This morning when I turned on the computer and scrolled through the news I saw yet another of my long-term community bank holdings had been taken over. Fox Chase Bancorp (FXCB), which I have owned for about four years, is being bought by Uninvest Corporation of Pennsylvania (UVSP) for $21 a share. This is double the average cost of my position and the latest example of the other "lollapalooza trade" -- one that has been working for several years and will continue for an extended period of time.
Rising regulatory and technology costs, along with a slow economy and crowded marketplace have combined to form a very attractive opportunity for small bank investors.
The setup in small regional and community banks is so close to perfect you would think it was a crowded trade. However, when I mention this "Trade of the Decade" most people whine about liquidity and a lack of visibility with these little stocks. But that is exactly why they should be buying shares of these banks! It's like talking to a brick wall, though.
Other folks just prefer trading in and out of stocks to make sure their broker has a nice holiday party this year and can continue to upgrade to the latest model BMW. To each their own, but I would rather make money with small illiquid banks that have powerful economic and demographic forces combining to create a "when, not if" opportunity.
As we get closer to New Year's Eve I want to give you a few of my favorite Trade of the Decade picks for 2016. My first suggestion is that any financially viable bank with less than one billion in assets, trading below book value and with bank stock activists and specialists as shareholders is a screaming buy. This will take some homework on your part, as most of these names are too small to mention here, but it will be worth your time.
I like Eagle Bancorp Montana (EBMT) as a pick for 2016. The bank has a presence in at least every decent-size city in Montana and has been growing nicely. Eagle has been growing deposits, loans and total assets since the credit crisis. Indeed, the bank may done a little too good of a job, as anyone that wants to enter the Montana markets has to seriously consider making a bid for Eagle. But the bank is not looking to sell and just raised $10 million from a subordinated debt sale to help to support organic growth and fund acquisitions.
Still, I can't rule out an offer too good to refuse for Eagle in 2016. Currently, the stock is trading right around tangible book value and the bank has been buying back shares to take advantage of the low valuation. With EBMT yielding 2.65%, you enjoy a nice payout while the bank either grows or gets taken out. Either scenario is a win for us as investors.
Next up is HopFed Bancorp (HFBC), located in Hopkinsville Ky., which has 18 branch offices located in middle Tennessee and western Kentucky. The bank has plans in place to expand toward Nashville and Louisville and its new Nashville loan production office is off to a strong start.
Meanwhile, HopFed is aggressively buying back stock and just announced another 300,000 share repurchase plan that restricts repurchases to prices below tangible book value. I have never seen that restriction in a buyback announcement but I like it.
HFBC shares are trading below book value, which is a big bonus. At just 91% of book value right now, the stock is a bargain. If the bank's growth plans are successful its earnings and stock price will go higher, and with $880 million of assets HopFed is a perfect target for another bank trying to grow into the $3 billion-$5 billion sweet spot.
HopFed's balance sheet is strong and its conservative approach to lending has kept nonperforming assets low, making it a tempting target for those wanting to expand in the region.
Forget all those other New Year's resolutions you will have broken by Super Bowl Sunday and forgotten altogether when the green flag drops on the Daytona 500. Resolve to make community bank stocks a bigger part of your portfolio.
Start with these two and then begin doing the homework needed to cash in on this lollapalooza.