In one of my last columns, called Bank Investing 101, I mentioned a few banks that I considered to be well-managed, high-performing, and reasonably valued. One of those banks was Alabama National BanCorporation
Don't let the "Alabama" fool you
This bank has a presence in some of the most rapidly growing markets in the nation, many of which are around Atlanta and coastal sections of Florida. Measuring the average growth rate of the bank's markets is a little tricky, since it serves so many of them. But if you weight the expected population growth for each of its markets by the percentage of the bank's total deposits in that market (which seems a reasonable approach), you wind up with a population growth projection of more than 12% annually.
That is about twice the comparable statistic for most of the bank's peers and twice the projected population growth rate for the U.S. Pretty heady growth, particularly given that we are not even factoring in potential market share gains, some of which could occur from competitors consolidating. One of the most recent such examples was the announcement of the sale of Alabama-based Compass Bancshares
"No tolerance in the system for having loan losses"
Those are their words, not mine. (I wish some of the subprime lenders could say the same.) Indeed, asset quality has been exceptional. Whereas the average ratio of nonperforming assets-to-total assets (essentially, the percentage of assets represented by their delinquent loans and real estate acquired through foreclosure) for the nation's larger banks is currently around 0.45%, it hasn't been that high at Alabama National BanCorporation for the past 10 years. Charge-offs have been miniscule.
Management has a lot of skin in the game
Few things link management's objectives to shareholders' objectives better than high inside ownership. Inside ownership is around 21%, according to the latest proxy, more than twice the level of most comparably sized banks. This large ownership stake is not concentrated, but is spread throughout the senior management team, another good sign.
They make good marriage partners
Anybody who quotes Warren Buffett in their investor presentations has to be pretty bright, right? Their acquisition mantra is borrowed from the 2005 Berkshire Hathaway annual meeting: "Once we buy a business, we do all we can not to extinguish the owner's passion for the business." They accomplish this by removing as much of the less attractive duties of bank management as possible -- like compliance internal audit, for example -- and implementing compensation structures that are based on the performance of the subsidiary bank.
Decent dividend yield, puny payout ratio
At 2.4%, the dividend yield is healthy. Just as importantly, so is the payout ratio. Remember, the higher the payout ratio, the less likely the dividend can be sustained, much less grow, in a flat or declining earnings environment (for a stretched payout ratio, take a look at New York Community Bancorp
Speaking of earnings ...
Earnings have benefited from rapid earnings asset growth, improvements in efficiency, and increasing diversity of revenue sources. Diluted earnings per share were $4.17 in 2006, up from $3.82 per share in 2005, and have increased at an impressive 12% annual rate since 2001. Those earnings are partially insulated from volatile interest rate swings by diverse sources of noninterest income, such as wealth management services, insurance operations, and fixed income investment services, to name a few. Traditional measures of profitability like return on average assets and return on average equity are impressive as well.
And of course, the valuation
You didn't really expect this to be cheap, did you? Let's put it this way: the valuation is in line with the averages, even though what you are getting is much better. The stock is currently trading at 15.4 times consensus 2007 estimated earnings of $4.50 per diluted share, versus about 15.1 times for all banks with more than $1 billion in assets. The price to book value and price to tangible book value ratios are pretty much in line with the other banks as well. Anytime you can pay a typical price for an unusually well-run company, you're likely making a worthwhile investment.
Buy it and put it away
I can hear someone thinking -- what about a buyout? Possible -- but frankly, I hope not, as I would likely have more confidence in these guys than in whoever would be buying them. This is simply a great stock to buy and put away for a few years. In the meantime, that 2.4% dividend rate gives me an after tax return (given the preferential tax rates on most common dividends) that rivals what my regular bank is paying me on deposits. And that comes with a piece of the banking action in some of the nation's hottest markets.
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Buddy Howard does not own stocks in any of the companies mentioned. The Fool's disclosure policy is coming home to you.