The global banking market was valued at $35.4 billion in 2024, according to Market Research Future. It’s expected to grow from $37.17 billion in 2025 to $55.25 billion by 2034 at a CAGR of 4.55%. McKinsey and Company’s Global Banking Annual Review for 2024 stated that the global banking industry has consistently displayed low price-to-book multiples, ranking at the bottom of all sectors. This raises a lot of questions regarding the industry’s long-term value creation.
However, in the past 2 years, the sector has seen healthy profitability, capital, and liquidity since the global financial crisis of 2007-2009. Because these gains are attributed to the surging interest rates, there are several questions about their sustainability. However, without these gains, the Return on Tangible Equity (ROTE) for many regions would fall below the cost of capital. The banking market should focus on structural changes and operational efficiency to counteract these concerns. Analyzing high-performing banks shows that they often result from specific segment selection and strategic scaling within the value chain and geographically.
Barclays senior equity analyst Jason Goldberg joined CNBC’s ‘Squawk Box’ on March 20 to discuss the state of the banking sector. Goldberg talked about the recent volatility in bank stocks, which initially increased after the presidential election but was followed by a drop. He thinks that bank valuations are currently lower than their historical averages, considering that the price-to-book ratios are about half a point lower than usual. Goldberg explained that the reason for the initial surge in this sector remains intact when asked about whether the fundamental environment for banks shifted since their peak during the recent rally. This is because of market enthusiasm for a pro-growth agenda and expectations of reduced regulation. He acknowledged the presence of near-term uncertainties about taxes, immigration, and tariffs. But he’s positive that these issues will be resolved shortly and followed by increased corporate borrowing, investment, M&A, and IPO activity.
Overall, Goldberg is of the idea that the potential for loan growth, increased merger activity, and reduced regulations will all contribute to an optimistic banking sector. That being said, we’re here with a list of the 10 best small small-cap bank stocks to invest in now.
A view of a busy banking hall, customers engaging with banking staff to conduct their financial transactions.
Our Methodology
We sifted through the Finviz stock screener to compile a list of all the bank stocks that were trading between $300 million and $2 billion. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q4 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
10 Best Small Cap Bank Stocks To Invest In Now
10. HarborOne Bancorp Inc. (NASDAQ:HONE)
Market Capitalization as of March 28: $459.55 million
Number of Hedge Fund Holders: 23
HarborOne Bancorp Inc. (NASDAQ:HONE) is a financial services company that caters to individuals, families, small and mid-size businesses, and municipalities. It operates in two segments: HarborOne Bank and HarborOne Mortgage. It offers deposit and lending products, along with educational services like free digital content, webinars, and recordings for small business and personal financial education.
The company’s subsidiary for mortgage lending is the HarborOne Mortgage segment which contributes significantly to the company’s overall revenue. The segment generated $1.1 million in Q4 2024 net income, which was a big difference from the $1.1 million loss in Q3 previously. This major improvement came from the $4 million gains on loan sales due to mortgage closings that totaled $179.1 million.
This growth came despite rising mortgage rates and seasonal slowdowns, because of which the rate-locked pipeline experienced a $30.7 million decrease. This segment is particularly sensitive to interest rate changes. Notably, the value of mortgage servicing rights (MSR) also increased by $1.9 million in Q4. MSR is the process of determining the present value of future cash flows that could come from servicing mortgage loans.
9. Flushing Financial Corp. (NASDAQ:FFIC)
Market Capitalization as of March 28: $428.46 million
Number of Hedge Fund Holders: 23
Flushing Financial Corp. (NASDAQ:FFIC) is a bank holding company for Flushing Bank. It provides banking products and services to consumers, businesses, and governmental units. It offers deposit products and provides mortgage loans, construction loans, small business administration loans & other small business loans, and consumer loans among other marketable securities.
The company’s Asian market segment is thriving. The focus on these communities is showcased through substantial financial activity, with around $1.3 billion in deposits and $749 million in loans currently held. This makes up 18% of the company’s total deposits, but it’s only 3% of the total addressable market.
To benefit from this untapped market potential, one-third of the company’s branches are focused on Asian communities and their planned expansion in 2025. To enhance these efforts, Flushing Financial Corp. (NASDAQ:FFIC) has employed multilingual staff, formed an Asian Advisory Board, and even participates in cultural activities every now and then. The end goal is to foster strong community ties.
