As we approach the end of a tumultuous 2011, it's time to look back at the biggest winners and losers.
So in this series, that's exactly what we're doing, sector by sector. Today, let's take a look at the 10 biggest winners in regional banking. First, the backstory, then the results.
This year, we saw U.S. Treasuries get downgraded from AAA status while Congress played politics instead of fixing the budget; a domestic economy that has been recovering from its financial crisis in fits and starts; big trouble in Europe; and a Chinese economy that doesn't seem so bulletproof.
The daily volatility in the banking industry has been tremendous because the economic crisis over the last few years has been largely driven by the financial industry and because the banking industry as a whole holds a great deal of sovereign debt.
However, global issues affect the biggest banks more than most regional banks. Size in banking is usually directly proportional to the level of complexity and opacity in a bank's balance sheet. The extreme can be seen in the giant Wall Street banks like Goldman Sachs and Citigroup.
Also, the smaller the bank, the more localized that external factors tend to be. As an investor, you worry more about the local economy than the economy of Greece.
The top 10 regional bank stocks of 2011
For context, the S&P 500 has returned 1.7% after dividends this year. In other words, the market has been basically flat, but these 10 regional banks have done quite well.
Price-to-Tangible Book Value
|Citizens Republic Bancorp (Nasdaq: CRBC )||86.2%||1.1|
|Enterprise Financial Services (Nasdaq: EFSC )||42.8%||1.7|
|Texas Capital BancShares (Nasdaq: TCBI )||35.7%||1.9|
|Bank of the Ozarks (Nasdaq: OZRK )||30.5%||2.4|
|Tower Bancorp (Nasdaq: TOBC )||29.1%||1.4|
|Boston Private Financial (Nasdaq: BPFH )||23.2%||1.8|
|F.N.B. (NYSE: FNB )||18.3%||2.3|
Source: S&P Capital IQ. Return includes dividends, if any.
When we look at these high-returners, we don't see any bargain basement sub-1.0 price-to-tangible book values. That, of course, is not surprising given the love they've been shown by the market this year.
But just because they've enjoyed good returns doesn't mean we shouldn't look for value here.
Personally, I like to find small banks that have shown a good track record of operational performance. I want to see good, conservative lending, profits and good returns on investment, and preferably a dividend. And I want it all at a good price.
Looking down the list, there are certainly some interesting operational numbers. However, none of the banks meets all the criteria of an ideal small bank buy.
Let me highlight with two examples.
Bank of the Ozarks has an impressive trailing return on equity of 27.6% that makes its 2.4 price-to-tangible look cheaper than it seems. Its P/E ratio is actually under 10. But a danger sign is 3.3% non-performing assets rate. I'd also ideally prefer a higher dividend than its 1.4% yield.
Enterprise Financial Services sells for a moderate P/TBV and a sub-10 P/E ratio. It has a good return on equity (15.5%) as well. But there are similar danger signs to Bank of Ozarks. Its non-performing assets ratio is 3.7%, and its dividend yield is only 1.4%. It also doesn't fully reserve for its non-performing loans.
One of my favorite regional banks didn't make this list for 2011, but it has some of the best operational numbers I've ever seen. I wrote about it in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy. Just click here to find out the name of the bank.