Banking company insiders are sending stock investors a message now: Calm down and buy shares of regional banks, because they are not likely to lose all their business to “safer” megabanks.
We know this because community bank insiders are aggressively buying their companies’ shares in the banking sector’s sell-off following the collapse of Credit Suisse Group
CS
Since the bank sector meltdown began, insiders at scores of regional banks have purchased company shares. More than a dozen of these buys were worth $500,000 to $1 million or more. That’s big enough to serve as a solid buy signal at smaller companies, according to how I use insider analysis at my stock letter.
In short, insiders are telling us that the reports of the death of their banks are greatly exaggerated. They aren’t the only ones who think so.
“The risk of contagion is generally low and investors should take advantage of weakness to add exposure to the group,” Baird analyst David George wrote in a March 14 note. He said bank stocks are offering one of the market’s best risk-reward profiles.
Moody’s Analytics chief economist Mark Zandi adds that the recent bank failures signal more failures ahead. He cites solid loan growth and profitability, and few problems with bad loans. Says Zandi: “These are not the conditions that historically have been the fodder for problems in the system.”
Meanwhile, bank analyst David Feaster at Raymond James says the key drivers behind the failure of Silicon Valley Bank and Signature Bank
SBNY
“are truly idiosyncratic, and not indicative of broader issues in the industry.”
Unlike SVB and Signature, most regional banks don’t have customer concentration in tech startups, cryptocurrency and other volatile sectors. Community banks have much broader branch networks and lots of customers with smaller deposits. At SVB and Signature, uninsured deposits were around 90% of the deposit base. For context, as of the end of September 2022, 55.3% of overall bank deposits were uninsured, according to the Federal Deposit Insurance Corporation (FDIC).
This metric matters because uninsured depositors are more likely to flee, since their balances (over $250,000) are not protected by FDIC insurance. So, this is good risk measure at banks. One CEO at a $500 million market-cap community bank told me that during the worst of the meltdown his bank was actually seeing deposit inflows.
It make sense, intuitively, that community bank customers would not flee to big banks such as JPMorgan Chase
JPM
,
Citigroup
C
and Bank of America
BAC
.
After all, there are good reasons why small banks have thrived for decades, and for over a century in many cases.
For starters, community bankers have a better grasp on their local economies and businesses. The banking relationships are more personal. “They know their local markets better so they are more willing to lend,” says Matt Frankel, a banking analyst for Motley Fool. Plus,
Plus, a lot of small-town loans are too small to matter at the mega banks. “The national banks don’t really get excited about a $100,000 loan to a business. But we love that stuff,” said the community bank CEO I spoke with, who asked not to be identified.
4 bank stocks with active insider buying
Here are four bank stocks that look attractive based on their solid insider buying and apparent relatively low risk. I use two factors to assess risk:
1) A low percentage of uninsured deposits means fewer customers to get spooked into moving funds because their accounts are not FDIC-insured.
2) The percentage of debt securities that are “held to maturity” (HTM). HTM bonds are likely to be way underwater now, given how much interest rates have gone up. (Bond prices fall when rates rise.) Banks with high HTM ratios most likely have large paper losses on bonds. The losses have not been booked yet (because they are categorized as HTM). A bank with a high percentage of HTM that is forced to sell to short up financials will take a bigger hit on earnings. Lower is better. For context, SVB had an extremely high 78% of debt securities as HTM.
Insider buying data below are from The Washington Service’s EZ-Insider site. Uninsured deposit and HTM data come from the FDIC.
1. Coastal Financial (CCB)
Three insiders recently bought a total of $1.3 million worth of Coastal Financial
CCB
shares at an average price of $37.90. About 30% of Coastal Financial’s deposits are unisured, with 1% of debt securities held to maturity.
Based in Everett, Wash., Coastal Financial has low loan charge-offs, and more than 60% of its loans are variable rate, an advantage in a rising-rate climate. Raymond James reports that the bank’s cash represents 10.9% of assets, among the highest of the 117 banks the brokerage analyzed.
Note that a cluster or a group of buyers is bullish in insider analysis. In this case, most of the buying, or $1.1 million worth, was by director Steven Hovde, who owns more than 10% of the bank’s stock through his Hovde Group investment bank. Though Hovde is a director, purchases by investment firms carry less weight in insider analysis. In addition to the insider buying, the bank’s CEO, CFO and chief operating officer exercised $290,000 worth of options without selling, a bullish signal that insiders are looking to lock in options-related taxes ahead of an expected stock rise.
