Too Small to Fail? 3 Commercial Banks That Will Outperform Large-Caps

By Robert Coleman - January 30, 2012 | Tickers: LKFN, MBVT, SBSI | 0 Comments

• Email
• Print

One of the most striking developments to come out of the 2008 financial crisis was the impressive performance of small-cap financials relative to their larger counterparts. With confidence in the financial system still lagging and the threat of a European economic breakdown looming, we can expect this trend to continue into the foreseeable future. Small banks typically benefit from their lack of exposure to high-risk assets, such as the subprime real estate loans that killed Lehman Brothers and Bear Stearns or bonds from European nations that are now struggling to remain solvent.

            Investor confidence has played a large part in the success of small-cap banks; when the industry leaders show signs of weakness, people look to the local banks they trust to keep their money safe. This kind of psychological motivation should prevail in the face of any future economic downturns, particularly those that stem from massive financial institutions. Even social movements like the Occupy protests helped the little guys to a certain extent by urging Americans to pull their money out of the big banks, effectively redistributing their assets from the larger institutions to the smaller.

            A recent article in The Wall Street Journal highlighted another advantage the “little lenders” currently hold over the financial giants: exemption from the Durbin amendment of the Dodd-Frank overhaul. The Durbin amendment, which limits the amount banks can charge merchants for debit-card transactions, does not apply to financial institutions with less than $10 billion in assets, creating a distinct advantage for lenders with low caps, particularly in rural areas.

            Based out of Tyler, Texas, Southside Bancshares (NASDAQ: SBSI) fits our profile and serves as an example of a small company that has weathered the financial crisis, grown its earnings at a healthy rate since its inception in 1960, and is expected to continue its growth at a comparable pace. With a market cap of just under $350 million, SBSI has lifted its EPS by 21.5% over the past 5 years, in addition to raising its revenues 12.7% and yielding an annualized total return of almost 12%. The company currently pays a 3.4% dividend but is priced at a meager 9.2 times earnings.

            Lakeland Financial Corporation (NASDAQ: LKFN) represents another regional bank success story. The company, which was founded almost a century and a half ago and serves the Midwest region, is still valued at only 1.5 times book value after posting a 52 week price performance of 22%. More encouraging than the stock’s performance in the market is the fact that Lakeland has grown its EPS around 5% over the past five years and is projected to grow its EPS another 10% over the next 3-5 years. LKFN also pays a strong dividend (2.4% yield) and carries $104.5 million in cash.

            A company even older than Lakeland (founded 1849), Merchants Bancshares (NASDAQ: MBVT) serves the Northeast region. Merchants’ dividend yield currently hovers around 4%, reflecting its low price but not paying justice to its earnings potential. The bank beat earnings estimates in 9 out of the past 10 quarters, boosting its EPS by 6% over the past five years, and is projected similar long term growth. What is more, even at its low present day price, it has achieved a total annualized return of nearly 10% over the past five years.

            Though they receive little media attention, small banks have held their ground against a wave of negative sentiment targeted at the financial industry following the Great Recession of the late 2000’s. Economic conditions have since improved, but recent developments in Europe present a constant threat to the global economy. If (let’s not say when) things start to fall apart, the small-cap financials will have no choice but to succeed. 

• Email
• Print
• Feedback