Money in the Banks

 | Mar 27, 2013 | 3:30 PM EDT
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In addition to tracking my stocks and catching up on news and research, I spend a lot of time during the day talking about what's going on in the markets and the world. I usually talk with other Real Money and Real Money Pro contributors, like Tim Collins, Bob Byrne and others. The curmudgeonly option trader and the voodoo prof usually swing by in the interwebs to share thoughts and ideas. Most of the conversations center on really important stuff like baseball and BBQ, but occasionally something market related pops up.

Tuesday there was a discussion of using bank stocks in an income portfolio. This is an idea that is not getting much attention as investors seem to view financial stocks as a trading vehicle these days. The truth is that the bank stocks will be one of, if not the leading, source of dividend growth over the next decade, and income investors should include them in a diversified portfolio mix. During the credit crunch, many banks cut or eliminated dividend payments to conserve capital. Now, as credit problems slowly fade into the rear view, we will see them reinstated and raised by many financial institutions. When the economy is finally back on track, we should see double-digit increases for years to come.

I ran screens to find bank stocks that have healthy yields and are cheap enough to qualify for the Trade of the Decade in small regional and community bank stocks. As with all things TOD-related, most of the qualifying banks are too small to talk about here, but a few have high enough market caps.

One higher-yielding bank that I like is First PacTrust Bancorp (BANC). The California-based bank has 18 branches in and around the Los Angeles area with $1.6 billion in assets. Like most banks in the region, it had problems with nonperforming assets, disclosing NPAs of more than 6% at the start of 2012. Currently, NPAs are down to 2% and the bank is positioned to grow as the region regains its footing. The bank has been on an acquisition binge to take advantage of attractively priced assets in the California banking market, closing two deals last year and in the process of closing another merger with a smaller competitor.

The bank has used the acquisitions and high organic growth to become one of the fastest growing banks in the U.S. in the past couple of years. The stock is attractively priced at 70% of book value, and the shares currently yield a little over 4%. Insiders like what they see as officers and directors have been aggressive buyers of the stock in the past month.

Northeast Bancorp (NBN) of Lewiston, Maine, also makes the grade as a bank-income stock. It serves the western and southern regions of Maine, as well as parts of New Hampshire. It also has an online savings division. It has a loan acquisition and servicing group that buys performing loans from the bank's portfolio. The shares are cheap at less than 90% of tangible book value and they have plenty of capital, as evidenced by an equity-to-assets ratio of almost 12. The loan portfolio is solid with nonperforming assets below 2%. At the current price, the stock yields 3.7% and there's plenty of room to grow the dividend in the future.

Shares of First Niagara (FNFG) have moved up a bit, appreciating by about 12% so far this year, but I still like the stock from a long-term perspective. It recently purchased $1 billion of assets in a branch purchase transaction with HSBC (HBC), and this should add to the bottom line in 2013 and beyond. It has been focusing on commercial loans and has grown the commercial loan book for 11 straight quarters. This is helping to prop up the net interest margin for the Buffalo, N.Y., bank. Nonperforming assets are less than 1% and it has a solid equity-to-assets ratio of more than 14. The shares currently yield 3.6%. I would wait for weakness to buy the stock, but the long-term total return potential makes this a nice inclusion in a bank-income portfolio.

In addition to long-term price-appreciation potential that should be spectacular as the industry recovers and consolidates, many bank stocks also provide above average income while you wait.

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