Colonial shares have had a great run over the past five years. This bank, with $3.7 billion in market capitalization, has 300 offices in many of the fastest-growing states, including Florida, Nevada, and Texas. That prized geographic footprint has led many to consider Colonial an attractive takeover candidate for a larger bank. Strong growth in the company's interest income, driven by a dynamic regional real estate market, also helped Colonial achieve average annual total returns exceeding 18% since 2001.
The conditions that supported Colonial's recent stock returns no longer endure. At a recent share price of $24, Colonial's P/E and P/B multiples of 14.6 and 1.9 are already higher than the respective five-year averages. The stock is now just too expensive to command a rich takeover premium. Loan growth, the other component of Colonial's rising valuation, also appears more difficult to realize. Loans grew on the company's balance sheet at a much lower rate than the double-digit rates the bank had been seeing during the booming real estate market.
On the recent conference call to discuss third-quarter results, management was eager to highlight Colonial's strengths. In particular, credit quality remains strong with non-performing loans, charge-offs, and loan loss provisions at very low levels. Net income bounced 20% year over year to $68 million. Colonial appears to be a well-run, conservatively managed bank. In terms of deposit account market share, it's among the top six banks in Florida, with systemwide expansion plans focused mainly on that attractive market.
In fact, Colonial has a significant competitive presence in most of the five fragmented markets in which it operates. Only Bank of America
In the short run, however, Colonial will have to expand aggressively in order to maintain market share in the rapidly growing and competitive Florida market. In addition, near-term profitability will be challenged by contracting net interest margins, the result of the flat yield curve, and the migration of deposit accounts to higher-interest CDs.
Long-term investors might consider buying Colonial shares now for the bank's strategic footprint and solid execution, but they shouldn't expect to see much capital appreciation from Colonial's stock in the near future.
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Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the stocks of any of the companies mentioned above.