Axos, S&T and other small bank stocks with big opportunities

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All was going well for bank stocks this year — until Silicon Valley Bank collapsed.

As interest rates rose, customers withdrew billions of dollars from their savings accounts and placed the money in higher-yielding money market funds, forcing the SVB to take the drastic step of selling bonds at a loss to bolster its reserves. A panic ensued and the pain spread throughout the sector, forcing other banking institutions into receivership and making almost every bank suspect in the eyes of investors.

Smaller banks are particularly affected. The

SPDR S&P Regional Banking

The exchange-traded fund (ticker: KRE) is down nearly 30% this year amid the prospect of tighter regulations. Earnings estimates for the stocks in the ETF are already down 37% over the past six months, and stricter rules would make them even less profitable. If the group has one thing, it's the rating. Regional banks are trading 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 is a run on the bank, the bank is dead.”

However, it would be foolish to treat all banks equally. In a classic case of throwing the baby out with the bath water, even small banks with thriving companies have seen their stocks plummet along with the rest of the group.

The deposits of these small banks remained stable and their profits increased. Their sales have increased and lending volume has remained stable as customers from different industries look for money to grow their business. And even if demand falls, stocks are so cheap they should bounce back after the rough patch.

Here are six small bank stocks that seem poised to shine:

Axos Financial (ticker: AX)

axos
,

a $2.4 billion Las Vegas based lender serving small business, industrial and consumer customers and building a strong mortgage lending reputation. The stock is up 4.4% this year, making it one of the industry's top performers. Analysts have raised their 2023 earnings estimates by about 5% since the end of 2022, while deposits rose to $16.7 billion in the first quarter from $15.7 billion at the end of 2022. It's a stock that has just gotten cheaper while its fundamentals have only strengthened.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
Axos Financial / AX	4.4%	$2.4	7.6	5.0%

Sources: Bloomberg; FactSet

Bread Financial Holdings (BFH)

The

Lenders based in Columbus, Ohio

has had a solid year despite the troubles in the industry. Its earnings estimates for 2023 are up 10% this year after a sharp rise in earnings in the first quarter. Sales were boosted by better credit and transaction volumes and deposits remained relatively stable; They fell by just $688 million to $13.1 billion in the first quarter of 2023 as growth in digital direct deposits from consumers helped offset losses in the wholesale channel. At just 2.9 times forward 12-month earnings, the $1.6 billion lender's stock looks too cheap to ignore.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
Bread Financial Holdings / BFH	-15.6%	$1.6	2.9	10.3%

Sources: Bloomberg; FactSet

First Financial Bancorp (FFBC)

From its headquarters in Cincinnati

First financial

serves commercial customers across a range of industries, from industrial operations to fast-casual restaurants. That gives the $2 billion lender a level of diversification that protects it from an SVB-like meltdown. Analysts have raised the bank's 2023 earnings estimates by nearly 7%, as net interest margins rose to 4.5% in the first quarter from 3.1% a year earlier. Janney Montgomery Scott analyst John Rodis says the dollar value of First Financial's outstanding loans could rise about 5% this year as new loans are issued at higher interest rates.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
First Financial Bancorp / FFBC	-14.5%	$2.0	8.2	6.7%

Sources: Bloomberg; FactSet

OFG Bancorp (OFG)

OFG
,

a Puerto Rico-based company that derives the majority of its income from lending, primarily through mortgages, credit cards, and business loans. Analysts have left estimates for 2023 earnings per share unchanged this year, while deposits since the end of 2022 are also unchanged at $8.6 billion. All of the deposits at the $1.3 billion bank are in Puerto Rico, making them less likely to end up in US money – market funds. OFG also benefits from tens of billions of dollars in hurricane disaster relief for Puerto Rico, much-needed funds for the area. The stock trades at 7.5 times earnings.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
OFG Bancorp / OFG	-3.4%	$1.3	7.5	0.1%

Sources: Bloomberg; FactSet

Preferred Bank (PFBC)

Preferred

is a mortgage and real estate lender. The Los Angeles-based bank, which has a market value of $808 million, recently received regulatory approval for a $150 million share repurchase program. That could have a positive impact on earnings per share as the bank has $886 million in cash on hand and generates nearly $130 million in net income. Deposits are down only slightly at $5.4 billion from $5.6 billion at the end of 2022. Although the bank has exposure to commercial real estate, it has not yet seen any weakness. Analysts' earnings estimates are up 2% so far this year.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
Preferred Bank / PFBC	-24.8%	$0.8	6.1	2.3%

Sources: Bloomberg; FactSet

S&T Bancorp (STBA)

Based in Pennsylvania

S&T
,

which has a market value of $1.1 billion was impacted by concerns about its commercial real estate debt. However, office loans make up just 6.5% of the total portfolio, says Daniel Tamayo, an analyst at Raymond James. The rest of the business is going well. Analysts have raised earnings estimates for this year by 7.5% while deposits stand at about $7.1 billion, compared to $7.2 billion at the end of 2022. Additionally, the stock is trading at about eight times Traded at earnings, up from 10 times earlier in the year. “It's still cheap,” says Tamayo.

company / ticker	change since the beginning of the year	Market Value (Billions)	Forward P/E	Change in EPS estimate since the beginning of 2023
S&T Bancorp / STBA	-18.7%	$1.1	8.1	7.5%

Sources: Bloomberg; FactSet

write to Jacob Sonenshine at [email protected]