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As macabre as it might sound, those who survived Europe's medieval Black Death enjoyed greater wealth and prosperity because of less labor competition. A similar phenomenon will likely occur in the American banking system after the recession ends -- the banks that survive will benefit from less competition and stand to thrive once the economy recovers.
IberiaBank
Fast facts on IberiaBank
|
Market capitalization |
$1.4 billion |
|
Industry |
Banking |
|
Headquarters |
Lafayette, La. |
|
Price/ tangible book value |
1.3 times |
|
Dividend yield |
2.5% |
|
Key competitors |
BancorpSouth |
Source: Capital IQ, a division of Standard & Poor's.
3 reasons to buy IberiaBank
Here are the three major reasons I like IberiaBank today:
-
Opportunistic expansion: IberiaBank avoided the subprime lending mess that got many of its competitors in hot water and intentionally stayed out of the southern Florida housing bubble. While that may have looked foolish (lower case "f") to investors in 2005-2006, Iberia got the last laugh. Since November, it's made three FDIC-assisted acquisitions in Florida (Orion Bank, Century Bank, and Sterling Bank). Its other two FDIC-assisted acquisitions, CapitalSouth (2009) and ANB Financial (2008), gave Iberia additional exposure in Florida, as well as Alabama and Arkansas. What makes FDIC-assisted acquisitions so attractive is the FDIC's loss-share protection, which reduces Iberia's risk if some of its acquired banks' loans fail. In short, by staying patient and conservative, Iberia has been able to expand its geographic footprint quickly and with less risk.
-
Conservative nature: Even though IberiaBank isn't making much interest income on its $1 billion cash ... it still has $1 billion cash on its balance sheet. Iberia also posts a Tier 1 capital ratio of 20%. By comparison, as of December 2009, Wells Fargo's
(NYSE: WFC) Tier 1 ratio was 9.3%, Bank of America's(NYSE: BAC) 10.4%, and JPMorgan Chase's(NYSE: JPM) , 11.1%. Additionally, just 0.91% of Iberia's total assets were "non-performing" (loans at least 90 days past due) -- four full percentage points better than its southeastern competition.
Source: Company presentation.
All of these statistics speak well of Iberia's conservative lending practices. - Smart management: One of Iberia's unique aspects is that its executives work in different locations throughout the Southeast. President and CEO Daryl Bird, for example, works in Lafayette, La., while CFO Anthony Restel is in New Orleans, COO Michael Brown is in Little Rock, Ark., and Chief Credit Officer Gregg Strader is in Greensboro, N.C. That may sound strange, but this dispersion has two purposes: gain a better understanding of multiple markets and reduce geographic concentration in Louisiana (a lesson learned from hurricanes Katrina and Rita).
Mind your risks
Before you consider buying shares of Iberia for your portfolio, be sure to consider the risks to my thesis, including:
- A persistently low interest rate environment will keep Iberia's net interest income and earnings under pressure.
- With the majority of its operations located in and around the Gulf of Mexico, Iberia's business could be hurt by hurricane activity or other natural or man-made disasters (i.e., the BP spill).
- The FDIC loss-sharing agreements have finite lives (five years for commercial loans and 10 years for residential loans) and don't save Iberia from all losses incurred from non-performing loans at the acquired banks. In other words, Iberia would still get stung if a lot of those acquired South Florida loans go under.
- Banks are heavily regulated, and even more so now that the Dodd-Frank Bill is in effect. Increased FDIC insurance costs, heightened scrutiny of the fees that banks charge customers, and other restrictions may keep earnings growth suppressed.
- A sustained recession in the southeastern U.S. could lead to more foreclosures and loan delinquencies than Iberia planned for.
These are each meaningful risks, but I think the opportunity here outweighs them. Still, it's important to go into this investment with your eyes wide open.
Valuation
Running a traditional discounted cash flow model on a bank stock is a difficult task for two reasons. First, debt is a raw material to a bank much like lumber is to a homebuilder, so defining a bank's true enterprise value is an exercise in futility. Second, a bank's capital expenditures are also tricky to classify, making free cash flow measurement a harrowing chore.
As a result, we'll focus on Iberia's equity (book) value to get an idea of what it could be worth. With Iberia stock trading for around $50, and considering its book and tangible book values are $48.31 and $38.71 per share, respectively, let's compare its current P/BV and P/TBV to the historical averages.
|
Metric |
Current |
5-Year Average |
10-Year Average |
|---|---|---|---|
|
Price to book |
1.04 times |
1.48 |
1.54 |
|
Price to tangible book |
1.30 times |
2.45 |
2.38 |
Source: Capital IQ, a division of Standard and Poor's, as of Aug. 12.
Based on this, it wouldn't be a stretch to see Iberia back in the range of $70-$80 per share if and when the Southeastern economic recovery strengthens.
Foolish bottom line
There's a lot to like about IberiaBank's business, and even more to like about its current stock price. At around $50 per share, I believe we're buying in with a 30%-40% margin of safety and substantial upside potential.
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