2. Fifth Third Bancorp (FITB)
A bank director bought $1.3 million worth of stock at an average of $26.82 a share. In addition to the insider buying, a director exercised $827,000 worth of options without selling, which is a bullish signal in insider analysis.
Based in Cincinnati, Ohio, Fifth Third
FITB
primarily serves the U.S. Midwest and Southeast. Fifth Third is mostly in commercial, consumer and small business banking, and its wealth-management arm diversifies revenue. About 42% of its deposits are uninsured, with no debt securities held to maturity.
3. Lakeland Financial (LKFN)
A director bought $1.7 million worth of Lakeland Financial
LKFN
stock at an average of $64.34 a share.
Lakeland Financial operates in northern and central Indiana through Lake City Bank, based in Warsaw, Ind. Lake City Bank has a long history of community banking ties. Its deposit and loan base is diversified, with no client or industry concentrations. About 56% of deposits are uninsured, with 9.7% of debt securities held to maturity.
4. Valley National Bancorp (VLY)
A broad cluster of 11 directors bought $2.13 million worth of Valley National Bancorp
VLY
stock, paying an average of $10.37 a share.
Based in Wayne, N.J., Valley National Bancorp’s main subsidiary Valley National Bank has been building local business relationships since 1927. It is also in wealth management and insurance, which diversifies revenue by creating fee income outside of banking. About 33.5% of deposits are uninsured, with 75% of debt securities held to maturity.
Cluster buys are bullish in insider analysis, and it is rare to see clusters of 11 insiders acting in concert. The size is notable, as well, at over $2 million in buying.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested JPM, C, and BAC in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks
More: Analyst says banking crisis is ‘over.’ Is it too soon to invest in bank stocks?
Plus: 24 bank stocks that contrarian bottom-feeders can feast on now
Bank insider action tells us the battered financial sector is a buy: These 4 regional bank stocks are tempting those in the know.
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Banking company insiders are sending stock investors a message now: Calm down and buy shares of regional banks, because they are not likely to lose all their business to “safer” megabanks.
We know this because community bank insiders are aggressively buying their companies’ shares in the banking sector’s sell-off following the collapse of Credit Suisse Group
CS
and SVB Financial Group
SIVB
.
The signal is more notable because it comes at a time when corporate insiders overall have ghosted the market as buyers.
Since the bank sector meltdown began, insiders at scores of regional banks have purchased company shares. More than a dozen of these buys were worth $500,000 to $1 million or more. That’s big enough to serve as a solid buy signal at smaller companies, according to how I use insider analysis at my stock letter.
In short, insiders are telling us that the reports of the death of their banks are greatly exaggerated. They aren’t the only ones who think so.
“The risk of contagion is generally low and investors should take advantage of weakness to add exposure to the group,” Baird analyst David George wrote in a March 14 note. He said bank stocks are offering one of the market’s best risk-reward profiles.
Moody’s Analytics chief economist Mark Zandi adds that the recent bank failures signal more failures ahead. He cites solid loan growth and profitability, and few problems with bad loans. Says Zandi: “These are not the conditions that historically have been the fodder for problems in the system.”
Meanwhile, bank analyst David Feaster at Raymond James says the key drivers behind the failure of Silicon Valley Bank and Signature Bank
SBNY
“are truly idiosyncratic, and not indicative of broader issues in the industry.”
Unlike SVB and Signature, most regional banks don’t have customer concentration in tech startups, cryptocurrency and other volatile sectors. Community banks have much broader branch networks and lots of customers with smaller deposits. At SVB and Signature, uninsured deposits were around 90% of the deposit base. For context, as of the end of September 2022, 55.3% of overall bank deposits were uninsured, according to the Federal Deposit Insurance Corporation (FDIC).
This metric matters because uninsured depositors are more likely to flee, since their balances (over $250,000) are not protected by FDIC insurance. So, this is good risk measure at banks. One CEO at a $500 million market-cap community bank told me that during the worst of the meltdown his bank was actually seeing deposit inflows.
