Yesterday's column mentioning the continued struggles First NBC Bank (FNBC) made me wonder if there were any other potential longshot banks out there worth a small speculation. Banks that have struggled due to stupid decisions and loan problems (which, given the climate, were the direct result of stupid decisions) have a real chance to make up ground quickly if the new administration can pass some form of regulatory relief. A stronger economy that leads to higher interest rates and higher net interest margins is also going to give banks a chance to earn their way out of any current difficulties.
I usually limit my investments in the banks in the sector to solid banks on sale, but right now seems like a decent time to wind up and swing from the heels on a few of them. I won't be backing up the truck -- when I do engage in speculation, I like to keep potential losses small enough not to do much more than irritate me, and still have potential gains that will add a meaningful amount to overall total return. Also, bear in mind that I expect to make my returns over several years, not by the close of the market today.
Four Oaks Fincorp (FOFN) is one bank that looks to me like it could be on the road to recovery. The bank has 13 offices with about $717 million in assets. It operates in eastern and central North Carolina -- a great market that includes the city of Raleigh, which has a solid economy right now. The bank is operating under a consent order with the Federal Reserve Baird right now, as a result of conditions stemming from its relationship with payday lenders before 2011. In 2014, it paid a civil penalty to the U.S. Justice Department as a result of those relationships.
The bank also had a problem with nonperforming assets. At year-end 2011, nonperforming assets were over $50 million -- and were almost 6% of total assets. The bank has worked at rebuilding its credit culture and working down the total amount of nonperforming assets. And it has succeeded. Right now, nonperforming assets are down to about $6 million, or 0.84% of total assets. It has also reduced concentration in commercial real estate loans, as well as acquisition and construction loans, to levels the regulatory agencies will be much happier to see.
FOFN is now completely out of the third-party lending business, and is focusing on growth in core markets. The bank is profitable and growing once again. CEO Dave Rupp told investors back in November, "We are pleased to report a very solid quarter of both growth and earnings. Customer activity remains strong, and we are making progress in many areas of the business. With much of the foundational work behind us, we turn our focus to expanding our customer base and improving productivity across the Bank."
If the bank continues to execute on its recovery plan and grow assets and earnings, the stock could recover ground over the next several years. It is an uphill battle, but so far management has been up to the task. If they got halfway back to the mid-20s, the stock once traded for it would be a huge gain from today's $3.30. I think it is worth a small bet and will be picking up a few shares on the next pullback. Over about five years, I believe will be more than compensated for the risk.
It was prepaid credit cards that were the problem for The Bancorp (TBBK) . The bank settled with the FDIC for $3 million and had to pay restitution of about $1.3 million at the end of 2015. The regulators claimed The Bancorp engaged in unfair and deceptive practices, as well as failing to provide promised benefits for a debit card rewards program that the bank offered with a third-party services provider. I have mentioned this stock as a possible long shot before, but have not purchased it just yet. It is on my longshot watch list at the moment.
There may be some more weakness ahead when it announces earnings. Raymond James analyst William Wallace recently downgraded the stock, saying that "Given the increased likelihood of a capital raise following another quarter of significant credit marks, we do not believe having a positive bias on shares is appropriate." The stock has fallen another 20% or so since that report was issued, so I would be inclined to buy after the capital raise is completed.
If the positive perfect storm plays out for community banks, as many are hoping, then these long-shot, troubled banks could offer large returns for patient, aggressive investors over the next several years. If you decide to take the plunge, stay small and move slow.