It's a busy time for community-bank earnings reports, and two I've recently reviewed really stand out as pointing to strong opportunities for long-term investors.
Let's check them out:
Investors Bancorp (ISBC)
This chain of some 140 New York and New Jersey bank branches is the story of banking done right.
ISBC recently reported 17% year-over-year earnings growth, along with continued asset and loan growth. The bank's loan portfolio is also in solid shape, with a very low level of non-performing assets.
Meanwhile, Investors Bancorp has raised its dividend by 20%, so management is clearly working to return capital to shareholders. At the same time, the firm recently repurchased 12.2 million shares of its stock and announced a new buyback plan covering an additional 31 million shares (or 10% of the float). That program will kick in as soon as ISBC buys the 9 million shares remaining on its current stock-repurchase authorization.
During the bank's recent earnings call, CEO Kevin Cummings discussed management's approach to deploying capital from a 2014 second-step conversion, saying ISBC "is committed to leveraging its second-step proceeds [in] a prudent manner."
He said that includes "organic growth, stock buybacks, dividends, and acquisitions that are strategic and that create value for our franchise, our customers and most importantly, our shareholders." So far, management has exceeded expectations.
Investors Bancorp is also one of the few banks I'm aware of that's successfully opening new branches. The firm plans to cut the ribbon on 10 additional New York and New Jersey branches over the next several months, adding to four locations that it's opened since the bank completed its 2014 conversion offering.
Cummings told analysts that ISBC also intends to open seven additional branches next year. I don't know of any other bank that's adding locations with the same frequency and apparent success in today's very competitive environment.
Lastly, Investors Bancorp said it's open to mergers and acquisitions to grow the business. Cummings said during ISBC's conference call that M&A "will be an important tool for us in the future as we grow and leverage our excess capital.
"As mentioned many times on previous calls, we will do transactions that enhance shareholder value, have reasonable earn-backs on both the static and crossover methods and provide strategic and franchise expansion for the bank," he said. "The math is the driver here. But the potential [of] the target and what we can do with it are also major considerations."
The bottom line: I think ISBC does a great job of underwriting loans, and the quality of its portfolio reflects that. The firm is also using excess capital to reward shareholders, while management has a sensible growth plan in place.
Shares currently trade at 1.1x book value, but I still recommend buying them here. And if the price slips below book value because of continued sector weakness or a broad-market selloff, I think ISBC will become a "back-up-the-truck-and-buy" bank stock.
Greene Bancorp (GNBC)
Houston-based Greene Bancorp released a very interesting earnings report recently.
The bank has made some smart acquisitions over the past few years and done a nice job growing the business, but energy-related loans are becoming a problem. So, GNBC has decided to get out of energy lending entirely. The bank announced plans to segregate energy loans and initiate an asset-reduction strategy to "remove [this] temporary roadblock to execution of the company's growth plan."
This decision put GNBC way up on my radar screen. Non-performing assets are only 2.1% even including the bank's energy portfolio, so GNBC isn't facing any type of real stress. And the bank's tangible-equity-to-assets ratio is also about 9%, which means that while GNBC isn't exactly awash in excess capital, it should have sufficient funds to deal with its loan portfolio.
CEO Manuel Mehos certainly seems confident about the future, as he recently bought 15,400 GNBC shares for about $134,000 (or $8.67 each). I think GNBC is an outstanding buy for aggressive-but-patient investors at $7.75 or less (about 85% of book value), and shares have been trading below that level today.
The Bottom Line
Community banks remain my favorite market sector. Another flood of firms plan to report earnings this week -- and hopefully, that will turn up a few more gems to buy.