Over the years, I have been a big fan of insider buying. It is not foolproof -- nothing in the stock market is. If you haven't figured that out yet, please take my word for it.
Corporate insiders are human and susceptible to the same bias and errors all of us are. However, they are in the best position to evaluate the prospects and conditions of the companies they run, and it makes sense to pay attention to their buying and selling activities. I have found this to be especially true when the top two officers, the CEO and CFO, buy shares in their company. I have done several studies over the years that, combined with practical experience over the decades, tell me stocks with top-two buying activity have a significant chance of moving higher over the next year or so.
Since the credit crisis ended, I have found that top-executive buying has been a powerful indicator in community and regional bank stocks. There are enormous changes in the banking industry today and the consolidation wave continues to build. Banks have a grow-or-die challenge in the low-interest-rate, highly regulated world we find ourselves in, and the people running the banks are in the best position to know if they are up to the challenges. I have paid close attention to bank insider activity the past several years and have been well rewarded for doing so.
When bank stocks sold off in the early part of 2016, both CEO Matt Wagner and CFO Patrick Rusnak of PacWest Bancorp (PACW) took advantage of bargain pricing and bought shares of their bank. PacWest has grown by acquisitions and has acquired more than 20 financial institutions since its founding in 1999. It recently closed on a deal to buy Square 1, a lender with high-tech expertise. The Los Angeles-based bank has 80 branches with total assets of $21 billion. Business has been good for the bank, and in 2015 it reported earnings of $2.79 a share compared with just $1.52 in 2014. In fact, business is so good that Forbes magazine recently ranked PacWest second on its list of 100 best banks in 2016. Wagner and Rusnak have been buying shares in the past month. The stock trades right around book value and has a great dividend yield of 5.47%.
Royal Bancshares of Pennsylvania (RBPAA) is still in a turnaround phase as it looks to get back on track following the credit crisis and problems with nonperforming assets, particularly in the tax lending portfolio. It has cut back on the tax lien business, raised capital and worked on paring non-performing assets and it appears to be working. The bank has been profitable over the past three years and recently reversed $5.4 million of the valuation allowance related to net deferred tax assets, as it should be able to earn enough money to utilize the tax assets in the future. Nonperforming assets at year-end were just 1.64% of total assets, well below the 2.67% level in the prior year. CEO Kevin Tylus and CFO Michael Armstrong have both been buying the stock lately. They are not alone, as we noted last month that both FJ Capital and EJF Capital were buying the stock in the fourth quarter of 2015. The stock is trading at just 74% of book value and if the bank continues to execute its turnaround, the returns could be substantial.
I have owned shares of BSB Bancorp (BLMT) for several years with very pleasant results. The man running the bank doesn't think the good times are over year, as CEO Robert Mahoney has been a consistent and frequent buyer of the stock in the past year. The Belmont, Mass.-based bank has six branches with $1.8 billion in assets. It has a strong loan portfolio with non-performing assets that are just 0.2% of total assets. The equity to assets ratio is a little low for my taste at 7.8%, but that doesn't seem to deter the CEO's enthusiasm for the stock. Business has been good as the bank reported a 61% gain in earnings for 2015 over 2014.
It is no secret that regional and community banks are my favorite sector, and I suspect they will be for several more years at least. The regulatory and economic conditions have combined to form what I consider the trade of the decade. Paying attention to buying by the top two insiders in the banking sector can help identify those banks that will be among the big winners in bank stocks over the next few years.