The Chicago investment bank Howe Barnes Hoefer & Arnett has created an investment vehicle aimed at raising the profile of small-bank stocks that have gotten scant notice from institutional investors.
Howe Barnes last week closed a new $7.5 million unit investment trust made up of 25 stocks of Independent Community Bankers of America member banks.
The stocks were chosen from the roughly 400 ICBA publicly traded member banks as having the best chance of outperforming the overall market over the next three years, said William F. Sammon, a senior vice president at Howe Barnes and its director of capital markets.
"Considering what has happened to the valuations in bank stocks, this is a good opportunity to invest in community banks right now," Mr. Sammon said.
Howe Barnes is the capital markets provider for ICBA Securities Corp., a for-profit subsidiary of the ICBA.
Mr. Sammon said some community bank stocks have depreciated in value by 30% or more this year — dragged down more by the industry's overall performance than by their own fundamentals. However, some stocks are more likely than others to bounce back even stronger, and this trust gives investors an opportunity to buy them while they are cheaper, he said.
"We think the 25 stocks we picked could perform exceptionally well over the next three years, because they can flourish both in good times and in operating markets like we are in now," Mr. Sammon said.
One bank whose stock is included in the trust is the $837 million-asset Midsouth Bancorp Inc. in Lafayette, La.
Midsouth's stock is down about 18% year to date, but David B. Scharf, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp., said the decline is unwarranted given the company's performance. Midsouth's quarterly earnings have been in line with analyst expectations, its credit quality remains stable, and it is expanding into Texas and other markets by opening branches.
"The company is performing very well," Mr. Scharf said. Its stock devaluation reflects "a rotation out of the sector, and all of the banks are being painted by the same brush."
Mr. Scharf could not speak specifically about Howe Barnes' trust, but he said such instruments could get more institutional investors to invest in the more thinly traded stocks like Midsouth. Midsouth's current average daily trading volume is less than 3,000 and is 7% owned by institutional investors. The $4.8 billion-asset Iberiabank Corp. in Lafayette has an average daily trading volume of around 50,000 and is 58% owned by institutional investors.
Inclusion in an unit investment trust "may not increase Midsouth's daily share volume, but it has the potential to raise Wall Street's awareness of banks that are within that trust," Mr. Scharf said.
Howe Barnes' ICBA Capital Markets Trust, Series 1 is the first trust consisting solely of ICBA member-bank stocks, said Jim Reber, ICBA Securities' president and chief executive.
"This unit investment trust improves the visibility" of the stocks "in the institutional investor community, and it also gives other community banks the opportunity to invest in them," Mr. Reber said. "For example, if a bank was in a slower-growth area of the upper Midwest, they would have the opportunity to invest in banks in higher-growth areas like Florida, to realize some upside and to also diversify their investments geographically."
C.R. "Rusty" Cloutier, Midsouth's CEO, said his company also invested in the trust.
"We wouldn't have the money to make big enough investments in all of these banks, so this trust makes it easier to invest in them," Mr. Cloutier said. "We think it's a great opportunity to be buying community bank stocks at this moment, and we hope to make some money over the next three years."
