10 Best Small Cap Bank Stocks With Dividends

Published on May 21, 2023 at 1:37 pm by Fatima Farooq in Hedge Funds, News

In this article, we will be taking a look at the 10 best small cap bank stocks with dividends. To skip our detailed analysis of the banking sector, you can go directly to see the 5 Best Small Cap Bank Stocks With Dividends.

This March, the financial world witnessed perhaps the most significant financial crisis since 2008 in the form of the Silicon Valley Bank’s (SVB) collapse. SVB had drastically increased its long-term security holdings through 2021 in hopes of generating higher investment returns from its deposits. Through 2023 and during the start of 2023, the market value of these bonds plummeted due to rising interest rates and surging inflation. During the financial commotion, many SVB clients began pulling out their money, and to pay for these withdrawals, the bank sold over $21 billion worth of securities. This announcement caused more cash withdrawals from panicking clients, ultimately leading to the bank’s shocking collapse. As we mentioned in one of our previous articles, this crisis has plunged SVB into booking $15.16 billion of unrealized losses in the last fiscal year, and by March, it had sent its shares down by 60%. Suffice it to say the SVB crash has left the financial world reeling from its far-ranging after effects.

The Impact of the SVB Crash on Bank Stocks

The banking sector, in general, has been suffering since the SVB crash. Several notable banking stocks like JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Morgan Stanley (NYSE:MS) are among the many that have been adversely affected. Two days after the SVB crash, Signature Bank, another major bank in the US, was also closed by federal regulators. In the week following the crash, the KBW Nasdaq Bank Index, which tracks US commercial banks, declined by 15%, while regional bank stocks saw price decreases of 9.4%.

According to many financial professionals, while those who are skeptical about the future of the banking sector may be right about the situation today, they are wrong about the future. A McKinsey report published in December noted that banks have the potential to become bigger and more profitable in 2023, growing to create an opportunity worth $20 trillion.

The Future of The Banking Sector

In December, the banking industry managed about $370 trillion in worldwide assets, a figure that is continuously increasing. McKinsey professionals projected that this value would grow to between $500 trillion and $550 trillion by the next decade. To reach this point, the article stressed that most banks would have to adapt to changing industry dynamics and embrace cross-industrial platforms. This would enable them to better suit evolving customer demands in a rapidly changing and digitized marketplace. With the rise of fintech companies in particular, the banking sector is placed in a position of competition with newcomers in the financial sector. By September 2022, there were estimated to be about 274 fintech companies with a unicorn valuation of over $1 billion. This development alone seems to have given traditional banks a run for their money. And if these traditional banks want to win this race, they will have to adapt.

However, the fact that the banking sector, and many renowned banks operating within it, has been around for this long gives it an advantage. According to McKinsey, banking companies still have time to transform their business models over the next five to 10 years and stay in the race. If traditional banks take the cue and start collaborating with newer companies offering financial services, particularly digital banks and fintech companies, they can ensure they do not get roped into obsolescence. And solely because the banking sector continues to retain its potential for the next decade at least, we have compiled a list of the best small bank stocks in the market today.

Photo by Mikel Parera on Unsplash

Let’s now take a look at the 10 best small cap bank stocks with dividends.

Our Methodology

For our list below, we have selected small-cap bank stocks paying dividends with yields going as high as 7%. They are popular among hedge funds, as evidenced by Insider Monkey’s hedge fund data for the fourth quarter when 943 hedge funds and their holdings were tracked. They are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest. We also considered the upside potential for these stocks, using data from TipRanks.

Best Small Cap Bank Stocks With Dividends

10. Summit Financial Group Inc. (NASDAQ:SMMF)

Number of Hedge Fund Holders: 3

Dividend Yield as of May 20: 4.16%

Summit Financial Group Inc. (NASDAQ:SMMF) is the financial holding company for Summit Community Bank, Inc. It is based in Moorefield, West Virginia.

The company is a reliable dividend stock with a yield of over 4% and a dividend history showing consistent yield increases for the past seven years. In the fourth quarter, Summit Financial Group Inc. (NASDAQ:SMMF) generated revenues of $39.6 million, representing an increase of 13.87% year-over-year. The company is also deeply undervalued. Shares of Summit Financial Group Inc. (NASDAQ:SMMF) were trading at a P/E ratio of 4.71 on April 25, for instance.

