CenterState Is An Attractive 'Strong Getting Stronger' Story

This isn’t a great point in the banking cycle, as rate hike benefits are tapering off, the economy seems to be slowing, and credit costs are likely to increase substantially from here. That said, if you are still interested and willing to invest in banks, I think Florida’s CenterState (CSFL) is a name to consider. It’s a higher-risk, higher-growth story than ideas like SunTrust (STI), PNC (PNC), or BB&T (BBT), but management has generated some impressive results with a coherent, disciplined M&A and organic growth plan. Moreover, I think CenterState could be a “heads you win, tails you win” situation with respect to M&A – I believe CenterState would be an attractive target to many super-regionals, but they don’t need to get bought for this idea to work.

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CenterState Is An Attractive 'Strong Getting Stronger' Story

Seacoast Banking Making Money In The Sunshine State

A couple of years ago, Seacoast Banking (SBCF) was a “show me” story where investors were uncertain if the company could execute on opportunities to reduce costs, improve its utilization of technology, and drive better loan growth. Over the past three years, not only has Seacoast delivered on multiple growth and quality metrics, but the shares have roughly doubled since then, roughly doubling the regional bank indices and eking out a small win over CenterState (CSFL) over that time.

There are a lot of things I still find very attractive about Seacoast, including its strong core deposit franchise, its data-driven business model, and its leverage to significantly above-average growth potential in its home state of Florida. While I don’t think there are serious credit risks yet, I do have some concerns about where we are in the cycle and how that might impact a higher-multiple growth bank like Seacoast.

Although the valuation on a P/E basis isn’t bad, I find the long-term discounted earnings valuation a little stretched and I’m worried that bank multiples could re-rate lower. While I think M&A appeal is a back-stop to the valuation, I’d rather see a wider discount to fair value as compensation for some of those risks.

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Seacoast Banking Making Money In The Sunshine State

CenterState Banks Continues To Leverage Its Strong Florida Franchise

Long a popular target in takeover rumors, CenterState Banks (CSFL) has not only stayed independent, but has thrived over the past five years – pairing strong double-digit organic growth with an aggressive but still disciplined and coherent M&A strategy to drive above-average growth across multiple metrics. The market has certainly noticed, as the shares have roughly tripled the performance of regional banks over the last five years, while slightly outperforming over the past 12 months.

I’m a little more cautious about growth banking stories at this point in the cycle, as banks tend to peak ahead of yield curve inversion. Commercial real estate lending has gotten pretty frothy in many places, deposit betas continue to rise, and credit quality is about as good as it can get. Still, if low-to-mid teens growth is a reasonable long-term expectation, these shares may not be tapped out just yet.

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CenterState Banks Continues To Leverage Its Strong Florida Franchise

Seeking Alpha: Iberiabank Paying The Price Of Growth

Growth comes with its own set of costs, and Iberiabank (IBKC) is paying some of those costs today. Not only is the bank seeing accounting changes to covered loans weigh on reported results, but overhead expenses tied to the expansion of its branch banking and fee-generating operations are also taking a toll. On the other hand, Iberibank's underlying growth prospects in loans, deposits, profits and so on look considerably better than average over the next few years.

All told, Iberiabank's stock looks like a mixed bag today. The 1.1x multiple to book value and 1.5x multiple to tangible book value seem rather appealing, but that has to be set next to below-average returns on tangible assets and equity both today and likely for the next couple of years. Given that today's valuation already seems to factor in an eventual return to low-teens returns on equity, I would say Iberiabank is fairly valued today, but a name worth watching should the shares pull back again.

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Iberiabank Paying The Price Of Growth

Seeking Alpha: CenterState Bank An Odd Mix Of Performance Potential And Iffy Valuation

Bank stock investing is not for the investor who likes things neat, tidy, and easy. Although the basic operation of banking is simple in theory (borrow at one rate, lend at a higher rate, and what's left over after expenses is profit), the accounting rules muddy the waters considerably.

Even among those banks with relatively simpler operations, community banks that don't engage in extensive trading, leasing, or multi-state operations, you can find curious disconnects between value and operations. Florida's CenterState Banks (NASDAQ: CSFL) seems to be a case in point. While I think this bank offers good leverage to a recovery in Florida and has the potential to outperform with its covered loans, the company's high operating expenses and historical returns on assets and equity suggest that much of that value is already in the stock.

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CenterState Bank An Odd Mix Of Performance Potential And Iffy Valuation