Small bank stocks have continued to fall lately as pressure form difficult real estate markets continue to weigh heavily on their results. The index of community bank stocks, ABAQ, is once again flirting with new 52 week lows. Most of the banks have reported small earnings gains but have had to take large increases in loan loss provisions as well as rising net charge offs. Many of had to raise capital to protect their balance sheets and capital ratios.

As bad as business has been, it is starting to be reflected in the share price of many stocks. At least one group is starting to pay attention. Insiders at small banks are starting to buy stock at increasing levels as they bet on an eventual turnaround. In reviewing filings form just the last week I found more than 50 small to mid size banks where insiders have purchased stock in the open market place.

Sandy Spring Bancorp (SASR0 a bank based not far from me In Annapolis Maryland actually reported better profits for the quarter. In spite of loan loss provisions that almost tripled in the r Sandy Spring reported earnings of $.50 a share, a penny better than the year ago period. The stock is fairly cheap, trading at less than 1.5 times tangible book value. Sandy Springs is expected to earn over $2 a share, putting the stock at less than 10 times earnings. They also raised the dividend by a penny this quarter and the shares yield of almost 5%. Insiders have noticed with 4 different officers and directors buying stock in the open market in recent weeks.
Parke Bancorp (PKBK) is a small bank operating out of Sewell, New Jersey. The company announced earnings of $.31 a share, exactly the same as a year ago on a fully diluted basis. Deposits and assets both grew by double digits in the quarter, a period when many banks were struggling with decreasing asset values. Parke raised its cash and equivalents in the quarter to ensure that they had sufficient liquidity in the difficult operating environment. Although the company does not pay a cash dividend it recently distributed a 15% stock dividend to shareholders, the fifth time since 2002 they have done so. There have been 15 different insider purchases in the last six months, totaling over 21,000 shares. Currently insiders own almost 30% of the shares outstanding in the bank.

These are just two examples of small banks where insiders are confident enough of the future ot back their opinions with their checkbook. There are literally dozens of these small banks right now with equity to asset and tier one capital ratios that out them well into the well capitalized category. They are becoming extraordinarily cheap on the basis of price to book value and price to earnings. Although they are felling the effects of the weak real estate market, they do not have the complicated securities and leveraged loan problems of larger banks. As the economy recovers so will these banks. I except there to be substantial consolidation among small banks as well/larger banks will buy them to gain high quality assets and earning power going forward. At 1 times book value and 10 times earnings or less, the small banks are trading at about half the level where takeovers are usually priced in the small to mid size banking arena. Based on that, upside potential over a 3 to 5 year period would seem substantial.