3 Regional Banks That Offer Reasonable Dividends With A Kicker

Includes: FULT, SUSQ, WAYN
by: Henry Nyce

Now is the time to purchase regional banks. They are rebounding from the problems of the real estate bust and many of them have cleared their books of the problem loans that destroyed their profitability over the past several years. Real estate is not about to rebound any time soon, but the banks are no longer dependent on any rebound in real estate to increase their profitability.

Banks are like pipelines in that they are conduits for the flow of funds. They move money from one place to another for a fee. These fees make these financial firms profitable. Some regional banks have purchased companies that collect fees for handling other financial needs such as insurance, trusts and investment advice. These regional banks are rapidly becoming 1-stop financial supermarkets. One can get a loan, a savings account, a checking account, a credit card, car and home insurance and establish your 401K at the same branch office of your local bank. They offer many kinds of financial services from which they collect fees with little risk to their own capital. They also originate loans they no longer hold, but rather act as agents to sell and manage them for another entity. The loans they decide to keep and carry on their own books look more profitable than they have for the past few years.

The Kicker

As interest rates increase the banks increase the rates they charge for loans immediately while they slowly raise the interest rates they pay on customer savings accounts and CDs. This increases the spread between the two rates and hence the profitability of the bank. When interest rates begin to rise, which they will do sometime in the near future, the banks become more profitable and able to raise dividends.

I wrote articles earlier covering HARL, USVP, OVBC, and PBCT. There are several other regional banks that are paying good dividends with good prospects. The regional banks covered today are Susquehanna Bancshares, Inc. (NASDAQ:SUSQ), Fulton Financial Corp. (NASDAQ:FULT) and Wayne Savings Bancshares, Inc. (NASDAQ:WAYN). WAYN has just raised its latest dividend on July 5, 2012, by $.01 from $.06 to $.07 per share. It has 11 full-service banking locations near Wooster, Ohio. WAYN does not offer insurance products, but it has a full line of other financial services. With a $.28 dividend, WAYN is offering a 3% return at its current price of $8.25. Furthermore the company is selling well below book value of $13.48 Insiders hold 22% of the outstanding shares and they have not been selling recently. Its return on assets has run between 0.5 and 0.6 over the past five years. While total assets have not shown any growth over the past five years (S&P), my optimism for this bank rests upon the high ownership by insiders and the low valuation against book value. One can collect reasonable dividends while one waits for the company to be bought out or for it to get more profitable as rates rise.

FULT offers a full range of financial services including insurance and investment advice. It has 270 banking offices in Pennsylvania, Maryland, New Jersey, Delaware and Virginia. It is selling near book value and is only paying 31% of earnings in dividends. FULT offers a 2.8% dividend. Earnings have been growing since 2008 when they had a loss of $.03 per share. Last year they had earnings of $.73 per share and S&P is predicting $.79 this year. It also maintains that FULT has been conservative with their loan portfolio and expect lower loan loss provisions(S&P). The board of directors has recently authorized the repurchase of up to five million shares. This company is a good bet to increase in value as rates rise with a very good possibility of increasing dividends as well. It offers good value at $10.00 per share or lower.

SUSQ also has good prospects to increase in value over the next few years. It too offers the full range of financial services except insurance with it 250 branch offices located in Pennsylvania, New Jersey, Maryland and West Virginia. It has a book value of $13.38 per share while selling at less than $10.50 per share. It pays a dividend of $.20 per share, which represents only 21% of its earnings. It has been snapping up many other companies over the years, with two major acquisitions in the past year: Abington Bancorp and Tower Bancorp. The company has projected tens of millions of dollars in expected cost savings from these purchases. There is plenty of room for dividend increases as business brightens for this bank. Earnings per share have been growing since 2009 when SUSQ showed a loss of $.05. Last year's earnings were $.53 per share. This year's estimate is $.80 per share and $.95 for 2013. Insiders own about 3 million shares and are not selling at the current time.

The shares of these companies represent good value with respectable dividends with some selling below book value. All three have been increasing their dividends lately and should continue to do so for the foreseeable future. There is a reasonable possibility that one or two of them may be bought out in the near future. A buyout would offer a good bump in capital gains since most buyouts are going for 1.5 times book or better. Be sure to put a limit price on any purchases since these banks are thinly traded.

Disclosure: I am long FULT, SUSQ, UVSP, PBCT, OVBC, HARL.