In this article, we will be taking a look at the 10 best small bank stocks to invest in. To skip our detailed analysis of banking stocks and the sector in general, you can go directly to see the 5 Best Small Bank Stocks To Invest In.
After a rigorous period of recession and inflation, the global economy is expected to demonstrate the strongest post-recession growth in about 80 years. A Deloitte report on the banking and capital markets outlook for 2022 cited the International Monetary Fund as stating that global GDP is expected to grow by 4.9% in 2022. In the midst of this growth, the banking industry in the United States is expected to sustain itself supported by government stimulus programs. The top 100 US banks released about $24 billion in loan loss reserves in H1 2021 alone. American and Canadian banks are expected to demonstrate a faster growth rate in terms of profitability than other major markets. The Deloitte Center for Financial Services forecast mentioned that the average return on equity in the US banking industry could improve to 10.4% by 2025, for instance.
Major bank stocks such as JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Morgan Stanley (NYSE:MS), among others, are thus set to benefit. They have been performing well in a time of higher interest rates, to begin with. However, smaller bank stocks are also proving their mettle with their successful acquisitions and continuous additions of more assets under their belt. Bank stocks began performing well on the market generally this summer as well. According to a Wall Street Journal article published this August, since the end of June, five out of the six largest US banks managed to outperform the S&P 500’s 13%. Morgan Stanley (NYSE:MS) and Bank of America Corporation (NYSE:BAC) were both up by 21% and 17%, respectively, showing that the worst of it is over for bank stocks this year, allowing them to climb across the board.
According to a latest Deloitte report on banking and financial markets outlook for 2023, even in an uncertain macroeconomic situation, the retail banking business is expected to perform favorably. In the US, consumer loan growth is continuing to stay resilient, offering a cause for optimism. Additionally, wealth management is proving itself to be a key source of profitability for banking companies. Total global wealth crossed the $400 trillion mark in 2020, and high net-worth households are expected to grow at a compound annual growth rate of 7% to $52 million by 2026. Bank stocks are the direct beneficiaries of this growth, showing that prospects for the sector are beginning to seem bright moving into 2023.
Photo by Ferran Fusalba Roselló on Unsplash
Our Methodology
We have selected lesser-known bank stocks with significant growth potential and impressive recent performance in the third quarter for our list below. The stocks are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest. A few of the factors we have taken into consideration while selecting these stocks include analyst ratings and price targets, past acquisition successes and addition of assets to the banks’ profiles, efficiency ratios, and more.
Best Small Bank Stocks To Invest In
10. Summit Financial Group, Inc. (NASDAQ:SMMF)
Number of Hedge Fund Holders: 4
Summit Financial Group, Inc. (NASDAQ:SMMF) is the financial holding company for Summit Community Bank. It provides community banking and other financial services to individuals and businesses in the Eastern Panhandle, Southern and North Central regions of West Virginia, and the Northern, Shenandoah Valley, and Southwestern regions and Virginia and the Central region of Kentucky. The company is based in Moorefield, West Virginia.
Summit Financial Group, Inc. (NASDAQ:SMMF) is a well-run bank with industry-leading efficiency ratios. The bank is also a proven acquirer with a range of successful acquisitions in the past. Over the past five years, it has acquired $1 billion in total assets, paying about 27% above tangible book value on average. Summit Financial Group, Inc. (NASDAQ:SMMF) has seen its efficiency ration improve significantly over time, from 55% in 2016 to 49% in the third quarter of 2021.
Four hedge funds were long Summit Financial Group, Inc. (NASDAQ:SMMF) in the third quarter, with a total stake value of $10.3 million. Renaissance Technologies was the largest stakeholder in Summit Financial Group, Inc. (NASDAQ:SMMF), holding 225,435 shares worth $6.1 million.
Summit Financial Group, Inc. (NASDAQ:SMMF), like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Morgan Stanley (NYSE:MS), is a bank stock many institutional investors have recently begun to show an interest in.
9. Stock Yards Bancorp, Inc. (NASDAQ:SYBT)
Number of Hedge Fund Holders: 5
Stock Yards Bancorp, Inc. (NASDAQ:SYBT) is the holding company for Stock Yards Bank & Trust Company. It provides a range of financial services for individuals, corporations, and others in the US. The bank operates through its Commercial Banking and WM&T segments, and it is based in Louisville, Kentucky.
Stock Yards Bancorp, Inc. (NASDAQ:SYBT) is a bank driven by a strong wealth management practice. Its Wealth Management and Trust group has $4.5 billion in assets under management as of this year. The bank is also known for its successful acquisitions, such as its acquisition of Kentucky Bancshares in May 2021, which added $1.3 billion to its assets, $740 million in its loan portfolio, and $1 billion in deposits. In August 2021, Stock Yards Bancorp, Inc. (NASDAQ:SYBT) also announced the acquisition of Commonwealth Bancshares with over $1.2 billion in total assets, $1.1 billion in deposits, and $730 million in the total loan book.
There were five hedge funds long Stock Yards Bancorp, Inc. (NASDAQ:SYBT) in the third quarter, with a total stake value of $2.6 million. In comparison, two funds were long the stock in the previous quarter, with a total stake value of $815,000.
