After yesterday's column was released I was asked if what I said about infrastructure stock held true with the bank stocks as well. Many of the bank stocks, especially larger community and regional banks, have seen fantastic rallies since the election, and yes, many of them reached levels where it made lots of sense to sell them. The general feeling is that there will be a change of the regulatory climate under the new presidential administration, and while I think that is probably correct, I have my doubts that it will happen as easily and quickly as some newly minted banks stock investors are hoping.
Having said that, I have sold some bank stocks this month. I thought that both Kearny Financial (KRNY) and Beneficial Bancorp (BNCL) had moved to levels that represented at least fair value, so I sold them. I had good profits in both, so we went ahead and booked the gains. I have wanted to sell shares of Citizens Financial (CFG) almost since the day I bought them as it is far larger a bank than I usually like to own. We also let go of shares of First Bank (FRBA) when my friend Louis Navellier added it to his Buy list, and momentum buyers took the stock up by about 25%.
Don't let the fact that I took some profits mean that I am throwing in the towel on the Trade of the Decade. There are still plenty of small banks that are below book value with lots of capital and strong loan portfolios, and many of them are worth buying. In fact, I purchased three banks on Friday afternoon that have undergone a conversion transaction this year and are still very cheap. They have all three seen activist shareholders buy their stock during the third quarter, and I am pretty excited by the long-term potential of all three.
Two of them have a total market capitalization of less than $30 million, so you will have to do some digging on your own to uncover those banks. Randolph Bancorp (RNDB) is the largest of them with a market cap of $87 million, just barely large enough to share with the Real Money audience.
Randolph Bancorp completed its mutual thrift-to-stock conversion back in July and is currently selling at just 94% of tangible book value. At the same time as the offering, they acquired First Eastern Bankshares in a transaction that added a branch office in downtown Boston, seven loan production offices in Massachusetts and one loan production office in New Hampshire. They acquired First Eastern at a good enough price that they had to recognize a bargain purchase gain of $1,451,000, representing the excess of the fair value of the net assets acquired over the amount paid in the acquisition.
The addition of the mortgage offices seems to be working for Randolph Bancorp so far. In the quarter, interest income rose by $500,000 and management attributed all of the increase to First Eastern Mortgage production. CEO James P. McDonough said on the earnings call, "Our first quarter as a public company has certainly been exciting. It is particularly gratifying to see the positive impact our acquisition of First Eastern has had on our operating results. With the decline in mortgage rates that occurred during the quarter, our team of over 50 loan originators has been active in responding to the opportunity for customers to finance their home purchases and refinance their existing mortgages."
As is the case with most of these conversions, Randolph Bancorp attracted no shortage of interest by bank stock specialists and activists. Some of the biggest buyers were our old friends at EJF Capital, a firm from which I have stolen many profitable stock ideas over the years. Michael Price was a buyer of the stock as was activist Lawrence Seidman. M3F Funds was founded by bank stock investors who formerly worked at Hovde Capital Advisors, and they were also buyers of the stock during the quarter.
Randolph Bancorp is in solid shape with a loan portfolio that is more than 60% single-family homes, and non-performing assets are just 0.66% of total assets. The tangible stockholders' equity-to-tangible assets at the end of the quarter was 17.52%, so they have more than enough capital on hand.
While many banks had a huge rally following the election, many of the smaller ones that I prefer for the Trade of the Decade do not attract the attention of short-term traders and are still cheap enough to buy right now.