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Community banks are tough to own given their low trading volume and low coverage from market informants Yet, some of the key benefits to these small regional banks is their solid dividends and relatively conservative banking practices, when compared to other mega-banks. The low-coverage from Wall Street is also a big positive for the sector, as stocks with little coverage can provide mis-pricing opportunities and offer investors alpha.

Small community banks should be less burdened by new government regulations going forward and they have little to no exposure to poor European economies. They also tend to be closer to their customers, supporting individuals, small businesses and communities as a whole. The banking industry has also been in consolidation of late, which means the possibility of being acquired always looms.

Outlined below are five small-cap (sub $2 billion market-cap) community banks that have a payout ratio below 50% and pay a dividend yield of at least 3.3%.

The First of Long Island Corporation (NASDAQ:FLIC) is a bank holding company, providing financial services via The First National Bank of Long Island, with a $260 million market-cap.

The bank pays a 3.5% dividend yield with a payout ratio of only 42%. The company has also grown its dividend payment by 10.6% annualized over the last five years.

  • The key benefits for First of Long Island is its low beta of only 0.54 and high return on equity of 10.2%. That ROE is the highest of the five banks, and its return on assets of 0.99% is also the highest.

Fellow author at SA, FinancialStorm, lays out a solid bull case for First of Long in one of his articles. Quoted below is one of the key drivers for First of Long that stood out to me:

In addition to paying attention to trying to grow in a way that produces real returns, FLIC has done a strong job of controlling costs. Nassau Countyand Suffolk County are the 12th and 23rd highest-income counties in the country, which results in high fixed costs to doing business in these counties. Despite this, FLIC's expense-to-revenue ratio (near 51%) identifies FLIC as one of the most efficiently run banks in the country (noted in the 2011 annual report and reported by American Banker).

Worth noting is that billionaire Jim Simons, founder of hedge fund company Renaissance Technologies, is one of First of Long's top hedge fund owners (check out Simons' cheap stock picks).

Provident Financial Services (NYSE:PFS) is a holding company of The Provident Bank, which is a New Jersey-chartered savings bank. It operates some 78 full-service branch offices in that state.

The company has a $905 million market-cap and pays a dividend yield of 3.5%, with a 44% payout ratio.

  • Provident also has the lowest price to book ratio at only 0.9, with a solid debt to capital ratio of 45%.

Provident is one of the largest banks listed, with some $7.12 billion in assets. After two mergers earlier this decade, the bank has amassed over 80 branches in northern and central New Jersey. Provident also calls billionaire Jim Simons as an investor, as well as fellow billionaire Ken Griffin. Griffin's Citadel Investment Group just added Provident to its portfolio during the fourth quarter (check out Griffin's cheap stock picks).

Simmons First National Corporation (NASDAQ:SFNC) is a $416 million market-cap multi-bank holding company. Simmons pays a 3.3% dividend yield and has a 49% payout ratio. Its banks are located throughout Arkansas, Missouri and Kansas.

  • Simmons has one of the cheapest P/B ratios at 1.01 and a low-beta of 0.52. The bank also has the lowest debt to capital ratio of 35%.

Simons went on a buying spree toward the end of 2012, buying up Truman Bank and Excel Bank after both banks were seized by finance regulators. The bank does offer a middle of the road return on equity at 6.8% and return on assets at 0.8%, but in due time these recent acquisitions could help boost its returns.

NBT Bancorp (NASDAQ:NBTB) is a financial holding company, primarily conducing business via NBT Bank. NBT operates in upstate New York, northeastern Pennsylvania, western Massachusetts and Vermont. This $738 million market-cap bank pays a 3.7% dividend yield with a 49% payout ratio.

  • NBT has one of the top ROEs at 9.6%, while also commanding one of the top ROAs at 0.92%.

The Value Investor covered NBT's large acquisition of Alliance Financial in late 2012, which added $1.4 billion in assets. Since the announcement the stock has traded relatively flat. The Value Investor noted that many investors likely have concerns about acquisition integration given the deal size, but NBT has noted that annual synergies could reach $15 million per year.

A recap of The Value Investor's thesis is quoted below:

Investors in NBT approach the deal with caution, as the acquisition is relatively large. Investors should take comfort in annual synergies estimates of $15 million, but be wary of integration risks. The deal will be accretive to future earnings of NBT can make good on its synergy estimate, and its estimated timeline. Investors with a long term horizon, and confidence in management's ability to successfully integrate the business, could hold on to their shares.

Billionaires Jim Simons and Paul Jones Tudor (of Tudor Investment Corp.) both added NBT to their portfolios during the fourth quarter (check out Tudor's top five picks).

Tompkins Financial Corporation (NYSEMKT:TMP) is another bank holding company, with a $597 million market-cap. Tompkins is a community-based financial services company that operates 45 banking offices. The bank also pays a 3.7% dividend yield on a 37% payout ratio.

  • Tompkins has one of the lowest betas at only 0.52 and one of the top ROEs at 8.1%.

Fredrik Arnold broke down the creator of Fastgraphs' (Chuck Carnevale) top ten "Safe Haven" stocks as of mid-March. The list included five safe haven utilities. But most notably, financial firm Tompkins Financial placed fourth on the list.

In the end

First of Long IslandProvident FinancialSimmons First NationalNBT BancorpTompkins Financial
Dividend Yield3.5%3.5%3.3%3.7%3.7%
Return on Equity10.20%6.90%6.80%9.60%8.10%
Debt to Equity55%45%35%51%47%

All the regional financials pay a dividend yield of at least 3.3%, while also having solid returns on equity and balance sheets. First of Long Island has the top ROE, with NBT Bancorp in a close second. Meanwhile, Simmons has one of the lower ROEs, but also has the lowest debt to equity ratios at 35%.

All of these banks are positioned in strategic markets throughout the U.S. and are heavily integrated in their communities. One key factor for investing in these banks is to take a look at their respective markets (states) and compare employment and overall economic climates.

Source: 5 Dividend Paying Small-Cap Community Banks