Pretty much there has been a lot of talk of people searching into regional and community bank stocks that have been hurt due to the banking crisis, commercial loan concerns, rising interest rates, FHLB borrowings by these players, etc.
So even with all of these discussions saying they are going to research, i have not heard any results or observations so I’m going to give my take on the situation along with some stocks i have found
So basically on the asset side for these banks, like most traditional banks, they have 5-20% in securities, 30%-60% in commercial loans/RE (very broad), 10-30% residential, and sometimes 0-5% secured person loans.
On the liability size, most banks of these sizes have minimal non-deposit borrowings though most have recently borrowed a good amount of short-term FHLB along with remaining PPP debt, though thats rlly small. For deposits though, the main thing I have been looking at is non-interest bearing deposits and Term Deposits (CDs) being competitive and unfortunately more prevalent.
Though initially I haven’t been looking at it, I am seeing the most important aspect for opportunities being:
— A solid amount of non-interest deposits with the amount not really decreasing, along with this, current deposit growth being stable and a good mix between business and consumer deposits along with low brokered deposits.
— Preferably a smaller amount of loans in commercial real estate due to the risks in retail and especially in office
— A low net-charge off amount but most of of these banks have solid loan originations and the only material net charge offs are in their secured personal loan/SBA segments though that is expected.
— For their P&L, their trust management business should be high margin and growing relatively well along with service charges not being significant part of their non-interest income. Along with this, their efficiency should be pretty good even with their lack of scale, im talking net margins of 20%+ in good times and sub 60-65% efficiency ratio with ROE being high though this is dependent on situation.
— One more thing is of course making sure their capital ratios are above average aka they are well capitalized, because of the risk weighting of these securities and loans being in the 0%-20%, their liquidity needs to be looked at so I like to see that besides fair value securities, they have a fair amount of cash on hand.
Overall, of the around 30 smallest U.S community banks I’ve screened, the best I’ve found is FUNC or First United Corporation.
They have maintained their dividend at around 5% yield and only 15-20% payout ratio nicely. Along with this their only non deposit liabilities are some short-term repurchase agreements of 50M (Deposits of 1.59B), 80M in fixed 4.6% 12 and 18 month FHLB borrowing which occurred in the last quarter as a precaution just in case of issues (management’s words backed by their cash reserves at 9% of deposits, higher than average small bank), and 30M in subordinated debt at a variable rate (7.7% AOC). Overall only 80M in debt compared to them having some excess equity (through their cash) which is not earning much (around 1% for some reason) and though they are earnings less, NIM is pretty stable and the yoy net income being lower is mostly due to higher rates on deposit accounts (80% of it) and the rest being the FHLB borrowing, so I really think earnings will go down about 400-600k more to account for a full quarter of interest more, net income when adding back Depreciaiton and subtracting maintenance capex, we get around 4.4M next quarter or a low PE multiple of 5x annualized with adjusted ROE of 11.5% or ROTE of 12.6% and P/TBVPS of 0.62x around. The only thing I am concerned about with them is their commercial loans/RE, though I am not able to find on filings any breakdown of these loans but they are performing as expected.
Overall this is a quick thesis/analysis and i intend to look deeper into FUNC and the sector as a whole as there are many similarly attractive plays.
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