Small Banks vs. Big Banks: Which Side Are You On?

Many people are protesting big banks fees by simply taking their business elsewhere. The growing movement to leave big banks, fueled by charges for formally free services and high interest rates, has started a growing trend in alternative finance firms that range from small banks and online pawn lenders to peer-to-peer lending services.

As the Occupy Wall Street protesters are quick to point out -- not many are feeling very trusting toward big banking institutions. But the changes in big banks are largely consequences of the 2008 credit crisis and subsequent regulations that are choking revenue sources. Banks have been quick to charge consumers for the difference in various forms.

As a result, credit unions and pawn lenders are emerging as an alternative and cheaper source of banking services. "Credit unions, which are effectively not-for-profit co-operatives, are stepping up to offer cheaper alternatives to the short-term, high-interest loans provided by payday lenders," reports Reuters.

Data from the National Credit Union Administration shows demand for short-term, small-dollar loans from credit unions rose 52% in the second quarter, and more aggressive selling will be seen in the third quarter. "The credit unions are also lobbying to have their business lending cap more than doubled to 27.5 percent of assets so they can better target small businesses unable to access bank funding."

Credit union popularity has extended to several online financing companies that provide loans to individuals and small businesses at significantly lower interest rates than big banks.

Reuters provides these examples:

  • Online lender BillFloat, backed by Ebay's PayPal, offers a 30-day loan of up to $225 to consumers looking to pay their bills. The service, started two years ago, has an annualized interest rate of 36 percent, making it far cheaper than payday loans, where rates can be as high as 500 percent.
  • Peer-to-peer lending site Prosper.com, which has raised more than $70 million in venture funding, connects people who want to borrow money with those who want to invest. It has more than $262 million in funded loans since it launched in 2006.
  • Pawngo.com, an online pawn lender backed by Daylight Partners, Access Venture Partners and Groupon-backers Lightbank, offers up to $1 million to small business owners with collateral -- a shift from normal pawn operators where small loans of less than $1,000 are the norm.

The increasing demand for alternative financing solutions has also led to several talks of IPOs. "Regional Management Corp and Community Choice Financial have filed for initial public offerings this year, and Cash America said it would spin off its online lending unit, Enova International, in a $500 million IPO."

Interested in following this trend? To help you explore the emergence of smaller financials, we started with a universe of 200 small-cap financial stocks with market caps below $1 billion. We searched among them for the names experiencing significant levels of insider buying over the past six months.

From that universe, we further identified the ones with significant levels of institutional buying in the current quarter.

Insiders and institutional investors think there's significant upside to these smaller financials -- do you agree?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools analyze these ideas.)

List compiled by Eben Esterhuizen, CFA:

1. Prospect Capital (Nasdaq: PSEC  ) : Prospect Capital Corporation is a mezzanine finance and private equity firm that specializes in late venture, middle market, mature, mezzanine, buyouts, recapitalizations, growth capital, development, and bridge transactions. Net institutional purchases in the current quarter at 9.0M shares, which represents about 8.45% of the company's float of 106.45M shares. Over the last six months, insiders were net buyers of 128,266 shares, which represents about 0.12% of the company's 106.47M share float.

2. Pacific Capital Bancorp (Nasdaq: PCBC  ) : Provides a range of commercial and consumer banking services to households, professionals, and businesses primarily in the central coast of California. Net institutional purchases in the current quarter at 532.6K shares, which represents about 13.05% of the company's float of 4.08M shares. Over the last six months, insiders were net buyers of 3,495,414 shares, which represents about 85.67% of the company's 4.08M share float.

3. United Community Banks (Nasdaq: UCBI  ) : Operates as the bank holding company for United Community Bank that provides retail and corporate banking services. Net institutional purchases in the current quarter at 14.4M shares, which represents about 38.38% of the company's float of 37.52M shares. Over the last six months, insiders were net buyers of 165,750 shares, which represents about 0.44% of the company's 37.52M share float.

4. Central Pacific Financial (NYSE: CPF  ) : Operates as the bank holding company for Central Pacific Bank that provides commercial banking services to businesses, professionals, and individuals in Hawaii. Net institutional purchases in the current quarter at 15.5M shares, which represents about 70.01% of the company's float of 22.14M shares. Over the last six months, insiders were net buyers of 515,500 shares, which represents about 2.33% of the company's 22.14M share float.

5. Rockville Financial (Nasdaq: RCKB  ) : Operates as the holding company for Rockville Bank that provides a range of banking services to consumer and commercial customers. Net institutional purchases in the current quarter at 2.9M shares, which represents about 10.48% of the company's float of 27.67M shares. Over the last six months, insiders were net buyers of 92,070 shares, which represents about 0.33% of the company's 27.67M share float.

6. Cascade Bancorp (Nasdaq: CACB  ) : Operates as the holding company for Bank of the Cascades that offers a range of commercial and retail banking services. Net institutional purchases in the current quarter at 423.5K shares, which represents about 3.34% of the company's float of 12.68M shares. Over the last six months, insiders were net buyers of 6,265,990 shares, which represents about 49.42% of the company's 12.68M share float.

7. State Bancorp (Nasdaq: STBC  ) : Operates as the holding company for State Bank of Long Island that offers a range of banking services to commercial real estate owners and developers, small to middle market businesses, professional service firms, municipalities, and consumers in New York. Net institutional purchases in the current quarter at 473.9K shares, which represents about 3.13% of the company's float of 15.14M shares. Over the last six months, insiders were net buyers of 6,639 shares, which represents about 0.04% of the company's 15.14M share float.

8. Capital Bank (Nasdaq: CBKN  ) : Operates as the holding company for Capital Bank that provides general commercial banking products and services in North Carolina. Net institutional purchases in the current quarter at 965.3K shares, which represents about 6.91% of the company's float of 13.97M shares. Over the last six months, insiders were net buyers of 99,652 shares, which represents about 0.71% of the company's 13.97M share float.

9. SWS Group (NYSE: SWS  ) : Provides a range of investment and commercial banking, and related financial services to individual, corporate, and institutional investors, as well as broker/dealers, governmental entities, and financial intermediaries in the United States. Net institutional purchases in the current quarter at 2.3M shares, which represents about 12.6% of the company's float of 18.26M shares. Over the last six months, insiders were net buyers of 11,000 shares, which represents about 0.06% of the company's 18.26M share float.

10. Bridge Capital Holdings (Nasdaq: BBNK  ) : Operates as the bank holding company for Bridge Bank, National Association that provides commercial and retail banking services to small and medium size commercial businesses, business professionals, and retail customers in California. Net institutional purchases in the current quarter at 460.5K shares, which represents about 6.26% of the company's float of 7.36M shares. Over the last six months, insiders were net buyers of 1,083,610 shares, which represents about 14.72% of the company's 7.36M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Institutional data sourced from Fidelity, short data from Yahoo! Finance.

The Motley Fool owns shares of Pacific Capital Bancorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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