about was Joseph Stilwell, an investor who has been successful with small banks for a long time. He’s taken a stake of at least 5% in almost 50 such stocks and has successfully pressured for a sale at a higher price in many of these small banks.

Well, Stilwell’s 13F filing showing his holdings at the end of the third quarter is out now, and we can see what he has been up to in small bank stocks.

It was a quiet period for Stilwell’s finds, as many bank stocks rose more than the market and there were not as many attractive entry points as earlier on the year. But he did buy a few stocks worth mentioning.

He opened a position in shares of Banc of California (BANC[4]) in the quarter. The company is the holding company for Pacific Trust Bank and Beach Business Bank in the San Diego area. The bank has 60 locations and more than $3.5 billion in assets, and it just completed the acquisition of three institutions — The Private Bank of California, The Palisades Group and CS Financial —  which increased total assets by almost $1 billion. The shares trade right at book value. Banc of California is well positioned to benefit from a strong recovery in California and may eventually become a buyout target itself.

Stilwell’s funds also bought more shares of Peoples Bancorp of North Carolina (PEBK[5]). The bank operates in central North Carolina and has 22 branches with a little over $1 billion in assets. PEBK just reported a solid quarter, increasing earnings by more than 40% year-over-year while working down nonperforming assets by 30%. The bank also grew its deposit base in the quarter — a difficult accomplishment for many small banks this year.

North Carolina is one of the more attractive markets in the country, and most analysts expect a substantial amount of merger and acquisition activity in the state. Peoples Bancorp could be a very attractive target for a larger bank looking to expand in the region. The stock currently trades for less than 90% of book value, so there’s a lot of upside potential in the shares.

Stilwell also added to a couple of his microcap banks in the quarter, but all in all it was a very quiet summer for the longtime bank activist. If you are not already heavily involved in the trade of the decade[6], use his holdings as a good place to search for small bank ideas.

At the time of publication, Melvin had no positions in the securities mentioned.

  1. A few weeks ago:
  2. activist investors:
  3. increased activity in the banking sector:
  4. BANC:
  5. PEBK:
  6. trade of the decade:

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