Merger and acquisition activity continues to pick up among the smaller regional and community banks. Although conditions have improved markedly over the past few years and the credit problems have faded away, there’s still a lot of pain to go around.
A lethal combination of a slow-growth economy along with escalating regulatory costs make it very difficult for small banks to remain independent.
Add in the rising costs needed to upgrade technology and mobile offerings to compete in a crowded marketplace and it just makes sense for small institutions to seek out a merger partner.
On the flip side of the coin, the larger regionals are finding it difficult to grow earnings in a slow economic recovery and are looking to buy earnings growth.
Those factors make for something of a perfect storm for investors in small bank stocks.
Small Bank Stocks: Shore Bancshares (SHBI)
Shore Bancshares (SHBI) is the largest independent bank holding company located on Maryland’s Eastern Shore. It is the parent company of The Talbot Bank of Easton, Maryland, and CNB as well as three insurance brokerages.
The bank has a very attractive service area and could easily attract a buyer who wanted to move into the region. SHBI has aggressively dealt with problem assets over the past years. As a result, nonperforming assets have declined from 5.42% of total assets in 2012 to just 1.53% today. The equity-to-asset ratio is 11.98, so the bank is well capitalized and in sound financial shape.
Trading at 86% of book value, SHBI stock has captured the attention of activists investors interested in small bank stocks. The current shareholders list resembles a bank-stocks investor hall of fame right now.
Small Bank Stocks: MBT Financial (MBTF)
MBT Financial (MBTF) is another bank that has done a fantastic job of cleaning up its loan portfolio and rebuilding the balance sheet in the aftermath of the credit crisis.
Three years ago, the Michigan-based bank had an equity-to-asset ratio of just 6.18, and nonperforming assets were over 4.5% of total assets. Today, the equity-to-asset ratio is a healthy 10.57 and nonperforming assets are just 1.28% of total assets.
MBTF stock is trading at just 92% of book value and has also attracted more than its fair share of bank stocks activists and specialist investors. MBT Financial is a great play on the banking merger wave, and it will benefit from the continued recovery of the Detroit economy.
Small Bank Stocks: First Financial Northwest (FFNW)
First Financial Northwest (FFNW) is located in Renton, Washington and I am frankly surprised the single-branch bank has not attracted an interested buyer yet.
The Seattle market is very attractive, and this bank is equally attractive, given about $948 million of assets with a strong position in both commercial real estate and multifamily lending. FFNW is well capitalized, with an equity-to-asset ratio of 11.55, and the loan portfolio is healthy with nonperforming assets of just 0.87%.
Stilwell Value, one of the leading bank activists owns 8.47% of the bank and he has a strong record of forcing banks to either unlock shareholder value or the sell the bank at a premium to the current price. First financial Northwest is currently trading at just 92% of book value and is an attractive bank at this price level.
As of this writing, Tim Melvin was long SHBI, MBTF and FFNW. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.