Rising Star Buy: 3 Nicely Priced Regional Banks

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This article is part of our Rising Star Portfolios series.

My favorite sector of the market for good deals encompasses the smaller players in the banking space. Perhaps it's just because banking is my primary area of expertise as a stock picker, but I like delving into smaller-cap bank stocks. They're regulated and have similar business models to their larger counterparts. To some extent or another, they all take in deposits and make loans, pocketing the interest rate spread.

The danger with banks is that you never truly know what's on their books. You can see past history, and you can see general metrics on "bad loans" and capital cushions, but truly assessing the risk on a bank's balance sheet would require a granular look at each loan and security.

Fortunately, the smaller we go, the less exotic the banks tend to be. Knowing this, I patiently wait for good prices on smaller banks, and try to maintain a portfolio of them to diversify lone-bank risk. Today, I'm seeing two small banks that fit my screening criteria (i.e., they pay dividends and appear profitable, cheap, and conservative). I'm going to add each to the real-money portfolio I manage for The Motley Fool.

They are:

  • Oklahoma-based BancFirst (Nasdaq: BANF  )
  • Arkansas-based Simmons First National (Nasdaq: SFNC  )
  • Kentucky-based Republic Bancorp (Nasdaq: RBCAA  )

Each of these pays out a reasonable dividend yield of 2.6%-3%, each trades for a reasonable multiple of tangible book value (1.0 time to 1.5 times), and each also trades for a reasonable to low multiple on earnings (less than 15.0).

And each appears to be a reasonably conservative lender that doesn't make too many bad loans and provisions for those they do make (though Republic is a little low in this department, but I like its other stats a lot):

Company Name

Bad Loans/Total Loans

Provisions/Bad Loans

BancFirst 0.84% 155%
Simmons First National 1.14% 149%
Republic Bancorp 1.28% 91%

Source: Capital IQ, a division of Standard & Poor's.

These numbers may or may not seem impressive to you in total. So let's compare these against a few banks -- all larger (and perhaps more well-known) than these three -- that failed my screen.

  • Georgia-based Synovus (NYSE: SNV  )
  • New Jersey-based Hudson City Bancorp (Nasdaq: HCBK  )
  • Los Angeles-based commercial bank Cathay General (NYSE: CATY  )
  • Michigan-based Flagstar Bancorp (NYSE: FBC  )

Let's take them down in line:

Synovus hasn't had the loan discipline of my three (its bad loan rate is four times the average of mine) and, not surprisingly, isn't profitable. 

Hudson City has recently gone through a balance sheet restructuring, so its lack of profitability could be temporary. Still, its nonperforming loan rate has crept higher in recent years. Perhaps there's an opportunity in the chaos, but I'll just continue to monitor the situation for now.

Cathay General, as a commercial lender, has also seen higher rates of nonperforming loans. Perhaps I could look past that given the right circumstances, but its dividend yield is a nominal penny a quarter, and its multiple on earnings isn't especially cheap.

Flagstar adds to the lack of loan discipline parade with a monstrous 6.5% rate of bad loans as of March 31. Of course, that's down from 13.9% as of December 2009. No profit or dividend here either.

So come Monday, I won't be buying shares of Synovus, Hudson City, Cathay General, or Flagstar in my real-money portfolio. Instead, I'll be buying shares of BancFirst, Simmons First National, and Republic Bancorp. Follow along as I continue to scour the banking universe for more of these small banking plays.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Anand Chokkavelu doesn't own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2011, at 12:55 PM, mountain8 wrote:

    Where does Umpqua stand?

  • Report this Comment On July 24, 2011, at 9:08 AM, saturnc15 wrote:

    I do not think you've looked into these banks carefully. Republic Bancorp, for instance, is priced nicely because the majority of their income comes from tax-refund loans. The FDIC recently recommended the company stop making such loans, as they are inherently risky. All banks which used to be in the business are no longer in it, which makes me think Republic Bancorp will eventually folow the same route. Be careful in recommending these stocks without proper research!!!!

  • Report this Comment On July 25, 2011, at 11:05 AM, rgg123 wrote:

    what's your opinion on CTBI?

  • Report this Comment On August 22, 2011, at 8:30 PM, BUD15 wrote:

    what about FITB

  • Report this Comment On September 19, 2011, at 2:59 PM, smartwidowlady wrote:

    This is a couple of months later, and now what is your opinion of Simmons?

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