Harding Loevner, an investment management firm, mentioned Stock Yards Bancorp, Inc. (NASDAQ:SYBT) in its second-quarter 2021 investor letter. Here’s what the firm said:
“If Signature, which currently sits around our market cap ceiling, could be the next First Republic, then the Louisville-based bank Stock Yards could be the next Signature. Stock Yards operates in Kentucky, Ohio, and Indiana, smaller markets where local bankers develop knowledge of their communities not easily replicated by national competitors. Stock Yards’ 60 relationship managers live in the neighborhoods where they do business and have spent decades getting to know local companies and their owners, serving them with a high level of personal attention. The result is a bank that has grown at twice the pace of the industry, while earning higher returns.
Like Signature, Stock Yards was able to grow its market share during last year’s pandemic-driven downturn. Working closely within their local communities, its bankers understood how urgently businesses needed the federally funded small business loans offered under the 2020 Payroll Protection Program Flexibility Act. Many banks struggled to process the loans, which, among other things, required close coordination with the federal Small Business Administration. Stock Yards learned the procedures quickly and was able to provide loans when other banks could not. In addition to helping its existing clients during a difficult time, it was able to attract a large number of new clients by agreeing to write the loans on condition that they move their deposit accounts from their old banks to Stock Yards.”
8. TriCo Bancshares (NASDAQ:TCBK)
Number of Hedge Fund Holders: 8
TriCo Bancshares (NASDAQ:TCBK) is the bank holding company for Tri Counties Bank. It provides commercial banking services to individual and corporate customers. The company is based in Chico, California, and accepts demand, savings, and time deposits.
The company is a real estate-focused lender with strong credit underwriting. TriCo Bancshares (NASDAQ:TCBK) also has a strong history of acquisitions, representing its ability to remain financially comfortable. In 2021, the bank reported a net income of $117.7 million, compared to $64.8 million in 2020. TriCo Bancshares (NASDAQ:TCBK) has also improved its efficiency ratio between 2016 and 2021, with the ratio standing at 53% in 2021.
Davis Capital Partners was the largest stakeholder in TriCo Bancshares (NASDAQ:TCBK) in the third quarter, holding one million shares worth $44.7 million. In total, eight hedge funds were long the stock, with a total stake value of $71.9 million.
7. Horizon Bancorp (NASDAQ:HBNC)
Number of Hedge Fund Holders: 11
Horizon Bancorp (NASDAQ:HBNC) is the bank holding company for Horizon Bank. It provides commercial and retail banking services and is based in Michigan City, Indiana. The company also offers commercial, residential, real estate, mortgage warehouse, and consumer loans.
Damon DelMonte, an analyst at Keefe Bruyette, holds a Market Perform rating on Horizon Bancorp (NASDAQ:HBNC) shares as of October 27. The analyst also placed an $18 price target on the stock.
Analysts see Horizon Bancorp (NASDAQ:HBNC) growing through the end of 2023 on the back of moderate loan growth. The company is expected to report earnings of $2.11 per share for 2022, up 6% year-over-year. In 2023, the bank is expected to generate earnings of $2.13 per share. Horizon Bancorp (NASDAQ:HBNC) also regularly changes its quarterly dividend every year. Earnings and dividend estimates for the stock from this November suggest a payout ratio of 32% for 2023.
Horizon Bancorp (NASDAQ:HBNC) was found among the 13F holdings of 11 hedge funds in the third and second quarters, with total stake values of $17.9 million and $19.7 million, respectively.
6. Peoples Bancorp Inc. (NASDAQ:PEBO)
Number of Hedge Fund Holders: 13
Peoples Bancorp Inc. (NASDAQ:PEBO) is the holding company for Peoples Bank, providing commercial and retail banking products and services. The company is based in Marietta, Ohio, and accepts deposit products while also providing commercial and industrial, commercial real estate, construction, finance, residential real estate, and consumer indirect and direct loans, among more.
Hovde Group’s Bryce Rowe holds a Market Perform rating on Peoples Bancorp Inc. (NASDAQ:PEBO) shares as of October 26.
Peoples Bancorp Inc. (NASDAQ:PEBO) is expected to see an increase in its earnings for the full year of 2022, supported by mid-single-digit loan growth. The company’s earnings for 2022 are expected to come in at $3.47 per share, up 60% year-over-year. For 2023, it is expected that Peoples Bancorp Inc. (NASDAQ:PEBO) will further grow its earnings by 2% to $3.45 per share.
Our hedge fund data shows 13 funds long Peoples Bancorp Inc. (NASDAQ:PEBO) in the third quarter, with a total stake value of $20.4 million. Of these funds, Elizabeth Park Capital Management was the largest stakeholder, holding 142,158 shares worth $4.1 million.
Peoples Bancorp Inc. (NASDAQ:PEBO), like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Morgan Stanley (NYSE:MS), is a banking stock rising in popularity over the past few years.
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Disclosure: None. 10 Best Small Bank Stocks To Invest In is originally published on Insider Monkey.