Marshall Wace LLP was the largest shareholder in the company at the end of the fourth quarter, holding 13,710 shares. Three hedge funds were long Summit Financial Group Inc. (NASDAQ:SMMF) in total. Their total stake value was $7.04 million.

According to hedge funds, Summit Financial Group Inc. (NASDAQ:SMMF), like JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Morgan Stanley (NYSE:MS), is a top-tier bank stock to invest in today.

9. Mercantile Bank Corp. (NASDAQ:MBWM)

Number of Hedge Fund Holders: 5

Dividend Yield as of May 20: 5.11%

Mercantile Bank Corp. (NASDAQ:MBWM) is a small-cap bank operating as the bank holding company for Mercantile Bank of Michigan. It is based in Grand Rapids, Michigan.

On March 7, Piper Sandler’s Brendan Nosal upgraded shares of Mercantile Bank Corp. (NASDAQ:MBWM) from Neutral to Overweight.

Analysts have placed an average price target of $34 on Mercantile Bank Corp. (NASDAQ:MBWM) shares. The stock was trading at $25.84 on May 20, so the price target gives it an upside potential of 31.58%.

Five hedge funds were long Mercantile Bank Corp. (NASDAQ:MBWM) in the fourth quarter. Their total stake value was $26.8 million.

8. Stock Yards Bancorp, Inc. (NASDAQ:SYBT)

Number of Hedge Fund Holders: 5

Dividend Yield as of May 20: 2.73%

Stock Yards Bancorp, Inc. (NASDAQ:SYBT) is the holding company for Stock Yards Bank & Trust Company. It is based in Louisville, Kentucky.

The average price target placed on Stock Yards Bancorp, Inc. (NASDAQ:SYBT) shares is $65. The stock was trading at $42.50 on May 20, so the price target gives it an upside potential of 52.94%.

Balyasny Asset Management was the largest shareholder in Stock Yards Bancorp, Inc. (NASDAQ:SYBT) at the end of the fourth quarter, holding 9,424 shares in the company. In total, five hedge funds were long the stock, with a total stake value of $4.3 million.

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.”

7. Dime Community Bancshares, Inc. (NASDAQ:DCOM)

Number of Hedge Fund Holders: 9

Dividend Yield as of May 20: 5.89%

Dime Community Bancshares, Inc. (NASDAQ:DCOM) is the holding company for Dime Community Bank. It provides commercial banking and financial services.

An Outperform rating was reiterated on Dime Community Bancshares, Inc. (NASDAQ:DCOM) shares by analysts at Raymond James on May 1.

Wall Street analysts have placed an average price target of $27.50 on Dime Community Bancshares, Inc. (NASDAQ:DCOM) shares, with a high forecast of $28. The stock was trading at $16.98 on May 20. These figures give Dime Community Bancshares, Inc. (NASDAQ:DCOM) an upside potential of 61.96%.

Our hedge fund data shows nine hedge funds long Dime Community Bancshares, Inc. (NASDAQ:DCOM) in the fourth quarter. Their total stake value was $113 million.

6. OceanFirst Financial Corp. (NASDAQ:OCFC)

Number of Hedge Fund Holders: 13

Dividend Yield as of May 20: 5.62%

OceanFirst Financial Corp. (NASDAQ:OCFC) is the bank holding company for OceanFirst Bank N.A. It is based in Red Bank, New Jersey.

A Buy rating was reiterated on OceanFirst Financial Corp. (NASDAQ:OCFC) shares on April 24 by analysts at DA Davidson.

The average price target placed on OceanFirst Financial Corp. (NASDAQ:OCFC) is $23. The stock was trading at $14.24 on May 20. This gives it an upside potential of 61.52%.

There were 13 hedge funds long OceanFirst Financial Corp. (NASDAQ:OCFC) in the fourth quarter, with a total stake value of $25.9 million.

OceanFirst Financial Corp. (NASDAQ:OCFC), like JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Morgan Stanley (NYSE:MS), is a bank stock many elite hedge funds are investing in today.

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