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Given the turmoil in the financial system over the past five years, I can see why the banking system is awash with liquidity. Even with sub 1% short-term CD rates, folks are content to leave their money in banks just to know they won't lose principal.

However, as I review community bank stocks for my blog each month, I can't help thinking there are better alternatives for the risk averse investor with some cash to stash.

For example, there are at least seven solidly performing community bank stocks that offer relatively low-risk investment opportunities at a return much greater than 1%, as outlined in the table below.

Each of the following seven bank stocks:

  • Trades for less than 75% of book value* even though asset quality is above industry average and in many cases improving
  • Pays dividend yields of between 3.6% and 5.3% - much higher than today's 1% Bank Certificates of Deposit (CDs) and 2.01% yield of the S&P 500

    * Provided I'm allowed the literary freedom to overlook the fact that PBCT has diluted tangible book to $8.42 through acquisitions, well below the stated book of $14.58.

Why do I believe these bank stocks are pretty safe investments?

  • Good value. All of these companies offer investors unusually low price to book value ratios and high dividend yields. (Historically, banks have traded around twice book value and 12 times earnings, yielding around 3%.) Many also offer low P/E ratios.
  • Clean slates. In the wake of the mortgage crisis, regulators have scrubbed the industry looking for bad loans. The banks that have survived have been subjected to such scrutiny that most problems have been recognized, so we can reasonably expect smoother sailing from here.
  • Capital gains. One could argue that BOMK, CARE, FRAF, HCBK and NIDB, all trading at less than 10 times earnings and earning a decent return on equity should trade at least at book value. That would amount to an appreciation potential of almost 50% on average.
  • Opportunities ahead. For many of these bank stocks, there is a growing chance of being taken over at a significant premium. Experts agree that the lull the in bank M&A will not last forever, there is significant pent-up demand, and many conversations are taking place concerning specific M&A opportunities.

7 High-Yield Bank Stocks

Div Yield

P/E

P/B

NPAs/Assets

1. Peoples United Bancorp (PBCT)

5.3%

17

.8%

2.4%

2. Hudson City (HCBK)

5.2%

10

.7%

2.4%

3. Franklin Financial Services (OTCQB:FRAF)

5.1%

9

.62%

3.7%

4. Carter Bank and Trust (OTCQB:CARE)

4.6%

7

.65%

2.4%

5. Northeast Indiana Bancorp (OTCQB:NIDB)

4.5%

7

.72%

2.9%

6. Bank of McKenney (OTCQB:BOMK)

3.6%

10

.7%

2.6%

7. Wayne Savings Bancshares (WAYN)

3.3%

18

.64%

2.9%

Source: 7 High-Yield Stocks You Can Bank On