Retirement Investors, Scared Of Large Banks? Consider Community Banks

by: Aaron Katsman

There has been a lot of talk recently about the move back to buying locally, and supporting local, community businesses. As I write this from rainy Seattle, Wa., the media is filled with reports of efforts to get people to forgo doing their Christmas shopping at large national chains and buy from local businesses. It’s not just commerce. Probably the leader in the move to ‘go local’ is farming. Wanting healthier organic grown food, consumers have made a decision to start supporting local farms and buying locally grown produce. Privately held companies like Farmigo are leading this revolution. Farmigo’s premise is “that if small complementary farms in the same geographic area could collaborate with one another in a simple and efficient way, the food needs of the local community would be met and the farms would continue to develop and prosper.”

This move to ‘buy local’ has recently seen roots planted in the banking industry, believe it or not. Upset at rising fees, lack of personal service and fear over solvency, consumers in the U.S. have started opening accounts at local credit unions and community banks. Recently there was actually a day dedicated to ‘Move your money’. This ‘Move your money’ project, encouraged Americans to open new bank accounts at smaller banks and ditch the large banks, and send a message to the large banks that their business practices will no longer be appreciated.

In a recent Yahoo Finance article Steve Streit, CEO of Green Dot, said, “large banks simply aren’t set up to deal profitably with a large chunk of the American consumer base — without nailing them with huge fees. Banks face a challenge of servicing customers that don’t take loans and don’t generate fees through other services, especially at a time of generally muted interest rates." On consumers that just want to deposit $500 a month, "not only are banks not making money on them, they’re losing money.” He goes on to say, “As a result, banks feel compelled to level the kind of fees that alienate many consumers. If you don’t make a sufficient amount of money and don’t have a good enough cash flow to maintain minimum balance, you might get hit with minimum balance fees or monthly fees. If you make $8 or $9 an hour, and you get with $70 in fees per month, that’s painful.”

Can you profit?

Investors may be able to potentially profit from the development. I have written in this column previously about how much I like regional U.S. banks as an attractive long-term investment. Well the reasons I like regional banks (clean balance sheets, increasing dividends, and a focus on classic banking) applies to smaller community banks as well, and if consumers actually create a sustainable movement to ‘go local’, community banks may provide for an intriguing investment.

According to a recent report in Zacks:

"Yet for those seeking to maintain a well-diversified portfolio, complete avoidance of the financial sector seems unwise, especially if the market comes back to normal in months ahead. Furthermore, many corners of the financial market are not nearly as impacted by these European concerns as their big bank counterparts. This suggests that while they may have been beaten down by the weak economy, they could be due for a surge in months ahead as more investors realize how cheap some of these securities have become.” The report continues, “Thanks in part to this deep value, as well as the heavy concerns impacting big banks but not their more community-focused cousins, the community bank index has also outperformed more popular and larger cap focused securities on the year.”

How to Invest

Investors wanting exposure to this sector could either buy a broad based ETF which invests in community banks like the First Trust’s NASDAQ ABA Community Bank ETF (NASDAQ:QABA) or you could invest in specific bank stocks. While I am not recommending any of these, investors could look at stocks like Peoples United Financial (NASDAQ:PBCT), Signature Bank (NASDAQ:SBNY)-which used to be owned in part by Israel's Bank Hapoalim (OTC:BKHPF) - or Zions Bancorp (NASDAQ:ZION).

Speak with your advisor to see how you can implement the move to community banks in your investment portfolio.