Keep It in the Community

 | Jul 12, 2012 | 1:30 PM EDT
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It is no secret that I am a long-term raging bull on regional and community banks. They may face short-term headwinds and go lower before going higher, but patient investors should see outsized returns over the next decade. Many of them trade below tangible book value and also provide a high current dividend yield. Buying small positions in several of these stocks can add yield and provide long-term growth potential as well.

One of my favorite regional names right now is First Niagara Financial Group (FNFG). The stock trades below tangible book value and is near its 52-week lows. Insiders have been relatively small but consistent buyers since the beginning of the year. Management has taken advantage of weakness in the banking sector to make strategic acquisitions and expand its footprint. In 2011, the company bought New Alliance Bank, and in May it purchased 195 branches form the beleaguered HSBC Holdings (HBC).

The bank has raised both equity and debt capital to pay for these large acquisitions and recently announced the sale of $3.1 billion of mortgage bonds. Although the bond sale may hurt earnings for the next couple quarters, it allows management to pay down debt and strengthen the balance sheet. The company has decided to slow the pace of acquisitions and focus on organic growth in the upstate New York and New England markets.

The stock could track pretty much sideways for some time yet, but over time, I expect this regional bank to be a big winner. In the meantime, the already-reduced dividend provides an above-average 4.25% yield.

Hudson City Bancorp (HCBK) is still on my income-providing bank stock list. The stock has moved lower since my original purchase, and I have added a little by scaling in on big down days over the past year.

Low interest rates are hurting earnings for this 135-branch bank. This situation is probably not going to improve substantially for some time, as the Fed has told us that rates will likely remain low until 2014 at a minimum. The bank, however, has adequate capital, trades at just 70% of tangible book value and yields more than 5%. The payout ratio is just 53%, so the dividend looks sustainable until the economy and net interest margins improve and restore Hudson City's earnings power.

I have been championing (and buying) shares of Renasant (RNST) for more than two years now. The Mississippi-based bank has been opening new branches and making smart acquisitions to expand its operations throughout the southeastern U.S.

Core deposits and the loan portfolio have both grown over the past three quarters as economic activity in its core markets begins to improve. Credit quality continues to improve, and nonperforming loans are now just 1.33% of total loans.

The stock is at the top of its recent trading range, so you might want to wait for a pullback before buying. With a dividend yield of 4.25%, you get paid to wait for the banking sector to improve over the next few years.

It is preferable in my opinion to wait for a decline of at least 10% in the stock market before putting money to work, but I understand that some investors need to get cash to work to provide income right away. If you find yourself in this situation, stay small, move slowly and favor those sectors and stocks that others have shunned. Right now select bank stocks fit that description perfectly.



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