Successful investing is all about generating creative investment ideas. The best companies are often the ones you find when you're least expecting it. Just today, I was looking at a Washington Post list of contributors to John McCain's 2008 Presidential election campaign and the name Charles J. Moore of Kenilworth, Illinois jumped off the page. Who exactly is this man and why should you care?

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It turns out that not only is Mr. Moore a fan of Senator McCain, but he also has been investing in small community banks since 1986. While I don't know his investment company's actual performance, I'm confident Banc Funds Co. LLC wouldn't still be in existence after 24 years if things weren't working out for him. In his latest 13F holdings report ended June 30, he listed 188 companies and a market value of $314 million. With the exception of a few asset management and brokerage firms, they are all regional community-based banks. I'll look at three stocks each from both the eastern and western parts of the United States. If you're smart, you'll follow the money trail.

Six Banc Funds Co. Holdings




Company


Market Cap


% Ownership


Smithtown Bancorp (Nasdaq:SMTB)


$179.63M


4.9%


Pinnacle Financial Partners (Nasdaq:PNFP)


$419.21M


1.3%


SCBT Financial (Nasdaq:SCBT)


$353.45M


1.97%


Washington Banking Co. (Nasdaq:WBCO)


$88.49M


8.7%


MB Financial (Nasdaq:MBFI)


$764.86M


0.9%


Texas Capital Bancshares (Nasdaq:TCBI)


$605.42M


1.5%


Eastern U.S.
Tiny Long Island-based Smithtown Bancorp's market cap is 2.5% of the largest regional bank in the Northeast, M&T Bank (NYSE:MTB). Earnings were down in the second quarter primarily because of increased FDIC insurance premiums as well as a one-time special assessment to cover the FDIC's costs of resolving the bank failures. Excluding costs related to insurance-related expenses and pre-tax income. earnings are 13.5% higher than a year earlier. SMTB's stock currently trades at nine times earnings, one of the lowest multiples in the Northeast. Good things come in small packages. (Learn more about the FDIC in Who Backs Up The FDIC?)

The good news for Pinnacle Financial Partners in the second quarter was revenues increased 11.9% from $36.74 million to $41.1 million year-over-year. The bad news is that the bank lost $33.2 million, $41.1 million worse than Q2 last year. The culprit was $65.3 million in loan loss provisions, compared to $2.8 million last year. As a result, Pinnacle's efficiency ratio (noninterest expense divided by net interest income and noninterest income) jumped to 74.4% in Q2 from 59.5% at the end of the year. I guess that's why the stock is trading near its 52-week low. Banc Funds Co. should do all right if the economy keeps heading in the right direction.

Banc Funds Co. owns just less than 2% of SCBT Financial, which stands for South Carolina Bank and Trust. Although its second-quarter earnings before tax dropped 14.9%, SCBT's efficiency ratio was 60.88%, much lower than the 65.05% at the end of 2008. In May, the bank raised $29.9 million in a secondary offering at $23, and it's up 21% in the past three months. I'd say $23 is the floor on this one. Buy away.

Western U.S.
Washington Banking Co. is the smallest of the six banks with a market cap of less than $100 million. In the second quarter, it paid the 45th consecutive quarterly dividend since going public in 1998. Unfortunately, due to lower earnings - nine cents versus 25 cents - as well as funds set aside to redeem preferred shares issued for TARP funds, the dividend was only 2.5 cents instead of the usual 6.5. If you have a long-term hold in mind, this one should test $20 in the coming 18 months.

MB Financial sold $201.3 million at $16 a share in a secondary offering on September 18. Investors able to get in on the deal already have paper profits of 25%. That's a sweet deal made possible by its timely acquisition of Corus Bank's deposits, which the bank purchased or a song. We should expect that margins will rise as a result. MB's shares trade at 1.4 times book value, which is reasonable for a bank that's generating organic growth in the Chicago area. I like it.

Lastly, we have Texas Capital Bancshares, which Morgan Keegan analyst Robert Patten rates "outperform" due to its improving earnings picture and one of the regional banks most attractive share prices. A week prior to Morgan Keegan's call, Sterne Agee upgraded its stock from "neutral" to "buy." I'm not a big follower of analyst upgrades, but this kind of thing often lights a fire under a stock. It's a go. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Bottom Line
Oddly enough, Banc Funds Co.'s largest holding by a country mile is St. Louis-based Stifel Financial (NYSE:SF). Banc Funds owns $57 million in stock of the regional broker, accounting for 18% of its total portfolio. I've been reading some good things about the company, not the least of which is Q2 profits were up 28% and all divisions continue to grow, so SF joins the rest of these promising regional banks. Good call, Mr. Moore.

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Tickers in this Article: SMTB, PNFP, SCBT, WBCO, MBFI, TCBI, SF

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