Don't Ignore Small Banks

 | Apr 29, 2014 | 3:00 PM EDT
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It is probably pretty easy to just run out and find a few stocks paying dividends and hang on, hoping that they do well over the years ahead. The dividend-paying blue chips might just keep going up in spite of their very high valuations.

Large-cap REITs might go higher in spite of trading at high multiples of asset value. It could happen. Based on the sales pitches I receive that are thinly disguised as research reports, Wall Street wants you to think it is going to happen. Maybe and hope have never been my favorite words when buying stocks. So I would prefer to stick with those stocks that I am pretty sure will be a lot higher five to seven years from now and that also have decent dividend yields.

This leads me to the regional and community bank stocks. It will come as no little secret that this is one of my favorite sectors of the stock market and has been for a couple of years. I see industry improvement and a consolidation wave that is developing this sector. This means it also has the potential for above average dividend growth over the next decade.

Many small banks cut or eliminated their dividend during the financial crisis and they are now being restored and even increased. This should continue as credit problems continue to fade into the rear view mirror and the economy slowly grinds towards some sort of recovery.

Premier Financial (PFBI) is based in Huntington, W.Va., and has 22 branches with about $1.1 billion in assets. The bank has branches in its home state as well Kentucky, Ohio, Maryland Virginia and the District of Columbia. They just completed the acquisition of a smaller competitor that will add about $170 million to their asset base.

There are two subsidiaries though which they conduct business -- Citizens Deposit Bank & Trust and Premier Bank. The bank had some credit quality problems as a result of the financial crisis but nonperforming assets have been declining steadily since 2011. The equity-to-assets ratio is over 13, so they have more than enough capital and should see continued credit improvements further strengthen the balance sheet.

The bank is seeing strong operating results as net income was up 28% year over year in the most recent quarter and the loan portfolio bucked the industry trends and grew by 5.1%. The net interest margin is well above the national average of 3.58% at 4.26% as of the latest quarter.

The stock is cheap with the shares trading at just 84% of book value. At the current price the shares yield 3.39% and they should have plenty of room for future increases as results and credit quality continue to improve.

I have mentioned Republic Bancorp (RBCAA) several times in the past few months and the stock is not only cheap it is a great dividend stock. The bank has 42 branches in Kentucky, Indiana, and Tennessee as well as a profitable tax refund loan business.

Republic has roughly $3.3 billion in total assets and is in solid financial shape. The equity-to-asset ratio is over 13 and nonperforming assets are just 1.13% of total assets. Although their deal to buy the banking operations of H&R Block (HRB) recently fell through the banks management is dedicated to growing via acquisition over the next several years.

The stock is reasonably priced at 92% of book value and the shares yield 2.9%. They have increased the payout by more than 7% in the past five years and have raised the dividend every year for the past 14 years.

There are many more of these little banks with soaring balance sheets and decent dividend yields that are available at reasonable prices as compared to asset value. These banks are smaller and don't get much financial media attention. But investors who take the time to screen for them will not be disappointed. Many of these little banks have good yields and the prospects for solid dividend growth in the years ahead.

Banks, especially regionals and community banks, should be a part of the solution for most income investors. They have decent yields and the potential for outstanding long term dividend growth as well.

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