Under the Radar: New Year, New Financial Frontiers -Beyond the Big Banks

If all goes as expected, you will receive this on New Year’s Eve.

By now, if you are like me, you are a little tired of the holidays and beginning to wonder just how much dieting and exercise will be required to make the last few weeks’ excesses disappear.

I stopped going out on New Year’s decades ago, as I prefer to drink my cocktails rather than wear them.

A bar full of people who only drink once or twice a year is a social minefield too fraught with peril for me to navigate successfully.

By now, most of us are probably also sick and tired of predictions. An endless parade of folks has danced across our TV screens and the internet, telling us precisely what will happen next year.

 It is all marketing. If your predictions are right, the marketing department will promote you as the world’s leading expert on your chosen topic, be it politics, sports, economics, or markets.

 If you are wrong, you will be one of many, and no one will notice.

I do not know what will happen next year.

 I am pretty sure U.S. politics will be loud, ugly, and unpleasant.

 The economy will probably be much better than the instant experts of the internet and “End of America” crowd have been suggesting.

The Yankees will probably be good, and Ohtani will most likely be in the running for MVP again.

That is as precise as I care to get.

When it comes to the path of the stock market this year, there are so many variables that I would hate to have to make a bet on a prediction—mine or anybody else’s. I know that after four years of outright hostility from regulators and politicians, the banking industry should experience much better conditions.

I also know that for almost four decades, buying small banks with plenty of capital and management skilled at avoiding stupidity has been a winning recipe. We double down on the winning by only purchasing these banks at bargain prices.

The Biden Administration has throttled bank M&A.

There is pent-up demand on the part of both buyers and sellers.

With these thoughts in mind, I am not going to make a prediction.

I am going to give you three bank stocks that fit the characteristics of banks that have delivered strong returns in the past.

All three will appeal to larger banks looking to grow via acquisition. All three also have plenty of capital and trade at bargain prices.

They are smaller.

 Unless you live in their market area, you probably have never heard of them. Almost no one on Wall Street follows these banks.

These are not JP Morgan JPM trading millions of shares daily.

 Use a limit order.

Ponce Financial Group is a holding company based in the Bronx and has branches in Brooklyn, Queens, and Manhattan. The bank qualifies as a Minority Depository Institution, a Community Development Financial Institution, and a certified Small Business Administration lender.

Ponce also qualified for special financing back in 2020 under the Emergency Capital Investment Program (ECIP). The Treasury has recently announced the terms of exiting that plan, and the completion of these terms would add to the book value of Ponce shares.

The stock is already trading for right around book value, and the bank has plenty of capital. The loan portfolio is in good shape, and the nonperforming asset ratio is just 0.57.

There is a lot of skin in the game at Ponce Financial. Officers and directors own 6.7%. The Employee Stock Ownership Plan owns another 8.4%.

Even if the bank never gets bought out, the stock price has a good chance of trading much higher during the coming year.

Parke Bancorp PKBK has eight branches in South Jersey and a little over $2 billion in assets. The bank’s core market area is Philadelphia, surrounding counties, and Southern New Jersey, an area that has seen extensive M&A activity in the past.

The loan portfolio is primarily single-family homes and local commercial real estate. The nonperforming assets ratio is just 0.67, indicating a refreshing lack of stupidity on the part of management. Officers and directors own over 15% of Parke Bancorp, so there is lots of skin in the game.

 At 84% of book value and just 8 times earnings, the stock is undervalued at the current price.

Finally, we have ESSA Bank & Trust ESSA in Stroudsburg, PA. The bank serves a market from Philadelphia to Scranton. ESSA has 22 branches and a little over $2 billion in assets. It also has plenty of capital and a high-quality loan portfolio.

There is skin in the game at ESSA as officers and directors own about 7.5% of the bank’s stock, and the Employee Stock Ownership Plan holds over 10%.

The stock trades at bargain basement prices at 10 times earnings and 84% of book value.

Again, these are all smaller banks, so use a limit order to buy shares.

Most of you will not bother. It is not exciting enough. It is “just” banks.

The consolidation trade in community banks’ stocks has worked for decades and will work for a few more.

Buying well-run banks with plenty of capital at bargain prices has consistently been profitable over my career.

 I will take that over excitement any day of the week.