It has been a long slow economic recovery, but the banking industry is showing signs of getting back on track. Most of the credit issues are behind the sector now and banks can again focus on doing business instead of cleaning up messes. That is not the easiest thing in the world, with low net-interest margins and loan demand way below its peak levels, but it is closer to business as usual. Banks are in much better shape today than they were just a few years. The average equity-to-asset ratio rose to 11.3% from 11.2%, the highest level in almost two years. That's actually above the pre-crisis capital levels, as banks have cut leverage and become more conservative.
It's time for the banks to begin rewarding shareholders after the tough times in the past five years. Many banks had to reduce or eliminate dividend payments and suspend buyback plans to conserve capital and deal with difficult conditions and above-average loan losses. Now it's time for some of that capital to find its way back to shareholders. Some banks are starting to do just that, and we are seeing dividend increases and new stock buyback plans. Bank stocks are back on track to be income stocks with above-average dividend growth. This is especially true of smaller banks that are the backbone of the Trade of the Decade.
I ran a screen for banks with decent dividend yields and have been buying back stock in the past year. I am stubborn about buying undervalued securities, so I limited my universe to bank stocks trading below tangible book value. I came up with a few names that also qualify as Trade of the Decade stocks, and they will benefit from the continued recovery and consolidation trends that are starting to develop in the sector.
Westfield Financial (WFD) has been a very sleepy bank since I first bought it a couple of years ago. The stock has not done much but I am confident that that will change. The Massachusetts-based bank has 12 branches and about $1.2 billion in total assets. Nonperforming assets are just 0.25% of assets, and management has been extremely conservative about maintaining loan-loss reserves. Reserves against loan losses are currently 248.6% of nonperforming loans. The stock yields 3.36%, and management repurchased 614,548 shares of common stock for an average price of $7.23 per share. Westfield has just over 1.4 million shares remaining under the current repurchase program. The stock currently trades at just 89% of tangible book.
Provident Financial (PROV) operates 14 branches in the region known as the Inland Empire of Southern California. It has $1.4 billion in assets. Management has done a fantastic job of repairing the loan portfolio from the wreckage that was Southern California during the financial crisis. Nonperforming assets have fallen by more than 50% in the past two years and are currently just 1.8% of total assets. Provident just raised its dividend by 10% and the shares currently yield 3.02%. In the past year, the bank has bought back about 1.1 million shares of common stock and has 250,027 shares left to buy under the current program. The stock currently trades hands at 95% of tangible book value.
ESSA Bancorp (ESSA) has shown up on just about every bank stock screen I have run in the past few years. It is based in Pennsylvania, and it has 27 branches and $1.56 billion in total assets. Nonperforming assets are just 1.7% of total assets, so the loan portfolio is in solid shape. ESSA raised the dividend payout earlier this year, and the stock currently yields 2.46%. During the second quarter, the company repurchased 61,900 shares at an average cost of $10.53 per share, and it has repurchased 121,125 shares during the fiscal year-to-date 2014 at an average cost of $10.92 per share. ESSA trades at just 85% of tangible book and is one of my favorite long-term Trade of the Decade stocks.
Conditions in the banking industry are improving, and balance sheets are healthier than they have been in years. We should also see more bank boards return some capital to the shareholders in the form of dividends and stock buybacks. Both of these events should help push stock prices; those who by at bargain levels today may be rewarded.