Community banks are building value that’s not being reflected in share prices, presenting investors with an opportunity among the stronger, more-focused local banks, said Jon C. Bruss, CEO and managing principal at Fortress Partners Capital Management, Hartland, Wis. Speaking at the annual SNL Community Bankers Conference in Atlanta last week, Bruss said many community banks have made needed repairs to their operations and may now be benefiting from a resurgence in U.S. economic activity in manufacturing, transportation, energy, chemicals and other sectors.
“The average community bank is selling at barely over tangible book value – 105 percent to 115 percent – and that means a lot of them are selling at well less than TBV,” said Bruss, whose firm provides strategic capital advice and private equity to community banks. “Well-run community banks are building value that’s not being reflected in transaction prices, and that presents an opportunity.”
Community banks are now valued lower than at any time in the past two decades, Bruss said. During that 20-year period the sector twice saw returns for community bank stocks increase by more than 200 percent.
“Banks that held steady through the crisis have seen their valuations improve and are now in a better position to optimize their value.” Bruss said. The key to investing in the sector, he added, is to determine which companies are both good banks and good investments. He noted that banks that have dealt appropriately with the interest rate environment, nurtured their net interest margins, scrubbed their loan portfolios, educated their boards of directors regarding value, and have repaid or planned for TARP obligations, “will earn premiums on their sale—if they choose to sell.”
After years of retooling, many community banks find themselves in a strong competitive position, able to “out local” the super-regional or large banks, which are typically headquartered well out of market, said Bruss. “Small business owners trust community banks for financing because of their nimble decision making, accessibility to clients, and intimate local-market knowledge,” he said.
Bruss has nearly 50 years of experience in commercial banking, finance, and investment banking. He organized and managed Town Bankshares and Town Bank, which were sold in 2004 to Wintrust Financial Corp. In 1992, he formed Fortress Bancshares, which acquired three banks and was, in turn, acquired by a publicly-traded bank holding company, Merchants & Manufacturers. It was acquired by BMO Harris.