Whenever the subject of investing in today's stock market comes up, I usually find a way to steer the conversation toward small, regional and community banks. Everyone wants to talk about Apple's (AAPL) new iPhone and how it will move the stock over the next few days and which stocks are forming wedges and cups. That is usually just misdirected effort on the part of most traders and investors. It is almost impossible to turn in market-beating returns when you insist on doing the exact same thing everyone else is doing.
Even if you are fortunate enough to be a world-beating swing trader, it makes sense to take some of your gains and put them to work in a sector that has huge tailwinds that will prevail for a long time. Jim Rodgers is fond of saying that the time to invest is when there is money lying in the corner and all you have to do is wander over and pick it up off the floor. That's exactly the situation in the small regional and community banks right now. Many, if not most, small banks will be acquired and the regulatory and economic climate make it difficult to stay independent. The small banks that do stand alone will be those with powerful earnings that drive profit, dividends and the stock price a lot higher over the next decade.
One legitimate concern many people have is that their primary focus is income. Many of the smallest and cheapest small banks are conserving capital and pay no, or small, dividends. With their stock below book value, some of them prefer to direct their excess capital toward buybacks. But some banks fit the profile of a "trade of the decade" and yield more than the 30-year Treasury; they might fit well into an income portfolio. The nice thing about these stocks is that in addition to a nice initial yield, there is a strong prospect of dividend increases going forward.
Banc of California (BANC) is a great choice for income-oriented bank investors. The bank is based in Irvine, Calif., and has 80 branches in the region and $300 million in total assets. Nonperforming assets are just 1.32% of total assets. The stock is trading at 86% of book value and yields 4% at the current price. A potential catalyst with this stock is an activist investor pushing for change. PL Capital own more than 7% of the stock and issued a blistering letter to the board criticizing their business practices and compensation plans. Patriot Financial, a private equity firm specializing in banks, also owns more than 5%, so there is a real possibility of a forced sale or other measures designed to raise shareholder value.
ACNB Bank (ACNB) is headquartered in Gettysburg, Penn., and has 20 offices with a little over $1 billion in total assets. This well-run little bank has a solid, well-diversified loan portfolio with nonperforming assets that are just 0.85% of total assets. The stock trades at 1.1x book value and you get a dividend yield of 4% with the potential for higher payouts down the road.
Susquehanna Bancshares (SUSQ) is in the same general region as ACNB and has 245 branches in Pennsylvania, Maryland, New Jersey and West Virginia. At first blush, the bank looks like a tremendous bargain at 70% of book value. Take note, however, that it has done many acquisitions over the years and there is a lot of goodwill on the book. The price to tangible book value is actually about 1.3. Although you have to pay up a little for the shares, this stock should be in your growth and income-oriented portfolio. The bank is currently yielding 3.5% and I expect to see very strong dividend growth going forward. As a bonus, it is also buying back shares, which should be supportive of the stock price.
Income investors do not have to be shut out of the trade of the decade in small banks. By being selective, you can find plenty of regional and small bank stocks that yield more than many traditional income investments.