As I am constructing my dividend growth portfolio, I am deliberately seeking out companies in industries that I believe play important roles in their communities. This has led me to search for investment opportunities in regional banking. I believe investments in regional banks are sound ways to invest in the health of the region and that, more broadly, regional banks will benefit when interest rates eventually rise. I grew up in a town that had a strong local bank, and now more than 15 years after I left that town, I still maintain an account with that bank.
I'm sure there are a great number of investment opportunities in this area that I am going to ignore since I am looking for a suitable initial dividend yield, history of dividend growth, and a suitable dividend 5-year compound average growth rate.
Due to the small market capitalizations of many of these banks, I'd like to find more than 1, ideally in different regions, that I would be happy to add to my portfolio.
To find candidates, I began with David Fish's current spreadsheet of Dividend Champions. I sorted all of the Dividend Champions (25+ years dividend increases) and Contenders (10+ years) in the Banking Industry. I cut out all banks with a current dividend yield under 2.75%, those that don't trade on a major exchange, and those with a 5 year dividend growth rate less than 7%. This gave a list of 7 candidates for further investigation: CCFNB Bancorp Inc. (OTCQB:CCFN), Farmers & Merchants Bancorp (OTCQB:FMCB), First of Long Island Corp. (FLIC), First Robinson Financial Corp. (OTCQB:FRFC), Norwood Financial (NWFL), Republic Bancorp KY (RBCAA), Southside Bancshares (SBSI). I removed FRFC.OB from the list due to excessively low trade volume.
Below is the current dividend yield, the 5-year compound average growth rate of the dividend, payout ratio, and debt/equity ratio for each company (data from Morningstar):
With the initial screen completed, I looked a bit closer at each company to determine if it merits more in-depth research and/or a place on my watch list. For a first pass, I am going to look at the region the bank is in, historical earnings and dividends (data from Morningstar.com), the bank's Tier 1 Capital Ratio as an initial measure of how well capitalized the bank is, the banks' percentage of non-performing assets, and returns on equity and assets.
CCFNB Bancorp Inc.
CCFNB Bancorp operates Columbia County Farmers National Bank in Columbia County, Pennsylvania. In addition, CCFN maintains a 50% ownership position in Neighborhood Advisors, which is an insurance and financial services company.
The per capita income in Columbia County is about $17k. Unemployment in the county appears to be just over 7%. Columbia County is in the eastern part of the state and appears to be on the fringes of the Marcellus Shale at best.
CCFN has reported earnings per share and dividends in the past ten years as:
In 2011, CCFN reported Tier 1 capital to risk-weighted assets at 16.88%. The bank reported non-performing loans as a percent of total loans as 1.49%, up from 1.22% in 2010, and 1.42% in 2009. Return on average stockholder's equity has been just over 9% in the last three years, and return on average assets has been around 1%.
Farmers & Merchants Bancorp
Farmers & Merchants Bancorp operates Farmers and Merchants State Bank of Central California. The bank has 22 branches in the mid-central California area, including in Sacramento, San Joaquin, Stanislaus, and Merced counties. These counties have per capita income of $41k, $32k, $33k, and $29k. The unemployment rates, as reported by FMCB in 2011, are 12%, 17.1%, 17.3%, and 19.3%.
FMCB has reported earnings per share and dividends in the last 10 years as:
In 2011, FMCB reported Tier 1 capital to risk-weighted assets of 13.59%. The bank reported non-performing loans as a percentage of total loans of .35%, down from .45% in 2010, and .76% in 2009. Return on average equity has been just over 12% in the last three years, and return on average assets has been near 1.2% in the last three years.
First of Long Island Corp.
First of Long Island Corp. operates First National Bank of Long Island, which operates branches in New York City and Long Island (Nassau County and Suffolk County). There are 35 branch locations on Long Island and Manhattan. The unemployment rate in Nassau County is about 7.2%, and the rate is about 7.6% in Suffolk County. The per capita income in Nassau County is about $32k and is about $27k in Suffolk County. Both counties are in the 100 richest in the country.
FLIC has reported earnings and dividends in the last ten years as:
In 2011, FLIC reported Tier 1 capital to risk-weighted assets of 20.3%. The bank reported nonperforming assets as a percentage of total loans and foreclosed real estate of .33%, down from .44% in 2010, and up from .05% in 2009. Return on average equity has been in the 11 to 12% range in the last three years, and return on average assets has been around 1% in the last three years.
One confounding factor is Tropical Storm Sandy, which just hit the region.
Norwood Financial operates Wayne Bank, which has 11 branches in Pennsylvania. There are 5 offices in Wayne County, 3 offices in Pike County, and 3 offices in Monroe County. Norwood Financial has recently undertaken a merger with North Penn Bancorp, Inc. Wayne County is on the outer limits of the Marcellus Shale.
The unemployment rate in Wayne County, Pike County, and Monroe County is 6.5%, 9.6%, and 9.2% respectively. The per capita income in each county is $16,977, $20,315, and $20,011 respectively.
NWFL has reported earnings and dividends in the last ten years as:
In 2012, NWFL reported Tier 1 capital to risk-weighted assets of 15.75%. The bank reported nonperforming loans to total loans as 1.71% in 2011, 1.14% in 2010, and 1.38% in 2009. Return on average equity was 9.26% in 2011 and 10.87% in 2010, and return on average assets was 1.18% in 2011 and 1.37% in 2010.
Republic Bancorp KY
Republic Bancorp is bank holding company located in Louisville, Kentucky and is the second largest bank holding company in Kentucky. Louisville is in Jefferson County, which has per capita income of about $25k and an unemployment rate of about 9.6%.
RBCAA has reported earnings and dividends in the last ten years as:
In 2012, RBCAA reported Tier 1 capital to risk-weighted assets of 23.59%. The bank reported nonperforming loans to total loans as 1.02% in 2011, 1.30% in 2010, and 1.90% in 2009. Return on average equity was 21.42% in 2011, 17.92% in 2010 and 13.77% in 2009; and return on average assets was 2.76% in 2011, 1.85% in 2010, and 1.23% in 2009.
RBCAA had a Refund Anticipation Loan division, which closed in April 2012.
Southside Bancshares is the bank holding company for Southside Bank, headquartered in Tyler, Texas. The banks market includes Smith, Gregg, Tarrant, Travis, Cherokee, Anderson, Kaufman, Henderson and Wood Counties in Texas. The bank operates 48 banking centers, 19 of which are in grocery stores. I won't report county per capita and unemployment information due to the large number of counties.
SBSI reported earnings and dividends over the last ten years as:
In 2011, SBSI reported Tier 1 capital to risk-weighted assets of 21.11%. The bank reported nonperforming assets to total loans (a different measure than used for the earlier banks due to what I could easily find in the annual report) as 1.21% in 2011, 1.64% in 2010, and 2.27% in 2009. Return on average equity was 16.20% in 2011, 17.98% in 2010 and 23.69% in 2009; and return on average assets was 1.25% in 2011, 1.30% in 2010, and 1.58% in 2009.
My Watch List Additions
I am not prepared to make any purchases, but I will be adding FMCB and FLIC to my list for more in depth research in the near future. I'm interested in RBCAA but want to wait and see what happens when the Refund Anticipation Loan division goes away. With SBSI, I would like to see the earnings per share trend of the last few years reverse. I will probably check-in with the other banks after a bit longer and will likely be interested in doing more research when the percentages of nonperforming loans begin to decrease and returns on equity and assets stabilize or being to increase.