Best Stocks to Buy Now: A Big Growth Case for Small Banks

While the big banks may have the attention of the Street right now, it's the smaller regional and community banks that are among the best stocks to buy now.

These small bank growth stocks are starting to show dazzling growth as their balance sheets improve dramatically. And they are still very early in the recovery cycle, so there is still plenty of time for individual investors to catch this train...

You see, these small banks are seeing rapid increases in bottom-line profits. The recent back-up in longer-term interest rates should help these banks continue to improve profits and it will allow their net interest margins to increase.

Earnings are being driven by credit improvements right now, but as the economy improves these banks will see stronger loan demand and higher interest margins to drive sustained profit growth.

Best of all, we have not even begun to see improved demand or loans from business or individuals, so there is ample room for growth there. Demand is expected to pick up in 2014.

To stay ahead of Wall Street, we've found two of these smaller banks that rank among the best stocks to buy now...

Bank Mutual (Nasdaq: BKMU) is not going to be confused with one of the big-money-center banks anytime soon.

The Wisconsin-based bank has 75 branches and about $2.4 million in total assets. In the most recent quarter, earnings improved by 99% over the year-ago period and for the first six months of the year they are up 114%.

Bank Mutual has seen its problem assets decline steadily and problem assets are now just 1.54% of total assets, down from almost 6% just two years ago. Management has also worked hard to change its funding mix and is one of the few banks to see its net interest margin rise for the previous four quarters in a row.

Institutions own less than 50% of the outstanding shares of the bank. And here's a sign that Wall Street does not seem tuned into the company's outstanding performance: The shareholders list shows none of the large mutual funds or hedge funds as investors in Bank Mutual. The few analysts who do cover the stock have been increasing their estimates for both 2013 and 2014, so larger growth funds are likely to notice these stocks soon.

With the stock trading at just a slight premium to its book value, there is ample upside for this stock when the institutions become buyers. The stock is up nearly 45% year-to-date.

Newbridge Bancorp (Nasdaq: NBBC) has been showing substantial earnings growth in the past year, making it one of the best stocks to buy in small banks. Earnings were up more than 200% in the previous quarter and for the year are ahead of 2012 by more than 100%.

Newbridge Bancorp has 37 branches in the Piedmont Triad and Coastal regions of North Carolina with about $1.7 billion in assets.

The bank sold off the bulk of its troubled assets and raised capital last year and its balance sheet is now in great shape with non-performing assets at just 1.06% of total assets.

The company also recently added two locations in North Carolina's strongest business regions with new branches in both Charlotte and Raleigh. Those offices are having a huge impact as loan-production offices in those two cites have accounted for 50% of the bank's loan growth so far this year.

The other regions Newbridge serves are showing a steady recovery in both the local economy and real estate market, which will bode well for the bank.

Institutions own just 30% of the bank, meaning they seem to be ignoring or oblivious to the strong growth here. The shareholders list is mostly smaller mutual funds and investment management firms and none of the bigger funds have started buying the stock yet.

However, insiders must know that Newbridge is among the best stocks to buy to tap into bank's recovery as they have been steadily buying the banks' shares all year. When the larger funds and institutions begin to notice the strong growth of the bank, shares could see an extended run due to the buying pressure created.

Both Newbridge and Bank Mutual are clearly among the best stocks to buy for investors looking for solid growth potential in the financial institutions sector, and both are succeeding under the Street's radar - for now.

NBBC shares are up nearly 70% this year.

There are some fantastic top stocks to buy now if you know which segments of the market to focus on... like this one.