Checking Insider Action at Small Banks

 | Mar 10, 2014 | 2:30 PM EDT
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For most of my career, I have been a big fan of following insider trading. When the people running the company are willing to open their checkbooks and buy shares of their company, good things are probably about to happen. These people are in a position to know what their company is worth and what positive events and changes may be on the horizon that can lead to a much higher stock price. For long-term investors, a report on insider action is one of the best tools in the box.

I am also a big fan of the "Trade of the Decade" in small bank stocks. The changing economic and regulatory landscape is going to force many of these little banks to seek a merger partner in order to survive. They will find plenty of willing buyers among the regional banks, as there is very little opportunity for organic growth in the banking system right now, and I do not see that changing anytime soon. The only way to grow assets and earnings is to buy smaller banks and expand your footprint.

Combining these two trading factors, we can put together a list of small banks whose insiders believe their shares are undervalued, and create a list of stocks that have strong tailwinds of industry conditions and insider' faith in future performance.

Northfield Bank (NFBK) has 30 branches in Staten Island and Brooklyn, New York, and in Middlesex and Union counties in New Jersey. The company completed its conversion from a mutual holding company to public ownership in late 2012, and the cash from the stock offering pushed its equity-to-assets ratio up over 20. The bank has been using the cash to reward shareholders by buying back stock below book value and paying dividends.

Last week, Northfield announced that it had repurchased 2,198,002 shares of its common stock, of the 2,886,312 shares approved under its current buyback plan. The bank said that the board was authoring another buyback plan for an additional 5% of the shares outstanding. The bank is in great shape: Its nonperforming assets are just 1% of total assets. Insiders like what they see, as two members of the board bought stock in the bank at the end of January.

HopFed Bancorp (HFBC) has been one of my favorite Trade of the Decade stocks for some time. The bank's board came under pressure from activist investors last year and was pushed to cancel the planned takeover of another bank. HopFed did so and also announced a buyback and a large dividend increase back in August. The company operates 18 offices in middle Tennessee and western Kentucky and is in good shape financially. The equity-to-asset ratio is over 10, and nonperforming assets are just 1.22% of total assets. Activist investors still hold a substantial stake in the bank, and I would expect to see the pressure to sell intensify if the stock price doesn't not move a lot higher in 2014. The CEO and chief operating officer must feel good about the direction of the bank, as they have been buying stock so far this year.

QCR Holdings (QCRH) is a Moline, Il.-based, multibank holding company that has 15 branches in the Quad City, Cedar Rapids and Rockford communities. Its Quad City Bank and Trust Company also engages in commercial leasing through its wholly owned subsidiary, m2 Lease Funds LLC, based in Milwaukee. Insiders own 16% of the bank, and they have continued to buy in the past year. Employee benefit plans for bank employees own an additional 10% of the company, so they have a vested interest in seeing a higher stock price in the year ahead. The equity-to-assets ratio is a little low for my taste at 7.8%, but nonperforming assets are just 1.1% of total assets, so as long as conditions continue to improve, additional capital should not be needed.

Using insider buying to identify Trade of the Decade stocks makes a lot of sense to me. When you see the officers and directors buying shares in these smaller banks, it is a solid indication that they believe the bank is on the right track to improved financial conditions and stronger earnings growth. These are exactly the characteristics that larger banks on an acquisition spree will be looking for in takeover candidates.



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