With Bank Stocks, Smaller Is Better

 | Apr 22, 2016 | 2:00 PM EDT
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Bank stocks have gotten a lot of attention the past few weeks. The earnings reports from the bigger banks have been less than wonderful so far. Tight net interest margins, lower trading revenues and mounting losses from energy lending have been a problem for many of the larger financial institutions. I read the reports from the big banks as they usually provide an excellent 30,000-foot view of the economy and financial markets, but count me among those who have no interest in owning them. The risks they face for the rest of 2016 and beyond just seem too high to me and they have very limited growth prospects. I see no need to own them.

The picture changes when you drop down to the smaller banks. We have only seen a few community banks report earnings, but those that have are doing pretty well. Credit conditions remain excellent for most of them as they tend not to have exposure to the higher-risk loans and have avoided energy for the most part. They are seeing decent growth in loans and deposits as they take market share from their very unpopular larger cousins. Net interest margins are still a problem, but most of the smaller banks are doing a decent job of dealing with the low-rate environment. I am still bullish on them and so are the people running the small banks. Insiders continue to be buyers and I think it is worth following their example.

Severn Bancorp (SVBI) did a private placement of 2 million shares of stock earlier this month and six officers and directors were buyers of the offering. I have owned Severn for some time and I think the long-term future of the bank is very bright. Based in Annapolis, Md., the bank serves one of the wealthiest markets in the United States and the management team has deep ties to the local business community that should serve them well. I know several of the insiders at this little bank and have a lot of respect for their abilities. A lot has been going right for Severn in the past year and it is not reflected in the stock price, in my opinion. They have worked down the level of nonperforming assets and in February the restrictive agreement with the Federal Reserve was finally canceled. The stock is trading at about 95% of book value and I think you can follow the insiders' example and buy the stock at this level.

MSB Financial (MSBF) completed the conversion process last year and became a fully public institution. It is no secret that I am a big fan of recently converted thrifts and MSB is no exception. I am apparently not the only one who likes the stock as insiders have been buying it. Two activists have large positions in the stock as PL Capital and Lawrence Seidman both have large positions as well. Michael Price and Joseph Stilwell also have positions in the stock. MB Financial shares trade right around book value and are a great candidate for a trade-of-the-decade portfolio. The bank has five branches in the very crowded and competitive north New Jersey market and it would be less than a surprise to turn on the machines one morning and find a competitor has made a takeover offer at a healthy premium to the current price.

Sunshine Bancorp (SBCP) is located just down the street from me in Plant City, Fla. The bank has been focusing on the I-4 corridor between Orlando and Tampa and should see solid long-term growth as a result of strong economic conditions in the region. Insiders have been buying and so have some of the smarter bank stock investors. EJF Capital has been a buyer of the shares and recently filed a 13G announcing 6% ownership of the bank. Lawrence Seidman, Basswood Capital and Joseph Stilwell are also shareholders. The shares trade at about 1.2x book value right now, but I think you can pay up a little for a bank that has doubled its asset base in the past three years. Sunshine Bancorp has solid growth plans and outstanding management, and long-term shareholders should be well rewarded.

Conditions in the community bank sector are still pretty good and insiders as well as institutions are still buying. So should we.

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