BCOM cited as a terrific buying opportunity by, among others, Acadia Fund, Miller & Jacobs Capital, Keefe Bruyette & Co, Hoefer & Arnett. Excerpted from posts 44/45 on the BCOM Yahoo message board. Bold highlights are my own.
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Tulvio
11/03 WS WSJ: THE WALL STREET JOURNAL / CALIFORNIA: Heard In California:
By Brenda L. Moore
Staff Reporter of The Wall Street Journal / California
Neighborhood banks have suffered the same stockholder withdrawals in the whipsawing market as their big brothers, but some money managers and analysts say it's time for investors to reopen their accounts.
Community-bank stock prices "have gone down this year, kind of following on the tails of the money-center banks," says Lisa Welch, of the John Hancock Regional Bank Fund in Boston. But Ms. Welch thinks "that's been overdone."
The banking sector has been knocked down by concerns over troubled foreign economies, massive losses related to the Long-Term Capital Management hedge fund, and fears about a slowing economy. But, says Ms. Welch, small banks are being unfairly penalized. "All banks don't have exposure to Russia, emerging
markets or hedge funds," she says.
Jeff Miller of Miller & Jacobs Capital in Radnor, Pa., however, sees a bright side to the sharp drop in prices. Mr. Miller co-manages the Acadia Fund, which invests mainly in community banks in the West. He says community banks are now
buying opportunities for discerning shoppers.
Last year and early this year, his company was "somewhat cautious" about buying small bank stocks because takeover speculation and overly optimistic earnings forecasts made them expensive, he says.
But in the past few months, he adds, there has been "a complete turnaround in people's expectations and the prices in the sector. People have moved [earnings! estimates down, but the fact is, for the most part, these smaller community banks are reporting great earnings."
So great that Mr. Miller and others named a handful of banks high on their buying lists. Among those cited most often: Bank of Commerce in San Diego; Greater Bay Bancorp of Palo Alto; SierraWest Bancorp of Truckee; and Westamerica Bancorp. of San Rafael. All four recently posted upside earnings surprises.
Of course, that isn't to say that the community-bank stocks are good buys across the board.
Investors should be careful in choosing bank stocks, says David Winton, an analyst with Keefe, Bruyette & Woods, a New York brokerage firm specializing in bank stocks. They should "pick those that have good, sound underwriting and can therefore withstand a slower economy, if that's what we're in for," says
Mr. Winton.
Louis Feldman, banking analyst with Red Chip Review, a research firm in Portland, Ore., describes the environment as "kind of" a buying opportunity. Loan volume is down and competition is rising for customers with strong credit, he says. At the same time, declining interest rates are squeezing bank
margins, which means slower revenue and earnings growth, he notes.
With those factors in mind, investors who want to take advantage of recent share-price declines should look for banks that aren't seeing increases in their nonperforming assets (past-due loans), or that have a history of lower nonperforming assets than their peers, Mr. Feldman says. He also likes to see a return on equity, which is a key measure of a bank's profitability, of 15% or better and at least 1% return on assets.
"If they can get over 1a [return on assets!, that makes us even more happy," he says. "And if they're paying a good dividend, that's just a bonus."
James Hill, director of the banking-institutions group at Sutro & Co. in Los Angeles, says California institutions should provide investors with some good candidates. In a recent analysis, Mr. Hill found that the state's community banks outperformed their peers in a range of areas. He looked at banks and thrifts with assets of $150 million to $5 billion, examining factors including growth in assets, loans, equity and profits. He also looked at asset quality and charge-offs of bad loans.
Mr. Hill concluded, in part, that "return on average equity of California banks is higher than their counterparts in the rest of the country, loan portfolios are growing faster and the asset quality is improving."
He also says the recent wave of mergers among the bigger players has stimulated new growth at lower levels, with smaller banks picking up disenchanted or disenfranchised customers.
"Investors who seize this opportunity will do very well," he says. Here, then, is a closer look at some of the favorites of analysts and money managers:
Bank of Commerce
Bank of Commerce has carved out a niche as a kingpin of U.S. Small Business Administration loans: It was the U.S.'s fourth-largest SBA lender last year. The company's $182 million in SBA loans accounted for about 90% of its business.
One thing that makes that particularly attractive, says Mr. Winton of Keefe Bruyette, is that up to 80% of a loan's value, or as high as $750,000, whichever is smaller, is guaranteed by the federal government.
Steven Didion, an analyst at Hoefer & Arnett in San Francisco, says the company also benefits from geographic diversity: It has 10 branch offices in Southern California and 18 loan offices in California, Arizona, Nevada, Oregon, Washington, Colorado, Texas, Utah and Georgia. The company plans to open loan offices in Idaho and Illinois this year.
Third-quarter net income rose 54% to $3.8 million from a year earlier. Per-share diluted earnings were 24 cents, two cents ahead of analysts' estimates. The stock is trading at about $13, down from a 52-week high of $22.438 in April. |
