Economists are beginning to worry about the dreaded S-word again stagflation. The 1970s were marked by a combination of persistently high inflation and 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 hit 8.5% per annum in March, marking the highest level since 1981. GDP growth, which was a hot 7% during 4Q21, will 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 that these stocks offer a range of benefits that suit current conditions.
“The traditional view that financials benefit from steepening yield curves and are hurt by flattening ones seems to no more apply. Subramanian stated that financials performed better than 40% of the times during market selloffs around yield curve Inversions and 50% during the entire inversion period.
With this in view, we used the TipRanks databaseTo find out more about three small-cap bank shares that fit Subramanian’s criteria, Let’s take a closer look and include commentary from Wall Street analysts.
Preferred Bank (PFBC)
Preferred Bank, an independent commercial bank in California, is the first. With a market cap of $1.01billion, the bank has 10 branches throughout California, plus one in Flushing. The bank provides a wide range of services for small and medium-sized businesses, real estate developers, professionals and individuals with high net worth.
Preferred Bank released its financial results for the fourth quarter as well as the full year 2021 in early 2018. The bank’s bottom line was $1.80 in earnings per share, based upon net income of $26.4 millions. The EPS grew 28% year-overyear from $1.40 to $1.80. 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 bank dividend, which was declared in march for an April 21 payment at 43 cents per common stock. Annually, the dividend yield is 2.4%. While the yield is not very high, Preferred Bank has an 8 year history of maintaining the payments.
Timothy Coffey, Janney analyst, believes that this bank of small capital is well-placed to bring strong ROI once the Fed stops 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 increase of short-term rates could lead to higher yields on loans totaling $900 million and liquid assets totalling $800 Mil held at other institutions. Coffey stated that this could lead to a more than 10bps increase in margin.
Coffey’s optimistic outlook leads him PFBC stock to be rated Buy. His price target of $30 suggests a potential upside for 35% over the next year. (To view Coffeys track records, Click here)
Wall Street seems to be in agreement about the bullish future of this stock, as all five analyst reviews are positive. This supports 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 has a stock forecast for PFBC)
Old Second Bancorp (OSBC)
Old Second Bancorp is next, an Illinois-based bank that operates in the Chicagoland region. Old Second Bancorp has a $633 million market cap and operates 29 branches in America’s third largest city. It also has more than 70 ATMs. 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 a merger in December with West Suburban Bancorp. This effectively merged the smaller branches and assets 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 is modest at 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) and our 10yr yields reaching 2.75%, 3.50%, and 3.0 at YE24.
“YTD outperformance does not reflect the extreme asset sensitivity at OSBC. It also disregards OSBC’s substantial progress in building its lending team to drive higher-peer loan 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 rates OSBC shares as Buy and sets a $22 price target. This implies a potential upside in excess of 54% for the next 12 month.
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 stock’s average price target of $18.67 indicates that there is room for 31% upside compared to its trading price of $14.24. (TipRanks has the OSBC stock forecast)
Mercantile Bank Corporation (MBWM)
We’ll wrap up with a company located in Grand Rapids, Michigan. Mercantile Bank has assets of $5.2 billion and 44 banking offices. It serves both business and consumer customers in the region. You can get mortgages, deposit and checking accounts, savings accounts, personal loans, and health savings accounts.
Mercantile announced its results for the 4Q21 and full year 2021 in January. They described the reports as strong. 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 $44.1million in the previous year.
Solid growth in the residential mortgage loan and commercial loan segments drove the full year gains. As of December 31, 2021, the bank had $975 million in cash and other liquid assets. This was an increase of 55% y/y.
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 analyst Daniel Tamayo (5-star analyst) believes MBWM is a compelling investment with a high risk reward. He wrote, “[Given]While we believe the bank’s fundamental outlook remains unchanged, the market is still expecting significant rate increases in the next two-years, we believe shares are a compelling investment and offer significant upside potential. 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 a Strong Buy and sets a $44 target price, which 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)
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Disclaimer: The opinions contained in this article are the sole opinions 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.
These views and opinions are solely the author’s and do not necessarily reflect the views of Nasdaq, Inc.