Please ensure Javascript is enabled for purposes of website accessibility

7 Smaller Banks Worth Considering

By Robert Eberhard – Updated Apr 6, 2017 at 6:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A Fool looks for value in smaller banks.

I am on a search to find a good financial stock. With reports that Bank of America is considering cutting as many as 30,000 jobs, I want to find other options in the financial sector. Luckily, there are many different banks that offer great opportunities for individual investors like you and me.

I decided to avoid the "too big to fail" banks. While cheap, they're more likely than their smaller compatriots to be more affected by the looming crisis in Europe. I looked at three criteria in my screen for smaller banks: price-to-book ratio under one, price-to-earnings under 15, and a dividend yield over 3%.


P/E Ratio (TTM)

P/B Ratio

Dividend Yield

Astoria Financial 9.96 0.72 5.56%
FirstMerit Corp. (Nasdaq: FMER) 11.89 0.87 5.17%
First Niagara Financial (Nasdaq: FNFG) 15.14 0.82 5.95%
FNB Corp. (NYSE: FNB) 13.35 0.96 5.29%
Huntington Bancshares (Nasdaq: HBAN) 11.40 0.84 3.12%
New York Community Bancorp (NYSE: NYB) 10.92 0.98 7.69%
WesBanco 11.96 0.80 3.43%

Source: TTM = trailing 12 months.

Why price to book?
Investors can use the price-to-book ratio to determine a company's value. This ratio compares the price of a company's shares to the per-share value of its equity -- i.e., book value. A company with a P/B under 1.0 is selling below its theoretical liquidation value and could be considered a value. As the value approaches zero, however, it may indicate a company in distress. In the banking industry, a P/B ratio of 1.5 is the norm. A ratio of one means the bank is worth the value of its equity, giving no credit for any kind of franchise value.

According to this ratio, the "safest" bank on my list is New York Community Bancorp, the 21st largest bank holding company in the nation. The bank operates more than 240 locations, primarily in the five boroughs of New York City, but it also has branches in New Jersey, Ohio, Florida, and Arizona.

Profitability is important
I limited my search to banks with a P/E under 15, because it's not enough just to find banks that are cheap on a book value basis, you also want ones that are cheap in relation to profits. Despite a low P/B multiple and high dividend yield, People's United Financial (Nasdaq: PBCT) failed to make the list on this basis.

Hudson City Bancorp (Nasdaq: HCBK) also missed the cut, despite a yield over 5% and a sub-1.0 P/B ratio. But the bank would have been profitable were it not for a huge one-time restructuring charge during its quarter which ended in March. Despite its exclusion from the list, this is another name worth considering.

The "cheapest" stock based on P/E of my seven choices above is Astoria Financial, a New York-based savings and loan, which is the only stock on my list under 10.

Dividends make me happy
As my Foolish colleague John Maxfield kindly points out, dividend stocks are back in vogue. Treasury yields are at all-time lows, making a portfolio full of dividend payers extremely competitive. With 30-year Treasury yields slightly above 3%, that is the (admittedly highly conservative) floor I used when screening smaller banks.

As you can see in the chart above, New York Community Bancorp comes out on top of the heap with an impressive 8% yield. Combine that with the second-lowest P/E of the seven banks here, and I think we may have found a winner.

Small banks can be good!
Other Fools point to great values in some of the larger banks, and I couldn't agree more. However, I think I've found a handful of smaller banks that could ultimately be just as valuable in the long run. I will be paying special attention to New York Community Bancorp, but will be adding all seven to My Watchlist. Feel free to do the same by clicking here.

Foolish contributor Robert Eberhard owns no shares of any companies mentioned here. Follow him on Twitter @GuruEbby. The Motley Fool owns shares of FirstMerit, Huntington Bancshares, and Bank of America. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Huntington Bancshares Incorporated Stock Quote
Huntington Bancshares Incorporated
$12.86 (-1.15%) $0.15
New York Community Bancorp, Inc. Stock Quote
New York Community Bancorp, Inc.
$8.61 (-0.81%) $0.07
FirstMerit Corporation Stock Quote
FirstMerit Corporation
F.N.B. Corporation Stock Quote
F.N.B. Corporation
$11.62 (-0.43%) $0.05
People's United Financial, Inc. Stock Quote
People's United Financial, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.