OC Bank Stocks Among Top Performers
By RAJIV VYAS
Higher profits, growing assets and few bad loans have driven the stocks of Orange County banks.
For the 12 months ended Sept. 30, OC bank stocks were up an average 31.5%, vs. a decline of 21.7% in S & P; 500 and 21.8% in the Nasdaq. In the same period, the Philadelphia Stock Exchange’s bank index fell by 12.5%.
“There’s is a whole group of investors who have come to learn that investments in small banks yield high returns,” said Ed Carpenter, chief executive of Irvine-based Carpenter & Co., which provided the data on banking stocks.
Huntington Beach-based Pacific Liberty Bank, No. 9 on this year’s Business Journal list, was the best performing stock for the 12 months ended Sept. 30.
The bank, which counts more than $70 million in assets, saw its stock price rise 56% as its profits rose almost seven times on a pre-tax basis.
“They are in a very strong market area and they have an excellent management,” said Troy Norlander, director of community banking group at Los Angeles-based Seidler & Co.
Don’t kick yourself if you missed Pacific Liberty’s runup. The bank’s shares trade on the low-profile over-the-counter exchange. Even with the stock near its highs for the past year, only about 500 shares trade each day.
As of Sept. 30, Pacific Liberty’s stock was trading at 14, up from 5 a year earlier.
The bank’s profit before taxes rose almost seven times to $438,000 in the Sept. 30 quarter. Its net earnings rose to $258,000 from $65,000 a year earlier.
And here’s the kicker: Pacific Liberty didn’t have any nonperforming loans at a time when large banks are saddled with bad loans.
“Their earnings have been consistent and their loss record has been excellent,” Norlander said.
In all, shares of five OC community banks trade publicly. All have risen in the past 12 months.
Industry observers cite a flight to safety for the runup in bank stocks. Investors are going to community banks because they are familiar with their operations. They may know the chief executive, the management or one of the directors, Carpenter said.
“They have confidence in the bank because they know the people on the board,” he said. “They know that banks are required to be audited by regulators.”
Community banks tend to grow with the markets they are serving, Carpenter said. And the hot housing market likely has helped fuel many local banks.
But don’t look to an OC community bank as a long-term investment. The average life of one is 16 years, Carpenter said. By that time they’re gobbled up by bigger banks.
That’s usually good for investors. If you invested in an OC bank when it was formed and stayed with it until it was bought, you would have multiplied your money eight times,a compounded return of 13%.
If you invested in an OC-based bank based near John Wayne Airport, you would have multiplied your money 12 times in 14 years,an annualized return of 18%.
“There are an estimated 20,000 investors in OC who have invested in small community banks in the past 25 years,” Carpenter said. “They are aware that there is strong appreciation in bank stocks.”
Newport Beach-based CommerceWest Bank, No. 13 in this year’s list, was the second-best performing stock among local community banks.
The bank raised $10.5 million through a public offering late last year. It offered its shares to the public at $10. Since then, the stock has risen to 13.75 as of Sept. 30, a gain of 37.5%.
More than 70% of the shareholders in community banks are customers.
“There are people there who haven’t done anything but invest in community bank stocks,” said Richard Ganulin, Pacific Liberty’s chief executive. “Community banks have nice steady growth, nothing exceptional, but nice and steady.”
Shares of Dana Point-based Harbor National Bank rose by 36.7% in the past year, making it the third best bank stock in OC.
Tustin-based Sunwest Bank rose by 17% during the period.
The worst performer,if you can call it that,was Costa Mesa-based Pacific Mercantile Bancorp. The bank’s shares were up 10.2% in the past year. It’s also the fastest growing bank in OC by assets.
The performance of the bank stocks was even better in the past two years. The average of five stocks rose by 34.2% for the 24 months ended Sept. 30. That compares to a 68.1% decline in Nasdaq and a 43.2% drop in the S & P; 500.
The best stock in the past two years: Harbor National Bank, up 58%.
Community banks have their downsides. There’s little trading in the shares, which means getting in and getting out isn’t easy.
And low liquidity means that prices tend to rise and fall more easily than stocks that are heavily traded. For instance, only 5,200 shares of Pacific Liberty changed hands in September.
“Price rise is a result of supply and demand,” said Norlander, who said he buys and sells $100 million of community bank stocks each year for him and his clients.
The five OC bank stocks also have small market values. Pacific Liberty, for one, has a market value of less than $10 million. None of OC bank stocks are a part of the Orange County Business Journal’s OC 50 index, which includes stocks with market values of $25 million to $1 billion.
