I wrote back in February that bank stocks are now in what I termed a “sweat spot”. The three primary reasons being that the yield curve is steepening, pent up demand is beginning to come back and there is potential for burdensome regulations to be modified. I think the best way to take advantage of this situation is to buy solid small cap banks.
One of the effects of legislation, such as the Dodd Frank act, that followed the financial crisis in 2007-2008, was to squelch a lot of the smaller banks ability to make a profit. These banks are bogged down in trying to comply with such regulations. With a more business friendly congress and president in control, the hope is that a lot of those rules will be rolled back, or modified to be more reasonable. Since the smaller banks were the hardest hit by the rules, I believe that they will bounce back more, once these regulations are relaxed.
The smaller cap banks should benefit more from the steepening yield curve, since their primary line of business is usually making loans. They tend not to have large trading desks, like the bigger banks. Small cap regional banks are more leveraged to the underlying economy. If the people and businesses they serve are doing well, then they will do well.
I am looking for banks, with a market cap between one to two billion dollars, that are well managed and capitalized. I want to see deposits and loans expanding. They should also be operating in markets with high growth prospects. Here are the three small cap bank stocks I think meet that criteria.
United Community Bank operates primarily in the Southeast region. The stock has an ROE of 9.7%, which is pretty good for a bank. They are investing a lot in mortgage lenders, which should bode well for them, as the yield curve steepens.
UCBI’s earnings and operating efficiency are both on the upswing, as they integrate the acquisition of other lenders and increase loans. Revenue was up 22% and Earnings Per Share was up 28% from 2015 to 2016. The The bank’s operating efficiency ratio stands at 56.6%. the P/E is 19 on a trailing basis and 14 on a forward one. This all makes for a modestly valued stock of a well managed bank, that is growing.
Ameris Bancorp is another Southeast region bank. This stock has an ROE of 12.42%. They have been on an acquisition spree over the last eight years. The banks loan growth is up 20% and assets are up 23% from 2015 to 2016. Impressively, non-performing assets went from 1.09% to 0.85%, during this time frame.
The one caveat, is that the price to book on ABCB is a bit high, at 2.38. The company has been issuing stock. This stock is a riskier bet. However, with a 39% jump in earnings and 21 years of asset growth, I think the rewards outweigh the potential pitfalls.
BancFirst operates in Oklahoma. It is the largest state chartered bank there. It has a 10.34% ROE. Loans and deposits have been steadily increasing over the last four years. This has helped earnings per share go from 3.56 in 2013 to 4.53 in 2016. The stock has a P/E of 19.4 on a trailing basis and 18.1 on a forward one.
BancFirst is very leveraged to the economy, since it operates in Oklahoma, where the energy sector dominates. This is a well established bank, making loans in a market with a bright outlook for 2017.
All these stocks are small cap stocks. They should be bought in the overall context of your investment strategy. Keep in mind how much exposure you want or need to have to this market cap. However, if you do feel that your portfolio does need a small cap aspect to it, I do believe that buying bank stocks makes sense now. The three I highlighted are excellent ones to buy.