Regional Banks Are Expecting to Catch Fire in 2014

At long last the new year is upon us, and I am more excited about the trade of the decade than ever before. Now that we have a clearer picture of all the new regulations and how they will impact the small regional and community bank I think we will see merger activity pick up in the sector.

A solid 65% of community bank executives surveyed by KPMG expect to be involved in a transaction next year. With compliance costs rising and organic growth difficult at best, the easiest path for many banks will be to merge. Banks that are able to survive as free-standing institutions will be rewarded with higher multiples of earnings and asset value as a result of the M&A activity, so the upside in this group is broad in the years ahead.

I find it instructive to see which smaller banks are seeing strong insider buying by the officers and directors who run the bank every day. They have the best understanding of their bank’s financial condition and prospects, and when they crack open their wallets to buy it makes sense to pay attention. The insiders know if the bank is seeing the potential for making sensible acquisitions in 2014 that make for solid growth opportunities. When insiders write a check to buy shares in the open market it’s because they expect the stock price to go higher.

One interesting bank that is seeing insider buying activity is Berkshire Bancorp (BERK). The company has recently switched from the Nasdaq to OTC markets, but that has not stopped director Moses Marx from consistently buying BERK stock. Berkshire does business in the already overbanked New York and New Jersey markets, and the stock is very cheap at just 82% of book value. Insiders won more than 60% of the bank, so investors are on the same side of the table as management.

Peoples Bank of North Carolina (PEBK) has also seen strong insider buying recently. One director as well as the CEO and Chairman of the board have made open market purchases of the stock in the past few months. The bank serves the central areas of North Carolina and also operates Banco de la Gente, which has four branches that serve the region’s fast-growing Latin American community. The bank serves a market with above-average economic prospects and has a very attractive 22-branch network that is likely to attract the attention of larger banks in the region.

The year ahead should be a great one for the smaller bank stocks. Larger regionals like Huntington Bancorp (HBAN) and Capital Ban Financial (CBF) have made it clear they intend to grow by acquisition in the years ahead. Banks like First Merit (FMER) and First Merchants (FRME) have done deals in the past year and are open to doing more to increase their market share and footprints. This should be the year the floodgates open and we see the first wave of merger activity in small banks.

As of this writing, Tim Melvin was long PEBK and BERK.

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