If you know me at all or are a regular reader you should be able to guess exactly where today's column is going. So far, we have talked about growth, value and special situation low-priced stocks. The only area we have not talked about thus far is small community bank stocks trading at low prices.
Community banks have been my favorite investment area for a few years now, and I am being well rewarded for my focus and dedication to the "trade of the decade." The small banks are reporting solid earnings growth well above their larger brethren, dividends are being increased, stock is being repurchased below book value and merger and acquisition activity is picking up.
The best part is that the sector is in the early stages of a long term trend and the biggest gains are still to come.
There are more than 100 community bank stocks trading below $10 a share. And when I whittle the list down to those trading below book value, I still have about 47 stocks from which to choose. Therefore, I am going to get super picky and limit my low-priced, undervalued bank selections to those with activists, or what I call "bank smart" investors on the shareholder list.
Northeast Community Bancorp (NECB) has an interesting strategy for a smaller bank. In addition to the home office in White Plains, N.Y. and four branches in the New York City area, NECB has four branches up in the Boston, Mass. market. The bank considers its lending territory to be the northeastern U.S., including New York, Massachusetts, New Jersey, Connecticut, Pennsylvania and New Hampshire. NECB is in solid financial shape, with an equity-to-assets ratio over 16 and nonperforming assets that are just 2.36% of total assets.
At first glance, the stock is cheap enough at 90% of book value. But a deeper look shows us that the bank is even more undervalued. NECB is a partially converted thrift and the mutual holding company still owns almost 60%, or $7.2 million shares, of the bank. If it were to do a second-step conversion, the book value would go from today's $8.57 per share to somewhere in the $11 per share area.
The stock is currently trading at about 68% of fully converted book value so it is a much bigger bargain than it first appears. Activist investor Joseph Stilwell is a NECB shareholder who owns about 10% of the bank according to the latest proxy filing. In addition, Banc Funds LLC has a stake of more than 4% and Orlando-based value firm DePrince Race & Zollo also has a substantial position in the stock.
It's been a while since we talked about Westfield Bank (WFD). I have owned the stock for a couple of years now and WFD really hasn't done much so far. It's a sleepy little Massachusetts bank with 13 branches and about $1.3 billion in total assets. However, the quiet is disguising the good things going on at the bank.
Westfield grew its loan book by more than 12 times in the past year at a solid pace. In the first quarter of 2015, the bank had increases in residential loans of $38.9 million, commercial and industrial loans of $29.8 million and commercial real estate loans of $13.0 million. The bank is also taking a shareholder-friendly approach, as it bought back 225,041 shares at an average price of $7.44 in the first quarter of 2015. The stock also yields 1.64% at the recent price.
The bank is in solid financial shape, with an equity-to-assets ratio of 9.99 and nonperforming assets are just 0.63% of total assets. EJF Capital and Banc Funds LLC both have solid positions in the stock, as does Blackrock and Royce Funds. Officers and directors own more than 6% and the bank's ESOP plan is the largest shareholder, with a 9.9% stake. Therefore, everyone at the bank has "skin in the game" and a vested interest to do what it takes to move the stock price higher over time.
Other stocks on the list that I have recently talked about include Cape Bancorp (CBNJ), MBT Financial (MBTF) and Northeast Bancorp (NBN). They are all trading at a discount to book value, below $10 and have activists and bank smart investors involved in the stocks.
There are a bunch more with the same characteristics but are too small to talk about here. You can put together a very nice portfolio of low-priced bank stocks right now and I encourage you to do so.