Here’s a look at three top small bank stocks to buy now. In times of turbulence, big banks often steal the limelight among banking stocks. However, fundamentally strong, even small banks do not need to take center stage to attract investors. This article lists a trio of small, lesser-known banks quietly gearing up for explosive growth in 2023. As economic conditions unfold, these banks have strategically positioned themselves to capitalize on emerging opportunities and overcome challenges.
The first one on the list, headquartered in the pristine wilderness of Alaska, aligns itself with the state’s impressive economic resurgence. It is offering unique prospects tied to its regional environment. Meanwhile, the second bank, stationed along the U.S.-Mexico border, harnesses the power of cross-border trade and a growing Hispanic population in Texas. Lastly, the third, with an astonishing 81 consecutive quarters of profitability, is a stalwart of consistency in an industry highly exposed to macroeconomic conditions.
Northrim BanCorp (NRIM)
As a regional bank with operations in Alaska, Northrim BanCorp’s (NASDAQ:NRIM) performance and growth are closely tied to the economic conditions and developments in the state.
Due to increased business activity, Alaska’s Gross State Product outperforms the national average. It is leading to greater opportunities for Northrim BanCorp. With a decrease in the seasonally adjusted unemployment rate to 3.6% (lower than the U.S. rate), Alaska’s economic recovery is gaining momentum. This recovery provides Northrim BanCorp with a larger customer base and increased lending opportunities.
The leisure and hospitality sector, which had the largest year-over-year (YOY) growth of 7.2% in May 2023, is a significant driver of Alaska’s economic revival. Northrim BanCorp may capitalize on this growth. Similarly, growth in professional and business services, health care, and the oil and gas sector can increase demand for banking services, including loans and commercial banking.
Notably, there is stability in the price of Alaska’s North Slope crude oil, which is essential for the state’s economy. The economy heavily relies on energy production. This stability can boost confidence among businesses and individuals, leading to increased financial activity which can benefit Northrim BanCorp. Also, Alaska’s housing market has been experiencing steady growth, benefiting Northrim BanCorp’s mortgage banking segment.
Along with strong liquidity, Northrim BanCorp’s loan portfolio has been growing steadily, with loans increasing by 10% YOY (Q2 2023). It is primarily driven by commercial and consumer mortgage loans, highlighting the bank’s ability to attract borrowers despite macroeconomic challenges.
Finally, Northrim BanCorp’s loan portfolio with exposure to various sectors is well-diversified. It includes oil and gas, healthcare, tourism, accommodations, retail, fishing, aviation, and restaurants. Such diversification minimizes risk and provides stability in sector-specific challenges. It’s definitely one to consider when looking out for top small bank stocks to buy.
International Bancshares (IBOC)
Next on the list of small bank stocks to buy is International Bancshares (NASDAQ:IBOC), which operates across a wide geographical footprint with 167 facilities. Interestingly, the key growth factor here is that its strategic location along the U.S. border with Mexico positions the bank to benefit from cross-border trade and business activities. The bank’s strong presence in Texas, including areas with a growing Hispanic population, provides a solid customer base and growth opportunities.
International Bancshares derives its core earnings from the interest spread between interest-earning assets and interest-bearing liabilities. The simple fundamental banking model provides a stable and consistent source of income.
Efficient expense control is a long-standing focus for the bank, ensuring long-term profitability. As a result, the bank’s net income for Q2 and H1 2023 increased significantly YOY based on an expanding investment portfolio and higher interest rates. This demonstrates the bank’s ability to adapt and capitalize on market conditions.
The bank’s proactive approach to managing interest rate risk through gap and simulation analysis is noteworthy. Regarding capital adequacy, a high CET1 to risk-weighted assets ratio and a solid Tier 1 capital-to-average-total-asset (leverage) ratio indicate the bank’s robust capital base.
To note a key fundamental strength, the bank has increased its allowance for credit losses by 11.5% YOY (Q2 2023). It is a proactive approach to protecting its loan portfolio from potential losses.
Finally, despite the recent banking crises and high-interest rates, the bank experienced loan growth of 10% YOY during H1 2023 due to commercial and consumer mortgage loan growth, highlighting its resiliency.
Farmers & Merchants Bancorp (FMAO)
Farmers & Merchants Bancorp (NASDAQ:FMAO) has demonstrated strong financial and operational growth. The bank has achieved 81 consecutive quarters of profitability, reflecting its consistent financial stability and landing it on this list of top small bank stocks.
Despite a YOY decrease in net income (Q2 2023), the bank remains financially sound. The decrease is attributed to rising interest rates and strategic one-time expenses. Despite the recent regional banking crisis, its stockholders’ equity has increased by 8.5%, strengthening its capital base. Similarly, deposits increased by 11.0% YOY, contributing to the bank’s liquidity and funding capacity.
The bank experienced substantial loan growth, with total net loans increasing by 23.6% YOY. Organic loan growth, excluding acquisitions, was a significant contributor, accounting for 18.5% of the growth. At the same time, the bank maintains strong asset quality, with non-performing loans accounting for only 0.25% of total loans. The allowance for credit losses is 395.71% of non-performing loans, indicating prudent risk management. The critical factor here is the bank’s emphasis on commercial real estate loans, with a weighted average loan-to-value of approximately 64%, demonstrating a balanced and secure lending portfolio.
In terms of expansion, the bank is opening new offices in strategic locations like downtown Toledo, Ohio, and Oxford, Ohio. Also, the construction of a new regional headquarters in Fort Wayne, Indiana, signifies the company’s investment in infrastructure to support growth.
Overall, the bank’s focus on sustainable growth, strong asset quality, and strategic investments positions it for rapid growth over the long term.
As of this writing, Yiannis Zourmpanos was long NRIM and IBOC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.