Banks: 3 Small Cap Growth Stocks Worth Buying

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The financial sector in the U.S. is going through rapid structural changes with uninterrupted expense control, sound balance sheets, an up-tick in mortgage activity, and fewer credit loss provisions. Moreover, a favorable equity and asset market backdrop, progressive housing sector, and an accommodative monetary policy are expected to make the road to growth smoother. 

The implementation of Basel III requirements this year will boost minimum capital standards. Adjusting liquidity management processes will cause a short-term negative impact on the financials of U.S. banks. But a greater capital cushion will help fundamentally strong banks withstand internal and external shocks over the long run. 

Small Cap Bank Stocks Worth Buying

Despite the volatility in the financial sector, many investors still remain curious about opportunities within this category. And with good reason, as there are companies that have continued to thrive by running fiscally sound operations.

The banks I am going to recommend have their footprints in a few states or just one state, and usually have assets of $25 billion or less. They don’t extend loans to Greece and don’t load up on fancy derivatives. I think you will find the financial stocks listed below quite interesting.

Rockville Financial (NASDAQ: RCKB)

This is a state-chartered, mid-tier stock holding company that wholly owns Rockville Bank. The bank offers deposit instruments, including checking, savings, money market savings accounts, negotiable order of withdrawal accounts, and fixed-rate time deposits. Its loan portfolio comprises commercial and industrial loans, commercial real estate loans, consumer loans, residential mortgage loans, and installment and collateral loans.

Rockville Financial is a debt-free company. The company raised its quarterly dividend significantly in 2012. The company also paid a special cash dividend and bought back 61% of its share repurchase plan last year. When including both dividends and the stock buyback program, the company returned to its shareholders 231% of its net income for 2012.

In the quarterly earnings results posted a few weeks ago the company reported net income of $4.3 million, or $0.16 earnings per share for the quarter ended Dec. 31, 2012, compared to net income of $4.0 million, or $0.14 earnings per share, for the quarter ended Dec. 31, 2011. For the year 2012, net income was $15.8 million, or $0.56 per diluted share, compared to $7.1 million, or $0.25 per diluted share for 2011.

Financial Strengths of the Company

  • Record annual net income of $15.8 million in 2012, 2.2 times 2011 net income.
     
  • Record annual diluted earnings per share of $0.56 in 2012 compared to $0.25 in 2011.
     
  • 20% annual core operating revenue growth of $13.3 million.
     
  • 13% growth in deposits in 2012.
     
  • 16% growth in non-interest-bearing deposits in the year.

First Connecticut Bancorp (NASDAQ: FBNK)

This is a Maryland-chartered stock holding company that wholly owns Farmington Bank. Farmington Bank is a full-service community bank with 18 branch locations throughout central Connecticut. The company offers a range of deposit instruments. It also provides various loans, such as one-to-four family residential real estate loans; commercial real estate loans; construction loans; commercial loans; home equity loans and home equity lines of credit secured by owner-occupied one-to-four family residences; and consumer loans.

The stock appears to be well positioned for growth with minimal long-term debt. The company has a relatively low Debt/Equity Ratio of 0.5.  The Debt/Equity Ratio illustrates how aggressively a company is financing its growth via debt.

The company reported 3rd quarter 2012 earnings of $0.09 per share, excluding stock compensation expenses and a loss on the sale of non-strategic properties. The company had 3rd quarter 2012 revenues of $15.5 million. This bettered the $15.1 million consensus analysts’ estimates, and was 13.2% above the prior year's 3rd quarter results.

Financial Strengths of the Company

  • Strong loan growth continued as total loans increased $69.5 million, or 5%, during the quarter ended Sept. 30, 2012 and have increased $189.8 million or 15% since Dec. 31, 2011. 
     
  • Net interest income increased $588,000, or 5%, for the quarter ended Sept. 30, 2012 as a result of strong organic loan growth compared to the quarter ended June 30, 2012. 
     
  • Checking accounts grew by 4%, or 1,282 net new accounts, for the quarter ended Sept. 30, 2012 compared to the quarter ended June 30, 2012. 
     
  • The company remained well-capitalized, with an estimated total capital to risk weighted asset ratio of 19.15% on Sept. 30, 2012. 

Texas Capital Bancshares (NASDAQ: TCBI)

This is the parent company of Texas Capital Bank, a commercial bank that delivers highly personalized financial services to businesses and private clients. Headquartered in Dallas, the Bank has full-service locations in Austin, Dallas, Fort Worth, Houston and San Antonio.

The stock has witnessed sturdy price momentum since December 2011. Moreover, the company has been continuously outperforming its 200-day moving average over the past year, showing a steady growth trend. The company has a trailing 12-month ROE of 16.8%, compared with the peer group average of 10.1%. Considering the recent share price fluctuations and consistent growth trends, there is a strong possibility of considerable upside from the current levels.

The company recently announced earnings and operating results for the fourth quarter and full year of 2012. EPS increased 51% for the year, a 5% decrease on a linked quarter basis (3% increase excluding litigation settlement), and a 13% increase for the fourth quarter of 2012 as compared to the same quarter of 2011.

Financial Strengths of the Company

  • Net income increased 59% for the year and 22% increase for the fourth quarter of 2012 as compared to the same quarter of 2011.
  • Demand deposits increased 45% and total deposits increased 34% for the year from 2011, reflecting linked quarter increases of 20% and 11%, respectively.
  • Loans held for investment increased 22% and total loans increased 30% for the year from 2011, reflecting linked quarter increases of 4% and 6%, respectively.


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