I have been investing in the small regional and community bank stocks as a core part of my investing practices for more than two decades now. With the exception of periods of severe overvaluation in the sector, I have always owned these little money machines in my portfolios.
Buying regional banks under book value and holding them until prices get well above two times book has been a recipe for fabulous profits with very little market correlation. Although I perform rigorous analysis if the balance sheet and loan portfolios before I buy, I have learned that the real margin of safety in small bank investing is in the character of the management.
The best measurement of character in a small bank is insider ownership in my opinion. When the people running the bank have a significant investment in the shares of the institution, they are less likely to commit mistakes or negligence. Insider owners are a lot less likely to make loans to a developer with a poor reputation or offer indirect funding to shady customers.
Management that owns a lot of its stock is also less likely to buy a bad bank at a bad price. Having a large percentage of your net worth in your own bank shows the world that you believe in its future and have a great degree of confidence in your lending and operating standards.
When you are looking at bank insider ownership do not rely on the figures in the various web based screeners. They all have different numbers. So, actually reading the proxy filings is worth a minute or two.
Here are three regional banks with significant insider ownership:
Sun Bancorp of New Jersey (SNBC)
Consider a bank like Sun Bancorp of New Jersey (SNBC). SNBC has undergone a significant turnaround since the depths of the credit crisis.
The directors of Sun Bancorp of New Jersey, who have overseen this process, own quite a bit of SNBC stock and have been buying more as recently as August. Wilbur Ross is a director of the bank and owns almost 25% of the bank.
The SNBC board has focused management on reducing higher risk activities and getting back to bank basics, and the strategy has been working. SNBC is overseen by a board that owns a lot its stock and has vested interest in a higher stock price.
NASB Financial (NASB)
NASB Financial (NASB) is a small bank in Grandview, MO with about $1.1 billion of assets and nine branches. If NASB management makes an egregious mistake that hurts shareholder value, it pays a big price.
Chairman of the Board David Hancock owns a little over 44% of NASB stock, and several other officers and directors own at least 20,000 shares of NASB. A series of bad loans or misguided acquisitions is going to hurt the NASB insider owners as much or more than it does outside shareholders.
Peoples Bancorp of North Carolina (PEBK)
Peoples Bancorp of North Carolina (PEBK) is a bank located in Newton, NC that has 23 branches and about $1 billion in assets. PEBK officers and directors own a combined total of a little over 10% of the regional bank, which keeps them pretty focused on the day-to-day operations.
The regional bank focuses on the basic with the majority of the loan portfolio in commercial and residential real estate and non-performing assets are below the national average. Investors and management are sitting on the same side of the table with the same goals for the bank and its stock price.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.