Economists now worry about the dreaded Sword again stagflation. The 1970s’ economic crisis was characterized by persistently high and persistent inflation combined with slowing GDP growth. This kind of economic slowdown has not been seen in two generations, but market watchers are concerned that it may return.
Inflation reached 8.5% in March at an annualized rate. GDP growth of 7% in 4Q21 is expected to slow to 1.7% for 1Q22. Even though it is not at recession level yet, a slowdown in this magnitude will have an impact, especially when it comes with historically high inflation.
Although the current economic environment has caused investors to be afraid, Bank of Americas head of quant strategy and equity, Savita Subramanian, advises investors to remain bullish about financial stocks. Subramanian believes these stocks have a number of advantages that are more favorable than the current economic situation.
“The traditional view that financials benefit from steepening yield curves and are hurt by flattening ones seems to no more apply. Subramanian wrote that financials outperformed 40% during market sell-offs surrounding yield curve inversions, and 50% during the entire period of inversion.
This is why we created the TipRanks databaseWe will be revealing the details of three small-cap banks stocks that meet Subramanians criteria. Let’s take a closer look and include commentary from Wall Street analysts.
Preferred Bank (PFBC)
Preferred Bank is an independent commercial bank located in California. The bank has 10 branches in California and one in Flushing, New York. It has a market capital of $1.01 trillion. The bank offers a complete range of services to small and mid-sized businesses, real-estate developers, professionals, as well as high-net-worth individuals.
Preferred Bank announced its financial results for the full year 2021 and the fourth quarter in early 2019. The bank’s bottom line was $1.80 in earnings per share, based upon net income of $26.4 millions. The EPS grew by 28% from $1.40 year-over-year. The company’s full year growth was also impressive. 2021’s net income was $95.2 million, which translated to an EPS rate of $6.41. That’s a 37% increase from the previous year.
Solid financial results supported the banks dividend, which they declared in March for an April 21 payment of 43 cents per share. Annually, the dividend yield is 2.4%. Although the yield is not very high, Preferred Bank’s 8-year history of maintaining the payments makes it a remarkable bank dividend.
Timothy Coffey, a Janney analyst believes that the small-cap bank will bring strong ROI as the Fed ends quantitative easing.
“We are adjusting EPS estimates based on our expectations for better earnings power from higher rates… PFBC’s balance sheets are highly asset sensitive with 85% adjustable rate-tied at the Prime Rate and 84% variable rate loan currently priced at floor rate. We believe that the first 25bps rise in short-term interest rates could result in higher yields for $900 Million in loans and $800 Mil liquid assets held at other financial institutions. Coffey suggested that it could result in a more than 10bps improvement of margin.
Coffey’s positive outlook leads him to give PFBC stock a Buy rating. His price target of $30 implies a potential upside of 35% in the year ahead. (To see Coffey’s track record, click here. Click here)
Wall Street seems to agree with this stock’s bullish future. All five analyst reviews have been positive and support a Strong Buy consensus rating. The stock is priced at $70.6 with an average price target $91.80. This gives it its 30% upside potential.TipRanks offers a stock forecast for PFBC)
Old Second Bancorp (OSBC)
Old Second Bancorp, an Illinois bank that is based in Chicagoland, is next. Old Second, which has a market capitalization of $633 million, operates 29 branches in America’s third-most populous metropolis and more than 70 ATM units. The bank provides the usual full range services to both commercial customers and consumers, and it benefits from its location in the Midwest’s largest financial, transportation, and commercial center.
Old Second completed the merger with West Suburban Bancorp in December last year. This effectively combined the assets and branches of smaller firms into Old Seconds network. The transaction was completed in cash and stock and was valued at $297 millions.
Old Second had net interest and dividend income of $28.6 millions in its 4Q21 quarter. This was $6 million more, or 26.7% in sequential terms, and $4.8million more, or 20% year-over-year. In January, the company approved a dividend of $5 per common share and paid it out in February. The dividend yields just 1.4% but Old Second has maintained it consistently for the past 13 year.
Manuel Navas covers investment firm DA Davidson. He writes Old Second: OSBC screens for the most asset-sensitive bank in our Mids coverage. The 10K disclosure points out to +19.5% NII benefit from a +100bp Fed Funds rate increase… Our forecasted NIM grows rapidly when we add in our new rate expectation for 8 Fed rate increases across 2022-2023 (vs. the 4prior), as also 10yr yields reaching 2.75%, 2.50%, and 3.0 at YE23, YE23, YE23, YE23, YE23, YE24, 2.75%, YE23, YE23, YE23, YE23, YE23, YE23, YE24 and 3% at YE24, YE23, & YE23, YE23, YE22, YE22, 2.75%, and YE23, respectively,,,,,,,,,,,,,,,, at,,,,,,,,,,,,,, s,,,,,,,,,,,,,,,
“YTD outperformance is understating the extreme asset sensitivity of OSBC. However, it also ignores OSBC’s significant progress in growing its lending staff to drive above-peer loans growth. These factors all support a better, above peer return profile in our upwardly revised estimates that warrant a higher valuation. This should drive Consensus higher.
Navas has given OSBC shares a Buy rating. His price target of $22 implies a potential upside of 54% in the next 12 months.
Like many small caps, this stock has not received many analyst reviews. However, the analysts who have reviewed it have liked it. OSBC received a unanimous Strong Buy consensus rating based on 3 positive reviews. The average price target for OSBC stocks is $18.67, which indicates a 31% upside to the $14.24 trading price. (TipRanks has the OSBC stock forecast)
Mercantile Bank Corporation (MBWM)
We’ll wrap up with a company located in Grand Rapids, Michigan. Mercantile Bank serves customers from all sectors of the economy, including consumers and businesses. With assets in excess of $5.2 Billion, 44 branches and a market capitalization of $534.2 Million, it serves customers both commercial and government. The services offered include checking and deposit accounts, health savings accounts and personal and business loans.
Mercantile released its January results for 4Q21 as well as the full-year 2021. The company described the reports’ strength. The quarterly EPS of 74 cents per share was down 14% over the year. However, the full year earnings of $3.69 a share increased 36% over the 2020 result. The year’s total net income was $59million, compared with $44.1 million the previous year.
Solid growth in residential mortgage loan and commercial loan segments drove the full-year gains. The bank reported that it had $975million in cash and liquid assets as of December 31, 2021. This was 55% more than the previous year.
The banks dividend was supported by cash assets and full year earnings growth. It was increased by 3% to 31c per common share. This yielded 3.6% and an annualized payment to stakeholders of $1.24
Raymond James’ stock was covered by 5-star analyst Daniel Tamayo, who believes MBWM offers a compelling risk-reward ratio. He wrote, “[Given]We believe that the bank’s fundamental outlook is unchanged, and the market continues to anticipate significant rate hikes over the next two years. However, shares offer a compelling opportunity to buy and have significant upside potential at this price. We remain positive about the company’s long-term prospects, given its attractive deposit base and attractive footprint. We believe that strong organic loan growth will drive near-term performance.
Tamayo rates these shares Strong Buy. He sets a $44 price target. This implies a 30% upside. (To view Tamayos track records, Click here)
Tamayos is currently the only analyst review for this small-cap banking institution. Shares are currently trading at $33.71 each. (TipRanks offers a stock forecast for MBWM)
TipRanks has great ideas for trading financial stocks at attractive valuations. Stocks you should buyTipRanks has just launched a new tool called, which unites all of TipRanks equity insight.
Disclaimer: The opinions expressed within this article are solely the views of the featured analysts. This content is meant to be used only for informational purposes. It is crucial to do your own analysis before you make any investment.
