10 Best Small Bank Stocks To Invest In

In this article, we will be taking a look at the 10 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.

5. Huntington Bancshares Incorporated (NASDAQ:HBAN)

Number of Hedge Fund Holders: 23

Huntington Bancshares Incorporated (NASDAQ:HBAN) is the bank holding company for The Huntington National Bank. It provides commercial, consumer, and mortgage banking services in the US.

On October 24, Terry McEvoy at Stephens placed an Equal Weight rating on Huntington Bancshares Incorporated (NASDAQ:HBAN) shares, alongside a $16 price target.

Huntington Bancshares Incorporated (NASDAQ:HBAN) performed exceptionally well in the third quarter, reporting revenues of $1.9 billion, representing an $11.8% growth. The company is well-positioned to benefit from higher interest rates because of its asset sensitivity. The bank also grew average loans by $3 billion of 2.6% quarter-on-quarter.

In total, 23 funds were long Huntington Bancshares Incorporated (NASDAQ:HBAN) in the third quarter, with a total stake value of $168 million.

Aristotle Capital Boston, LLC, an investment advisor, mentioned Huntington Bancshares Incorporated (NASDAQ:HBAN) in its third-quarter 2022 investor letter. Here’s what the firm said:

“Huntington Bancshares Incorporated (NASDAQ:HBAN), an Ohio-based bank holding company, was removed from the portfolio based on our belief that shares were fully valued and there were better opportunities to deploy capital elsewhere within the portfolio.”

4. Regions Financial Corporation (NYSE:RF)

Number of Hedge Fund Holders: 32

Regions Financial Corporation (NYSE:RF) is a financial holding company. It provides banking and bank-related services to individual and corporate customers.

Michael Rose at Raymond James holds a Market Perform rating on Regions Financial Corporation (NYSE:RF) shares as of November 21.

In the third quarter, Regions Financial Corporation (NYSE:RF) reported strong loan growth as it builds more client relationships. The company’s net interest income rose from $1.11 billion to $1.27 billion quarter-on-quarter, representing a growth of over 30% from last year. Its net interest margin also grew from 3.06% to 3.53% in this quarter.

Out of 920 hedge funds tracked in the third quarter, 32 funds were long Regions Financial Corporation (NYSE:RF). Their total stake value was $330 million.

3. Fifth Third Bancorp (NASDAQ:FITB)

Number of Hedge Fund Holders: 35

Fifth Third Bancorp (NASDAQ:FITB) is an American regional bank working to help individuals, families, businesses, and communities grow through smart financial services. The company is based in Cincinnati, Ohio.

Vivek Juneja at JPMorgan holds a Neutral rating and a $39 price target on Fifth Third Bancorp (NASDAQ:FITB) as of November 2.

Fifth Third Bancorp (NASDAQ:FITB) has a high dividend yield of over 4% and is trading at a discount compared to its competitors, making it an attractive bank stock pick. Analysts at Bank of America see the company’s earnings growing sharply over 2023. For 2022, the company’s EPS is expected to come in at $3.5, and for 2023, it’s expected to stand at $4.3, representing a growth 23% between 2022 and 2023.

Our hedge fund data shows 35 funds long Fifth Third Bancorp (NASDAQ:FITB) in the third quarter, with a total stake value of $393 million.

2. First Republic Bank (NYSE:FRC)

Number of Hedge Fund Holders: 39

First Republic Bank (NYSE:FRC) provides private banking, private business banking, and private wealth management services in the US. The company is based in San Francisco, California.

An Outperform rating was reiterated on First Republic Bank (NYSE:FRC) shares on November 10 by analyst David Chiaverini at Wedbush.

First Republic Bank (NYSE:FRC) has a competitive strategy resulting in a superior value proposition to its customers. The company compounded its revenues at a rate of 18% from 2016 to 2021. In the second quarter of 2022, it also generated a growth rate of 23% in mortgage originations.

There were 39 hedge funds long First Republic Bank (NYSE:FRC) in the third quarter, with a total stake value of $1.2 billion.

RiverPark Funds, an investment management firm, mentioned First Republic Bank (NYSE:FRC) in its second-quarter 2022 investor letter. Here’s what the firm said:

“First Republic Bank is one of the most differentiated business models in our large cap universe. What makes the Company so different is not necessarily the activities that it does, but the activities it does not do. These trade-offs are an incredibly important strategic decision that every company must make. However, in our experience, rarely are these forgone activities lauded or even recognized as critical differentiators. The Company does mention these foregone activities, on page 45 of its most recent investor presentation appendix.

When we consider the financial industry, especially banking, is fraught with competition, simply being better than any of the other massive money-center banks is not enough to sustain many decades or even years of superior performance. Rather than try to outcompete every bank in the country, First Republic’s competitive strategy of doing only a handful of things well results in a superior value proposition to its customers. These trade-offs are easy to understand but difficult to copy, given widespread competitive and institutional imperatives that pressure management teams to revert to the mean…” (Click here to see the full text)

1. Citizens Financial Group, Inc. (NYSE:CFG)

Number of Hedge Fund Holders: 43

Citizens Financial Group, Inc. (NYSE:CFG) is the bank holding company for Citizens Bank, National Association. It provides retail and commercial banking products and services in the US.

JPMorgan’s Vivek Juneja holds an Overweight rating and a $43 price target on Citizens Financial Group, Inc. (NYSE:CFG) shares as of November 2.

In the third quarter, Citizens Financial Group, Inc. (NYSE:CFG) reported strong results with over $5.50 in earnings. This makes the stock too cheap to ignore at its current valuation. The company also generated a $1.27 billion revenue, with a 10.9% return on common equity and a 17% return on tangible equity.

Citizens Financial Group, Inc. (NYSE:CFG) was found among the 13F holdings of 43 hedge funds in the third quarter. Their total stake value was $659 million.

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Disclosure: None. 10 Best Small Bank Stocks To Invest In is originally published on Insider Monkey.