Axos, S&T, and Other Small Bank Stocks With Big Upsides

Smaller banks have been hit particularly hard. The

SPDR S&P Regional Banking

exchange-traded fund (ticker: KRE) has dropped nearly 30% this year as the prospect of stricter regulations looms large. Earnings estimates for the stocks in the ETF have already dropped 37% over the past six months, and tighter rules would make them even less profitable. If the group has one thing going for it, it’s valuation. Regional banks trade at 8.8 times 12-month forward earnings, down from 9.8 times a year ago. But even that might not be cheap enough to buy the group outright.

“Banks are definitely cheap,” says Lamar Villere, portfolio manager at investment manager Villere & Co.“[But] you have this completely unpredictable risk. If there’s a run on the bank, the bank’s done.”

It would be foolhardy, though, to treat all banks the same way. In a classic case of throwing the baby out with the bath water, even small banks with thriving businesses have seen their stocks tumble with the rest of the group.

These small bank have seen their deposits remain stable and their profits rise. Their revenue has increased and loan volumes have held steady as customers from various industries seek money to grow their businesses. And even if demand should slip, the stocks are cheap enough that they should flourish once the rough patch is over.

Here are six small bank stocks that look ready to shine:

Axos Financial (ticker: AX)

Axos
,
a Las Vegas-based lender with a market value of $2.4 billion, serves small businesses, industrial companies, and consumers, and is building a reputation for mortgage lending. The stock is up 4.4% this year—making it one of the sector’s best performers. Analysts have raised their 2023 earnings estimates by about 5% since the end of 2022, while deposits rose from $15.7 billion at the end of 2022 to $16.7 billion in the first quarter. It’s a stock that has just gotten cheaper, while its fundamentals have only strengthened.

Bread Financial Holdings (BFH)

The

Columbus, Ohio-based lender

has had a solid year despite troubles in the industry. Its 2023 earnings estimates have risen 10% this year after a big first-quarter earnings beat. Sales have been boosted by better loan and transaction volumes, and deposits were relatively stable; they dropped just $688 million to $13.1 billion, during the first quarter of 2023, as growth in digital direct-to-consumer deposits helped offset losses in the wholesale channel. At just 2.9 times 12-month forward earnings, shares of the $1.6 billion lender look too cheap to ignore.

First Financial Bancorp (FFBC)

From its base in Cincinnati,

First Financial

caters to commercial customers across a range of industries, from industrial businesses to fast-casual restaurants. That gives the lender, with a market value of $2 billion, a level of diversification that protects it from an SVB-like meltdown. Analysts have raised the bank’s 2023 earnings estimates by almost 7% for the year, reflecting net interest margins that increased to 4.5% in the first quarter from 3.1% a yer earlier. Janney Montgomery Scott analyst John Rodis says the dollar value of First Financial’s loans outstanding could increase roughly 5% this year as new loans are made at higher rates.

OFG Bancorp (OFG)

OFG
,
a Puerto Rico-based firm, gets the majority of its revenue from lending, mainly through mortgages, credit cards, and business loans. Analysts have kept 2023 earnings per share estimates flat this year while deposits have also been flat at $8.6 billion since the end of 2022. All of the deposits at the $1.3 billion bank are in Puerto Rico, which makes them less likely to move into U.S. money-market funds. OFG is also benefiting from tens of billions of dollars of hurricane disaster relief for Puerto Rico, much-needed funds for the territory. The stock trades at 7.5 times earnings.

Preferred Bank (PFBC)

Preferred

is a mortgage and real estate lender. The Los Angeles-based bank, with a market value of $808 million, recently received regulatory approval for a $150 million share repurchase program. The could be a tailwind to earnings per share, as the bank has $886 million in cash on hand and generates almost $130 million in annual net income. Deposits, at $5.4 billion, have declined just a touch from $5.6 billion at the end of 2022. While the bank is exposed to commercial real estate, it says it hasn’t yet seen any weakness as of yet. Analysts earnings estimates have climbed 2% so far this year.

S&T Bancorp (STBA)

Pennsylvania-based

S&T
,
which has a market value of $1.1 billion, has been hurt by concerns around its commercial real estate loans. Office loans, though, make up just 6.5% of its total portfolio, says Daniel Tamayo, an analyst at Raymond James. The rest of the business is doing just fine. Analysts have increased this year’s earnings estimates by 7.5%, while deposits sit at about $7.1 billion, down from $7.2 billion at the end of 2022. What’s more, the stock trades at about eight times earnings, down from 10 times to start the year. “It’s still cheap,” says Tamayo.

Write to Jacob Sonenshine at [email protected]