FBR Capital Markets Friday said it was starting coverage of ten small-cap banks focused in the Mid-Atlantic and Southeast The initial coverage included community banks in the Washington, D.C.,metro market and larger community banks having presence predominantly in South Carolina, Georgia, Virginia, and North Carolina.
FBR started coverage with an Outperform rating on First Citizens Bancshares Inc. (FCNCA) with $205 price target, Eagle Bancorp, Inc. (EGBN) with a price target of $12.50, and Cardinal Financial Corp. (CFNL) with a price target of $10.50 per share.
Virginia Commerce Bancorp Inc. (VCBI) and Sandy Spring Bancorp Inc. (SASR) were initiated with Underperform rating with price target of $3.00 and $7.50 per share respectively.
Further, the brokerage began coverage with Market Perform rating on United Community Banks Inc. (UCBI) with price target of $4.00, Union Bankshares Corp. (UBSH) with an $11.00 price target, First Bancorp (FBNC) with a $16.00 price target, Towne Bank (TOWN) with $13.50 price target and StellarOne Corporation (STEL) with $10.50 price target.
The brokerage believes that with the fragmented, smaller competitors, the performance metrics and valuation of banks with assets below $20 billion will vary widely, and that offers unique investment opportunities.
Analyst Brett Scheiner believes investors less familiar with community banking would find significant differences between banks with more than $20 billion in assets and those with lesser assets.
Without respect to the increased credit costs prevalent at nearly all banks, small banks' profitability is generally weaker, as large banks have considerable revenue from fee-income, the analyst said. Though some small banks' businesses include asset management, investment banking, and insurance subsidiaries, their customers use these services lesser, the brokerage believes.
According to FBR, the community banking institutions are the most affected by the steepness of and rapid changes in the yield curve and the repayment of interest as well as principal on outstanding loan balances.
In the list of coverage, real estate-backed debt ranges from 73% to 90% of total loans, making collateral values in each market a large driver of future credit costs, FBR said. The analyst believes these loans will continue their softer credit performance of late, as exposure is largely commercial.
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