Three stocks to bank on
Small players with strong franchises and growth prospects.
(Fortune Magazine) -- Small banks have been popular takeover targets lately. In some cases, the acquirers have been midsized players like Seattle-based Washington Federal (Charts), which bought New Mexico's First Federal Banc of the Southwest.
Others have been larger institutions like Wachovia (Charts), which has been expanding westward by snapping up California-based shops, including Metropolitan West Securities, auto lender Westcorp, AmNet Mortgage and Golden West Financial.
Yet there are many small banks still going it alone. Rather than try to guess which banks will be taken over next, we found three with solid franchises that make them appealing even if they don't get swept up in the merger wave.
East West Bancorp
You could consider East West Bancorp (down $0.60 to $36.61, Charts), a Southern California outfit with $10.8 billion in assets, as a way to play booming economic activity in China. Since its founding in 1972, East West has focused on Chinese Americans; it does a lot of lending to importers of goods from the Asian powerhouse and has an office in Beijing so customers can easily send money across the Pacific.
In its most recent quarter, East West's revenues grew 31.4 percent, well above the small-banking industry's average 22 percent. Earnings jumped 24.4 percent. Chris Goebel, managing director at Tributary Capital's First Focus Growth Opportunities fund, says the bank has met or topped earnings estimates for the past 27 quarters. The stock trades at 15 times next year's estimated earnings, about average for the group.
Because most of East West's lending business is commercial rather than residential, it's been relatively unscathed by the housing slump. "There are a lot of people trying to capitalize on Chinese growth, but these guys have been doing it for a long time," says Goebel. "They're pros."
Columbia Banking System
Columbia Banking System (up $0.70 to $34.60, Charts), based in Tacoma, Wash., has established an impressive track record. A holding company with banks throughout the Pacific Northwest, it has 40 branches and $2.8 billion in assets, up from four branches and $211 million in 1993.
And unlike most of its rivals in the region, it did not plunge heavily into construction lending - a fact that weighed on the stock in the recent past but should help it now.
Columbia is one of the biggest holdings in the Johnson Family Small Cap Value fund. William Fitzpatrick, Johnson's banking analyst, likes Columbia's limited exposure to residential real estate.
He also notes that the bank - which trades at two times book value, a substantial discount to its peers - would be a tempting takeover target. "Banks this size have been acquired at 2˝ or 3 times book value," he says.
Hudson City Bancorp
Dave Ellison, longtime manager of the FBR Small Cap Financial Services fund, likes Hudson City Bancorp (down $0.06 to $13.58, Charts), based in New Jersey. The stock's P/E is high at 20, but Matthew Kelley, an analyst at Sterne, Agee and Leach, argues that the bank stands out from its peers.
With $34 billion in assets, it makes no risky home equity or auto loans, concentrating on lucrative jumbo mortgages to affluent individuals in the New York City suburbs. Morningstar analyst Jaime Black agrees, writing in a recent report: "Hudson City knows what it is good at - prime mortgage lending -and sticks to it profitably."
From the November 27, 2006 issue