I found some interesting insider buying in the banking sector this morning when I ran screens on what top executives are doing with shares in their companies. Many smaller regional and community-bank officers and directors have been adding to their stakes.
Conditions have been improving for small banks, which reported much better results than their larger peers during this past earnings season. While overall bank profits climbed 6.9%, community banks were a clear leader -- with net income up more than 16%, according to the FDIC Quarterly Review.
The near term looks even brighter for smaller institutions. After all:
- It seems increasingly clear that the Federal Reserve is determined to raise interest rates some time soon. That's good for small banks, where the only major drag on earnings has been today's historically low net interest margins. Any rate increase that helps lift margins is going to be a huge additional tailwind for smaller banks' earnings -- and ultimately for their share prices as well.
- Small banks are benefitting for an overall pickup in lending, especially in commercial real estate and commercial and industrial loans. The credit problems of the 2008 financial crisis are in the rearview mirror and smaller banks generally have excellent loan portfolios.
- Smaller banks' officers and directors are undoubtedly aware that rising regulatory and technology costs could eventually force them to consider selling their firms. Any such transactions would presumably involve a premium over banks' current stock prices.
Here are a few firms to consider investing in:
New Jersey-based Cape Bancorp (CBNJ) is one of my favorite small bank stocks, and I've written about it several times in recent months. The company focuses on commercial lending and has been expanding into the Philadelphia metropolitan area to build that business. (CBNJ has exited the residential-mortgage business and plans to let its current hone-loan portfolio run down over time.)
Officers and directors have been buying CBNJ stock all year long and stepped up the pace in May. The stock trades at about 90% of book and has a decent dividend yield of 2.52%, so you'll get paid to wait for the bright future that insiders apparently expect.
Although this bank operates in the suburbs of hard-hit Detroit, MBT Financial (MBTF) has done a fantastic job cleaning up its loan portfolio over the past few years. Nonperforming assets fell to just 1.32% of total holdings in the latest quarter from almost 5% in the past. Management has also strengthened the overall balance sheet, with the equity-to-asset ratio hitting 10.17 recently from 6.18 back in 2012.
As the Detroit economy continues to recover, MBTF should be in a strong position to grow earnings and continue to boost its stock price. That's presumably why the CEO and two directors have been buying shares over the past couple of months.
Philadelphia-headquartered Prudential Bancorp (PBIP) has been a pretty decent stock this year, with shares up 15.7% in the year to date. But at least two directors think even higher prices are ahead, as they've been buying shares in the past couple of months.
PBIP completed its conversion from a mutual thrift in 2013 and instituted both a stock-buyback program and a dividend payout as soon as a required one-year waiting period expired. So far, the company has repurchased 464,614 shares of a 950,000-share authorization. Prudential has also issued a $0.15-a-share special dividend in addition to a $0.03-per-share regular quarterly payout.
PBIP's shareholders' list looks like a who's who of bank investors, with noted activists Lawrence Seidman and PL Capital maintaining stakes in the firm. Shares currently trade right around book value, but insiders seem to think that both book value and the earnings multiple will move higher over time.
The bottom line
The outlook for small-bank stocks seems strong. In addition to improved credit quality and a pickup in commercial-loan demand, higher net interest margins as a result of Fed hikes should lead to strong earnings growth for the next several years. A building wave of merger-and-acquisition activity should only add to stock-price gains.
Focusing on banks where insiders are excited enough to buy their banks' shares in the open market should only improve your chances for success in the sector.