Description

HWFG came public in early November at $12 per share in the aftermath of a big washout in financial stocks. Sole managed by RBC Capital markets, the deal was poorly placed, in my opinion.

Harrington West is a community bank serving California's Central Coast, the Kansas City, KS suburbs and Phoenix/Scottsdale, AZ: all growth markets.

Some key figures:

shares 4.3m

$781m Assets
$520m deposits (85% California)
NPA's (non performing assets): $2.3= .55% of loans
reserves cover NPL's almost 2 to 1.
Insiders own over 40% of bank, so interests are aligned with shareholders


BV 9.90 per share= 115% of Book
EPS 1.30 expected for 203

at 8.7x earnings and a small premium to book, this is just too cheap for a bank with strong credit quality, savvy shareholder oriented management and growing market areas.



Risks:

collapse in commercial RE values in the Central Coast region. This possibility should be mitigated by the region's more resonable values, relative to SF and LA.

Association with Smith, Breedon: Could be a + or a potential minus. Smith, Breedon is well respected in the area of bank asset/liability management and the association with them as signficant shareholders brings a certain sophistication to the table. Yet, one must watch that management doesn't take their eye off the franchise enhancing ball.

Catalyst

In the near term, retail selling pressure should dry up after turn of year. Stock should gravitate to a multiple closer to that of other growth-oriented community banks. In the medium to longer term, HWFG would make an attractive acquisition candidate.