It make sense, intuitively, that community bank customers would not flee to big banks such as JPMorgan Chase
JPM
,
Citigroup
C
and Bank of America
BAC
.
After all, there are good reasons why small banks have thrived for decades, and for over a century in many cases.
For starters, community bankers have a better grasp on their local economies and businesses. The banking relationships are more personal. “They know their local markets better so they are more willing to lend,” says Matt Frankel, a banking analyst for Motley Fool. Plus,
Plus, a lot of small-town loans are too small to matter at the mega banks. “The national banks don’t really get excited about a $100,000 loan to a business. But we love that stuff,” said the community bank CEO I spoke with, who asked not to be identified.
4 bank stocks with active insider buying
Here are four bank stocks that look attractive based on their solid insider buying and apparent relatively low risk. I use two factors to assess risk:
1) A low percentage of uninsured deposits means fewer customers to get spooked into moving funds because their accounts are not FDIC-insured.
2) The percentage of debt securities that are “held to maturity” (HTM). HTM bonds are likely to be way underwater now, given how much interest rates have gone up. (Bond prices fall when rates rise.) Banks with high HTM ratios most likely have large paper losses on bonds. The losses have not been booked yet (because they are categorized as HTM). A bank with a high percentage of HTM that is forced to sell to short up financials will take a bigger hit on earnings. Lower is better. For context, SVB had an extremely high 78% of debt securities as HTM.
Insider buying data below are from The Washington Service’s EZ-Insider site. Uninsured deposit and HTM data come from the FDIC.
1. Coastal Financial (CCB)
Three insiders recently bought a total of $1.3 million worth of Coastal Financial
CCB
shares at an average price of $37.90. About 30% of Coastal Financial’s deposits are unisured, with 1% of debt securities held to maturity.
Based in Everett, Wash., Coastal Financial has low loan charge-offs, and more than 60% of its loans are variable rate, an advantage in a rising-rate climate. Raymond James reports that the bank’s cash represents 10.9% of assets, among the highest of the 117 banks the brokerage analyzed.
Note that a cluster or a group of buyers is bullish in insider analysis. In this case, most of the buying, or $1.1 million worth, was by director Steven Hovde, who owns more than 10% of the bank’s stock through his Hovde Group investment bank. Though Hovde is a director, purchases by investment firms carry less weight in insider analysis. In addition to the insider buying, the bank’s CEO, CFO and chief operating officer exercised $290,000 worth of options without selling, a bullish signal that insiders are looking to lock in options-related taxes ahead of an expected stock rise.
2. Fifth Third Bancorp (FITB)
A bank director bought $1.3 million worth of stock at an average of $26.82 a share. In addition to the insider buying, a director exercised $827,000 worth of options without selling, which is a bullish signal in insider analysis.
Based in Cincinnati, Ohio, Fifth Third
FITB
primarily serves the U.S. Midwest and Southeast. Fifth Third is mostly in commercial, consumer and small business banking, and its wealth-management arm diversifies revenue. About 42% of its deposits are uninsured, with no debt securities held to maturity.
3. Lakeland Financial (LKFN)
A director bought $1.7 million worth of Lakeland Financial
LKFN
stock at an average of $64.34 a share.
Lakeland Financial operates in northern and central Indiana through Lake City Bank, based in Warsaw, Ind. Lake City Bank has a long history of community banking ties. Its deposit and loan base is diversified, with no client or industry concentrations. About 56% of deposits are uninsured, with 9.7% of debt securities held to maturity.
4. Valley National Bancorp (VLY)
A broad cluster of 11 directors bought $2.13 million worth of Valley National Bancorp
VLY
stock, paying an average of $10.37 a share.
Based in Wayne, N.J., Valley National Bancorp’s main subsidiary Valley National Bank has been building local business relationships since 1927. It is also in wealth management and insurance, which diversifies revenue by creating fee income outside of banking. About 33.5% of deposits are uninsured, with 75% of debt securities held to maturity.
Cluster buys are bullish in insider analysis, and it is rare to see clusters of 11 insiders acting in concert. The size is notable, as well, at over $2 million in buying.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested JPM, C, and BAC in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks
More: Analyst says banking crisis is ‘over.’ Is it too soon to invest in bank stocks?
Plus: 24 bank stocks that contrarian bottom-feeders can feast on now
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