ESSA Bancorp: In the swing
Pennsylvania’s palette — red or blue? — will be keenly contested Nov. 4. But the outlook for community bank ESSA Bancorp (Nasdaq:ESSA) in Monroe County, is less divisive: blue skies are expected to linger at least into 2009.
The fast-growing county offers growth opportunities: monroe is 75 miles west of New York and population rose 19.5% to 2006 from 2000, compared with a 1.3% increase in all of Pennsylvania. It’s also a relatively stable region. Real estate values have increased considerably but at a steady rate, so there is not likely to be the bubble-popping of other markets, say in California or Florida.
Demographics aside, ESSA’s strength is its liberal amount of cash. “ESSA has a substantial amount of excess capital that they can deploy in a higher spread environment,” Mike Shafir, analyst at Sterne Agee, told to SmallCapInvestor.com. He noted that spreads are better than they have been in the past several years.
ESSA’s profitability hinges on net interest income, which is hurt by a flat yield curve. Profits are enhanced when the yield curve steepens, allowing banks to re-price short-term investments while getting a higher return on long-term loans and investments.
Since it is over-capitalized, ESSA can cash in on the misfortunes of other lenders, taking market share from those who have not survived the credit crisis. Shafir said ESSA itself has a “very low-risk profile” — about 80% of its loan portfolio is one- to four-family residential loans. Shafir has a “buy” rating on the company with a target of $15. ESSA closed Tuesday at $13.97, near the top of a 52-week range of $9.56 to $13.99.
Stroudsburg-based ESSA went public in April 2007 and owns ESSA Bank and Trust, which has been in business for more than 90 years. It has 13 offices throughout the Pocono area and is one of the region’s largest mortgage lenders. Its market capitalization is $230 million.
Total assets increased 8.2% to $985 million in the nine months ended June 30, and nonperforming assets were $1.1 million, or 0.11% of total assets. Signaling cash strength, ESSA’s tangible equity to tangible asset ratio was 21%, putting it above many peers.
Stifel Nicolaus sees blue skies too. “Simply put, as the industry continues to suffer from credit erosion, capital is king,” wrote analyst Laurie Hunsicker as she initiated coverage Sept. 5 with a “buy” rating and a $16 target. “We believe that management will continue to effectively manage excess capital, which in turn will translate into EPS growth and stock price appreciation.”
ESSA earned $0.12 per diluted share in the third quarter through June, and the average estimate of two analysts calls for 2008 earnings of $0.44, up from $0.22 a year ago.
Risks include a recession, which would reduce loan demand and raise credit issues, said Hunsicker. Interest rate risk is always there, and a decline in the local economy or real estate values so would hamper profitability.
While others are just hanging on, ESSA is swinging in a swing state.
The fast-growing county offers growth opportunities: monroe is 75 miles west of New York and population rose 19.5% to 2006 from 2000, compared with a 1.3% increase in all of Pennsylvania. It’s also a relatively stable region. Real estate values have increased considerably but at a steady rate, so there is not likely to be the bubble-popping of other markets, say in California or Florida.
Demographics aside, ESSA’s strength is its liberal amount of cash. “ESSA has a substantial amount of excess capital that they can deploy in a higher spread environment,” Mike Shafir, analyst at Sterne Agee, told to SmallCapInvestor.com. He noted that spreads are better than they have been in the past several years.
ESSA’s profitability hinges on net interest income, which is hurt by a flat yield curve. Profits are enhanced when the yield curve steepens, allowing banks to re-price short-term investments while getting a higher return on long-term loans and investments.
Since it is over-capitalized, ESSA can cash in on the misfortunes of other lenders, taking market share from those who have not survived the credit crisis. Shafir said ESSA itself has a “very low-risk profile” — about 80% of its loan portfolio is one- to four-family residential loans. Shafir has a “buy” rating on the company with a target of $15. ESSA closed Tuesday at $13.97, near the top of a 52-week range of $9.56 to $13.99.
Stroudsburg-based ESSA went public in April 2007 and owns ESSA Bank and Trust, which has been in business for more than 90 years. It has 13 offices throughout the Pocono area and is one of the region’s largest mortgage lenders. Its market capitalization is $230 million.
Total assets increased 8.2% to $985 million in the nine months ended June 30, and nonperforming assets were $1.1 million, or 0.11% of total assets. Signaling cash strength, ESSA’s tangible equity to tangible asset ratio was 21%, putting it above many peers.
Stifel Nicolaus sees blue skies too. “Simply put, as the industry continues to suffer from credit erosion, capital is king,” wrote analyst Laurie Hunsicker as she initiated coverage Sept. 5 with a “buy” rating and a $16 target. “We believe that management will continue to effectively manage excess capital, which in turn will translate into EPS growth and stock price appreciation.”
ESSA earned $0.12 per diluted share in the third quarter through June, and the average estimate of two analysts calls for 2008 earnings of $0.44, up from $0.22 a year ago.
Risks include a recession, which would reduce loan demand and raise credit issues, said Hunsicker. Interest rate risk is always there, and a decline in the local economy or real estate values so would hamper profitability.
While others are just hanging on, ESSA is swinging in a swing state.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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