8. Preferred Bank (NASDAQ:PFBC)
Market Capitalization as of March 28: $1.12 billion
Number of Hedge Fund Holders: 24
Preferred Bank (NASDAQ:PFBC) offers commercial banking products and services to small and mid-sized businesses and their owners, as well as other high-net-worth individuals. It provides real estate mortgage loans, real estate construction loans, commercial loans, and term loans among others. The company also offers trade finance, cash management, and internet, mobile, & tablet banking services.
The company’s commercial real estate (CRE) lending portfolio is a resilient and growth-driving segment, particularly within the Asian community markets. CRE drove the overall loan growth for 2024 to equal 7% year-over-year. The company’s strategy to mitigate risks here is to ensure that the loans are fully sponsored and backed by strong guarantors. Its underwriting also emphasizes guarantor strength and prioritizes cash flow and asset value.
The mortgage loan segment in the CRE portfolio usually remains unaffected by regional challenges, such as the recent LA wildfires. This stability also comes from strong underwriting together with strong borrowers. In its loan portfolio, the company reduced non-performing loans by 50% and criticized loans by 33% in Q4 2024.
7. Bank of NT Butterfield & Son Ltd. (NYSE:NTB)
Market Capitalization as of March 28: $1.68 billion
Number of Hedge Fund Holders: 24
Bank of NT Butterfield & Son Ltd. (NYSE:NTB) provides community, commercial, and private banking services to individuals and small to medium-sized businesses. It accepts retail and corporate checking, savings, term, and interest-bearing and non-interest-bearing deposits. Its lending portfolio ranges from residential mortgage lending to commercial and industrial loans. It also offers personal and property/auto insurance products.
The company’s wealth management division contributes significantly to its diversified fee income strategy. This segment encompasses trust services, private banking, asset management, and custody. Non-interest income showcased this segment’s performance and reached $63.2 million in Q4 2024. This was driven by card services, transaction volumes, incentive revenues, and foreign exchange activity.
Bank of NT Butterfield & Son Ltd. (NYSE:NTB) now aims to maintain a stable non-interest income stream and anticipates making around mid-$50 million per quarter excluding any seasonal fluctuations. The company will focus on strategic acquisitions and strong asset quality to position the wealth management division for continued growth and profitability.
6. Customers Bancorp Inc. (NYSE:CUBI)
Market Capitalization as of March 28: $1.58 billion
Number of Hedge Fund Holders: 26
Customers Bancorp Inc. (NYSE:CUBI) is the bank holding company for Customers Bank that provides banking products and services. It provides a range of deposit banking products and has an extensive lending business. It also provides digital banking, mobile phone and internet banking, wire transfers, electronic bill payment, and cash management services among other products.
The company’s cubiX platform is a major component of its digital banking strategy and contributes significantly to fee income and operational efficiency. cubiX is the company’s in-house developed digital banking platform for enhanced treasury management services and streamlined customer transactions. All CBIT (an instant USD transaction service) customers were transferred to the cubiX platform in Q4 2024. This transition helped generate an estimated $5 million in annual run-rate fee income and reduced third-party technology expenses.
The cubiX platform helps Customers Bancorp Inc. (NYSE:CUBI) to provide a single point-of-contact experience to its customers by bringing together high-tech solutions and personalized service. The platform also attracts and retains non-interest-bearing deposits. In Q4, non-interest-bearing deposits reached $5.6 billion, which was 30% of the total deposits that quarter.
5. OFG Bancorp. (NYSE:OFG)
Market Capitalization as of March 28: $1.28 billion
Number of Hedge Fund Holders: 26
OFG Bancorp. (NYSE:OFG) is a financial holding company that provides banking and financial services in the US. It operates through three segments: Banking, Wealth Management, and Treasury. It has services that range from savings accounts to commercial non-interest and interest-bearing checking accounts. It also has an extensive portfolio of loans.
The company focuses on its Digital First strategy which achieved impressive digital adoption rates in Q4 2024. In this quarter, 96% of routine retail customer transactions, 97% of retail deposit transactions, and 68% of retail loan payments were conducted through digital and self-service channels. This adoption rate was driven by a 12% year-over-year growth in digital enrollment, along with a 54% increase in digital loan payments. There was also a 5% overall customer growth in Q4.
Over the past 1-2 years, the company has introduced or relaunched 4 major digital products and services. These include Oriental Servicing Portal which was launched in mid-2023 and was adopted by one-third of retail clients by the end of 2024. The My Biz small business account is another example, which was relaunched in March 2024 and accounted for a 14% growth in loans to local businesses.
