I ran a broad screen across the entire market but ended up honing in on an area that I generally feel might be neglected by investors: Small-Cap Banks. My thinking has been that Banks are only now starting to draw attention from investors - they lagged terribly in both 2009 and 2010. During Q4, the tide may have turned.
Here is the screen I ran:
- Dividend Yield > 2%
- Dividend Increases in Past 5 years: 5
- Payout Ratio < 50%
- Net Debt to Capital < 20%
- Earnings Growth > 5% over past year
- Price to Tangible Book < 2X
Here are the results (click to enlarge):
While I didn't constrain the PE ratios, all are below 15X on a trailing basis. I sorted the list by dividend yield, with National Bankshares (NKSH) leading with a 3.4% dividend. I actually added this one to my Conservative Growth/Balanced Model Portfolio last quarter. We trimmed it after it shot up quickly but recently added it back to make it one of our above-average positions. It's an extremely conservative deposit-rich bank based in the SW corner of Virginia. The only risk I could identify that stands out from the normal risks of banking is that they would be adversely impacted by a closure or decline of Virginia Tech (and perhaps Radford University). The trailing PE and P/TB metrics are very close to the median over the past 10 years - reaccelerating earnings growth (as loan demand increases) should be the primary driver of the stock. The stock is covered by just two analysts according to First Call.
Republic Bank Kentucky (RBCAA) jumps out as almost stupidly cheap if one is to believe the numbers. Unfortunately, I don't know how to incorporate the fact that they earn a tremendous amount of their net income from "Tax Refund Solutions" - $44mm from processing $10 billion in tax refunds for 2.8mm clients, representing 2/3 of the overall income in 2010. For those who want to try to get their hands around the regulatory issues, refer to footnote 11 in their most recent 10-Q. RBCAA may prove the old adage that if it looks too good to be true, then it probably isn't. According to First Call, 3 analysts cover the company.
Enterprise Bancorp (EBTC) operates in Massachusetts. The company went public in 2005 and has no institutional analyst coverage. It looks very inexpensive on the two valuation metrics - it was even cheaper in December at 11. According to their press release from last week, the quarter was the 85th consecutive profitable quarter (that's 21 years!), and deposit growth is robust with loan demand growing a well. This sounds like a nice little community bank and worth checking out further. Directors and Officers own 31% of the company, while shoe heir Ronald Ansin (LB Evans) owns over 9%.
BancFirst Oklahoma (BANF) is another community bank (seeing a trend here?), operating in.... Oklahoma. They have 89 branches in 50 communities. Like the other banks that made the cut, it isn't widely followed, with just a single analyst. CEO David Rainbolt owns almost 40% of the company, with an ESOP owning almost 7%. Overall inside ownership is almost 50%. The dividend yield is near a 10-year high, while the P/TB hovers near a 10-year low. Earnings are still below the all-time high in 2007 but appear to be headed back that way. This stock looks to have minimal downside and substantial upside. Note that the stock touched the high 50s in 2006
For investors, these stocks can be challenging given their size and liquidity. Except perhaps for RBCAA, the risks are quite straight-forward. All of the companies have several growth and value traits that make them look quite attractive to me. M&A is just starting to pick up in the sector, and community banks should be very appealing to larger institutions looking for growth opportunities. While I went with NKSH for my model portfolio service in December, I can appreciate the very high inside ownership at EBTC and BANF, as this offers even more evidence of investor alignment. As I said before, banks generally have been out of favor with investors, making this a good time to dig deeper on these four names for conservative investors looking to perhaps diversify away from large multinationals.
Disclosure: : Long NKSH in the Conservative Growth/Balanced Model Portfolio at Invest By Model