Carolina Bank Holdings: An Undervalued, High Earnings Growth Bank

 |  About: Carolina Bank Holdings Inc. (CLBH)
by: Daniel Sermersheim

This entry will highlight the financial strength of Carolina Bank Holdings (NASDAQ:CLBH) and make a case for further advancement.

We can start with the PE, or price to earnings ratio. Although many will contend PE ratio is not necessarily a good indicator of anything, I do think when PE ratios are in the single digits on a company with earnings growth, there is a justifiable reason for advancement. In good times when banks are profitable, an extended bank with a reasonable PE may reach 12-15 times earnings.

CLBH has a trailing twelve month earnings per share number of $1.22.

Recent pivot point $ 6.07 5.0
Current price $ 7.47 6.1
Reasonable PE of 10 $ 12.20 10.0
Extended PE of 15 $ 18.30 15.0
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One can see at current prices CLBH has a PE of just 6. When the stock began the recent breakout, clearing the August 2nd high of $6.07, the PE was a mere 5. To try and project a reasonable evaluation of the stock at 10 times earnings would put the stock up around 65% from current prices, or around $12.20 a share. If one were to think about an extended run where the stock may reach full value, if not overvalued, a PE of 15 would put the stock two and half times its value at today's close. To see a valuation of 10 times or even 15 times earnings is not a stretch, one need only look at the industry group, Mid Atlantic Banks, as composed by Yahoo. Here one will see CLBH is at the low end of the range, actually one of the cheapest banks when using PE as a valuation.

Of course PE isn't everything. The bank could be heavily in debt and about to go under, but still churning a profit. So let's look at the balance sheet. The company has equity of $50.14 million, or $14.80 per share. This means CLBH is trading at roughly half of its equity per share. Compare this to some more well known banks, such as Fifth Third (NASDAQ:FITB), which is currently trading at twice equity.

There are many ratios a bank uses, but some of the more important ones were highlighted in the company's recent earnings release:

"Carolina Bank, the subsidiary of Carolina Bank Holdings, Inc., continued to maintain 'Well Capitalized' status, the highest regulatory capital measure. Capital ratios at June 30, 2012 for Carolina Bank improved to 8.79% for Tier 1 leverage, 11.12% for Tier 1 risk-based, and 14.12% for total risk-based."


"Non-performing loans to total loans held for investment decreased to 4.74% at June 30, 2012 from 5.95% at June 30, 2011. Non-performing assets to total assets decreased to 4.16% at June 30, 2012 from 6.26% at June 30, 2011."

Clearly from a regulatory perspective the company exceeds the government standards. From a non performing assets/loans perspective, the company is showing great improvement on a year over year basis, so much improvement the company chose not to record any provisions for loan loses in the most recent quarter.

One can also look at things like return on equity. This essentially is a measure of how well a company is using its equity to produce earnings. Again one can look to Yahoo's table above and sort it by ROE. CLBH is one of the better performers in the group.

Lastly I want to look at earnings growth on a year over year basis.

Earnings per share
4th quarter 2010 $ 0.12 $ (0.53)
1st quarter 2011 $ 0.10 $ -
2nd quarter 2011 $ (0.11) $ (0.54)
3rd quarter 2011 $ 0.16 $ (0.62)
4th quarter 2011 $ 0.21 $ 0.12
1st quarter 2012 $ 0.27 $ 0.10
2nd quarter 2012 $ 0.58 $ (0.11)
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From this table one can see each of the last seven quarters the company has reported year on year earnings growth, concluding in record quarterly profits for the most recent quarter, the third such quarter of record quarterly profits in a row. Now one caveat on these very nice numbers ties in to the above mention where the company did not record any allowance for loan losses. Eventually, the company will have to start taking this charge once again and earnings will not sustain themselves at the high level of $0.58 per share, however the $0.20-$0.30 per share range seems to be a reasonable expectation if the company is recording a normal amount of provision for loan losses. On a yearly basis a reasonable expectation of the company's earnings is then around $1.00-$1.10 per share assuming no change in current business conditions. Still plenty of earnings to call this stock undervalued.

Clearly this bank is undervalued relative to its peers, undervalued relative to most stocks, and undervalued in my mind. The company's latest quarter featured quarterly profit over twice as high as any other quarter in the company's history. With such a low valuation relative to equity, earnings, the financial sector, and the market in general, I can only assume there is much upside potential in this company's stock.

However, the stock had a very nice Monday this week, climbing over 15%. Will the stock advance from here, consolidate, pull back, or base? We shall see. From a fundamental perspective this bank only has upside potential.

Disclosure: I purchased this stock at $6.03 per share before the recent move began. I do not have a particular idea of when or at what price I want to sell and adjust my own mental stops on a daily basis.

Disclosure: I am long CLBH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.