Today I want to take a look at some banks that I hope have a bad quarter and see some selling by those who jumped into community banks in anticipation of a Trump Presidency granting some regulatory relief. I suspect we got a lot of hot money with a shorter timeframe than we usually see in the small bank stocks, and it will likely jump out as quickly as it jumped into them. We will see some markdowns of security inventories this quarter after the pop in interest rates post-election, and I am hoping some of my almost cheap enough banks become cheap enough.
ESSA Bancorp (ESSA) is an excellent example of an almost cheap enough bank. I have owned this stock for a very long time, with outstanding results so far. Management have executed their growth plans with a significant amount of success over the past few year. They have smart acquisitions that extended their markets into Scranton in one direction and the Philadelphia market in another. The shares yield 2.25%, and management have been buying back stock below book value for several years now. With the stock now trading at 1.14x book, they will stop buying back stock, but the management have a shareholder friendly attitude. The bank has 27 branches with about $1.7 billion in total assets, and I consider it a fantastic long-term holding. If the stock falls back below tangible book value this earnings season, it will make an excellent addition to a trade of the decade portfolio.
Select Bancorp (SLCT) is based in Dunn, North Carolina and has 13 branches with $844 million in assets right now. The bank has plenty of capital, with an equity to assets ratio of over 13. Back in August, it announced it would use some of that excess capital to buy back shares. The buyback allowed for the repurchase of 581, 518 shares, or about 5% of the outstanding stock. The loan portfolio is in fantastic shape, with nonperforming assets that are just 0.67% of total assets. This is a well-run bank in an area with decent economic activity trading at 1.18x book value. Again, I would love to see a pullback below book that would allow me to add to my position and those of you who do not already own the stock a chance to buy it at a bargain level.
Peoples Bancorp (PEBK) is also located in North Carolina, with 22 offices and just over $1 billion in total assets. This is another well-run little bank that is in great financial shape. The equity to asset ratio is over 11, and nonperforming assets are just 0.44% of total assets right now. The shares yield 1.66% at today's price, and the bank does have a buyback plan in place, so management have a shareholder-friendly attitude. The stock is trading at 1.18% of tangible book value after the recent price run-up. I would be a buyer if it pulled back during earnings season.
Northeast Bancorp (NBN) is another well-run, shareholder-friendly bank where I would love to see a pullback in price. Northeast is located in Lewiston, Maine and has 12 offices with $988 million in total assets. Management have done an excellent job of increasing the asset level over the past several years and are now on the threshold of the $1 billion survive-and-thrive mark. They have a buyback plan in place and, in the most recent quarter, they bought back 645,238 shares at an average price of $10.75 and announced an additional 500,000 share stock repurchase plan. The stock is trading at 1.12x tangible book value, so it would not take much of a price decline for it to be bargain levels once again.
Small banks have had a huge run following the election. While it is true that community banks could see enormous benefits from relaxed regulations, lower taxes, and increased economic activity, I do not think it will all come together quickly enough for some of the hot money that recently entered the arena. I have a list of 89 banks on my desk that have strong balance sheets and loan portfolios that trade between 1x and 1.2x times book value. Many of them have activist shareholders working to unlock shareholder value over the next few years. I will be watching closely, hoping that a disappointing short-term result creates a chance for me to buy into the long-term opportunity at bargain prices.