4. Veritex Holdings Inc. (NASDAQ:VBTX)
Market Capitalization as of March 28: $1.33 billion
Number of Hedge Fund Holders: 26
Veritex Holdings Inc. (NASDAQ:VBTX) operates as the bank holding company for Veritex Community Bank which provides various commercial banking products and services to small and medium-sized businesses and professionals in the US. The company accepts deposit products and offers loan products. It also provides interest rate swap services.
The company’s Commercial Real Estate (CRE) lending segment makes up most of its loan portfolio. In 2024, the company significantly reduced CRE and ADC (Acquisition, Development, and Construction) concentrations. CRE concentrations ended at 299% in 2024, while ADC ended at 87%. This reduction improved the bank’s risk profile. Total CRE criticized loans decreased by 20% year-over-year.
The CRE maturity profile indicates that Veritex Holdings Inc. (NASDAQ:VBTX) has under $400 million in fixed-rate maturities at an average rate of 5.48% over the next 4 quarters. This refers to prioritizing loans that are backed by affordable deposits to maximize the profit from interest rate difference. Loan payoffs remain elevated, despite a 44% loan production increase from 2023 to 2024. The company is also working to keep its loan-to-deposit ratio below 90%.
3. LendingClub Corp. (NYSE:LC)
Market Capitalization as of March 28: $1.18 billion
Number of Hedge Fund Holders: 26
LendingClub Corp. (NYSE:LC) is a bank holding company that provides financial products and services in the US. It offers deposit products and loan products. It also operates a lending marketplace platform, where the company connects borrowers with investors.
The company’s Marketplace Investor Segment is a significant revenue driver which is fueled by the company’s strong asset performance. Throughout 2024, the company experienced consecutive quarterly improvements in loan sales prices, which resulted in a 1.7% year-over-year rise. Participation of banks in the marketplace has also grown and purchased about one-third of LendingClub Corp.’s (NYSE:LC) loan volume in Q4.
The demand from private credit investors is also improving and bringing consistent returns. The improving marketplace economics is driven by higher loan sales prices and higher investor demand, which enables LendingClub Corp. (NYSE:LC) to reinvest and retain high-yielding and portfolio loans. The company expects to exit Q4 2025 with $2.3 billion in quarterly originations.
2. Eagle Bancorp Inc. (NASDAQ:EGBN)
Market Capitalization as of March 28: $626.87 million
Number of Hedge Fund Holders: 27
Eagle Bancorp Inc. (NASDAQ:EGBN) is the bank holding company for EagleBank that provides commercial and consumer banking services in the US. It offers commercial and consumer lending products, online and mobile banking services, and insurance products and services. It serves a diverse clientele that ranges from sole proprietors to non-profit organizations and associations.
The company focuses on its Commercial Real Estate (CRE) lending segment, particularly the office loan portfolio. One of the company’s office loans worth $74.9 million was reclassified in Q4 2024 because it was not bringing in substantial income due to a big drop in its appraisal value. However, the borrower continues to make contractual payments. The company is managing risks associated with its office loan portfolio such as moving excess cash flow and building additional reserves for new payment reserves.
The company has worked with borrowers to secure loan extensions and principal curtailment. This includes a 3-year extension on an office loan with planned principal reductions. Eagle Bancorp Inc. (NASDAQ:EGBN) operates with transparency and risk management within its CRE portfolio while navigating a challenging office loan environment.
1. Berkshire Hills Bancorp Inc. (NYSE:BHLB)
Market Capitalization as of March 28: $1.21 billion
Number of Hedge Fund Holders: 28
Berkshire Hills Bancorp Inc. (NYSE:BHLB) operates as the bank holding company for Berkshire Bank and provides financial services in the US. It provides both deposit and loan products and services. It also offers wealth management and investment products & brokerage services. It caters to personal, commercial, non-profit, and municipal deposit customers.
In Q4 2024, the company’s Commercial Real Estate (CRE) lending segment showed solid credit quality, with only 0.22% of the loans not earning income by the end of this period. To mitigate risks in this segment, the company is diversifying its CRE book across geography and collateral types. The CRE segment makes up about 294% of the bank’s total capital.
The company’s office loan portfolio, which is a part of the CRE sector, has an average loan-to-value of 60%, which shows a cautious lending strategy. While the current credit quality metrics for the CRE segment are strong, Berkshire Hills Bancorp Inc. (NYSE:BHLB) acknowledges the impact of economic uncertainties here. The company is also focused on integrating with Brookline Bancorp, which is expected to close in H2 2025.
While we acknowledge the growth potential of Berkshire Hills Bancorp Inc. (NYSE:BHLB), our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BHLB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
