5 Small Banks to Consider

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The original version misstated Southern Missouri Bancorp's Book Value. This version has been corrected.

A few weeks ago, I sold all of my shares of Bank of America. In the article, Why This Bank Is a Clear Sell, I explained my rationale for selling that stock.

Since making that decision, shares are down roughly 5% from the price that I sold them at.  Needless to say, I am not regretting the decision.

But I am considering reallocating that capital and purchasing a bank – maybe a small bank. They are a better bet than large banks for 2013--after all, there are quite a few small banks that have very attractive valuations. Plus they have the potential to grow.

Smaller is better right now for three reasons: (1) smaller banks aren’t subject to the additional capital requirements placed on larger banks; (2) the Volcker Rule will have no impact on smaller banks; and (3) the ongoing crisis in Europe will have virtually no impact on smaller banks.

That means that smaller banks are well-positioned to buy back shares and raise dividends!  And you might see some consolidation among smaller banks as they look to leverage scale.

After a few screens, I came up with 5 banks to consider investing in.  

Bank of Marin (NASDAQ: BMRC)

Bank of Marin is headquartered in California.  On Oct. 18, 2012, the Board of Directors declared a quarterly cash dividend of $0.18 per share – the company’s 30th consecutive quarterly cash dividend.  Overall, last year was a record year for Bank of Marin, and according to the CEO, “credit quality remains very strong throughout our loan portfolio.”  Even in an environment of weak loan demand, low interest rates and compressed margins, and an increased need for internal resources to comply with regulatory demands, this bank continues to deliver solid results for its shareholders.  Bank of Marin consistently outperforms its peers because it focuses on developing relationships, is disciplined, and has an in-depth understanding of its customer base.  This bank has a return on equity of 12.4% vs. the industry average of 9.27%, and trades at a price to earnings multiple of less than 12.     

Lakeland Financial (NASDAQ: LKFN)

Lakeland Financial is the third oldest financial institution headquartered in Indiana.  Similar to other small banks, this company’s business strategy is to maintain a traditional community banking approach while at the same time concurrently leverage the strength and size of its balance sheet to effectively compete with larger regional and national competitors.  Although this strategy encompasses all phases of traditional community banking, including consumer lending, wealth advisory, trust services and retail brokerage, Lakeland Financial is primarily focused on building expansive commercial lending and deposit relationships and pursuing retail deposit gathering strategies through high levels of relationship-based client services.  This company has a net profit margin of more than 31% vs. the industry average of less than 24%, and trades at a price to earnings multiple of around 11.  

Penns Woods (NASDAQ: PWOD)

Penns Woods is a bank headquartered in Williamsport, Pennsylvania.  Services offered by this bank include accepting time, demand and savings deposits, including super negotiable order of withdrawal accounts, statement savings accounts, money market accounts, fixed rate certificates of deposit, and club accounts.  It also makes secured and unsecured business and consumer loans that include financing commercial transactions, as well as construction and residential mortgage loans and revolving credit loans.  This bank has a dividend yield of 4.65% and trades at a price to earnings multiple of around 12. 

Over the past few years, Penns Woods has prioritized margin expansion over revenue growth.  To continue to improve profitability, Penns Woods will have to cut costs.  That is why it is important for investors to watch the company’s margins very closely.  Currently, Penns Woods has a net profit margin of 33.78% vs. the industry average of 21.57%.  If Penns Woods can maintain this profit margin, it will continue to grow earnings per share in the mid-to-high single digits.  With Penns Woods trading at less than 10 times cash flow, Penns Woods is attractively valued, particularly if you consider the strength of its underlying fundamentals.

Salisbury (NYSEMKT: SAL) 

Salisbury Bank and Trust is a commercial bank offering a broad range of services including an extensive array of deposit services, multiple mortgage products, and various other types of loans designed to meet the financial needs of its customers.  The Bank also has a full-service Trust and Investment Services division which offers financial planning, trust and estate administration, and investment management services.  Salisbury has a dividend yield of 4.48% and trades at a price to earnings multiple of less than 11.  Moreover, this bank trades at a price to book value ratio of around 0.60 vs. the industry average 1.27 (more than double) and has consistently delivered results over the past 10 years.  Like Penns Woods, Salisbury is focused on expanding its margins, which have expanded by more than 100% over the past few quarters.  Except that with a net profit margin of 15.87 there is still a lot of room for improvement.  Moving forward, investors should watch two things very closely: changes in critical leadership positions and efforts to improve net profit margins.    

Southern Missouri (NASDAQ: SMBC)

Southern Missouri Bank is the oldest financial institution headquartered in southeast Missouri.  This bank attracts retail deposits from the general public and then uses those deposits, along with funding from the Federal Home Loan Bank of Des Moines, to invest in mortgage loans, mortgage loans secured by commercial real estate, commercial non-mortgage business loans and consumer loans.  Funds are also used to purchase mortgage-backed and related securities and other investments.  In 2010, Southern Bank acquired First Southern Bank.  In the near future, this company may look to acquire another small bank in order to leverage scale.  Southern Missouri pays a dividend of 2.4% and trades at a price to earnings multiple of less than 10.  Over the past 5-years, this company has grown net income at an average annual rate of 26.74%, sales at 10.6%, and its dividend at 5.92%.  So there is plenty of room for Southern Bank to raise its dividend.  Furthermore, at a book value of $24.25 this company trades at a price to book value ratio of 1.   

My Foolish Take

These are just a few of the many small banks that have attractive valuations, pay a nice dividend, have the potential to grow, and continue to deliver results.  Even in an environment where loan demand is weak and interest rates are low, many of these banks continue to deliver record results.  So you may want to consider betting on a few small banks instead of the large banks.

RyanPeckyno has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus