Stock Watch


6 Small Banks with Attractive Dividends

Carolyn Bigda

These companies have raised their payouts regularly over the past five years.



If you’re a dividend investor, you’ve probably been wary of owning financial stocks. But a recent report by SNL Financial shows that not all banks have been dividend duds since the Great Recession, when many firms slashed payouts to pennies per share. A recent report by SNL Financial, a financial-services research firm, looked for banks that lifted their common-stock dividends by at least 2% each year from 2009 through 2013 and saw cumulative dividend growth of at least 30% for the same period. Twenty banks passed the test.

See Also: Great Dividend Stocks for 2014

You won’t find any of these names in Standard & Poor’s 500-stock index. After 2008, the Federal Reserve placed strict limits on when large banks could raise dividends, and not all have received the green light. Both Bank of America (symbol BAC) and Citigroup (C), for example, still pay a quarterly dividend of just one cent per share. Instead, the list of dividend growers is made up of community and regional players with median total assets of $650 million. Given the small size of the banks, most of the stocks trade in obscurity on the “pink sheets,” the non-Nasdaq over-the-counter market.

But six of the companies are large enough to trade on Nasdaq or the New York Stock Exchange and have at least $2 billion in total assets, which refers to the loans a bank has made and any money it has invested. Not one sports a big yield; only three beat the S&P 500’s 2% yield. But they all have potential for dividend increases, which makes them a good option to consider if you’re looking for a way to safely add financial stocks back to your portfolio. Unless otherwise noted, share prices and returns are as of February 24.

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With 37 bank branches in Long Island and Manhattan, First of Long Island Corp. (FLIC), the parent company of First National Bank of Long Island, benefits from its location in a market with rich demographics. In the fourth quarter of 2013, the bank’s loan balance grew by an eye-popping 29% over the same period the year before. Thanks to growth like that, the company, with $2.4 billion in assets, has been able to raise its dividend by an average of 9% annually over the past five years. Today, the stock yields 2.6%. Over the past five years, the stock has delivered an annualized total return of 17.0%, which lags the industry’s 21.9% annualized gain.

Looking ahead, First Long Island’s earnings are expected to rise just 6% in 2014, compared with about 11% for the industry. A competitive banking market in the New York City metro area keeps loan rates low, capping profits in the near term, says William Wallace, an analyst at Raymond James & Associates. But Wallace believes prospects are better over the long term because roughly one-third of First Long Island’s cash deposits are in noninterest-bearing checking accounts. If short-term rates rise, the bank will benefit. The stock trades at 1.7 times its tangible book value (essentially assets minus liabilities and nontangible assets, or what would be left if a company liquidated itself). The average for similar-size banks is 1.8.

Throughout the real-estate boom United Financial Bancorp. (UBNK) stuck to mainly high-quality loans. So in 2008, when the average regional bank stock fell 23.5%, United Financial, shockingly, gained 38.8%. Since then, the stock’s performance has been uneven, lagging in years when the West Springfield, Mass., firm, which owns United Bank, made acquisitions and bouncing back in subsequent years. As a result, the stock has returned just 8.9% annualized over the past five years.

Now the company, which has branches across Massachusetts and Connecticut, is merging with Rockville Financial, based in Rockville, Conn. Year-to-date, the stock is down 6.1%. But once the merger is completed later this year, the combined company would have approximately $4.8 billion in assets, nearly doubling United Financial’s size and providing the bank with growth in today’s low interest-rate environment. In fact, the firm’s earnings are expected to increase by 10% in 2014. The stock trades at a relatively low 1.4 times tangible book value and yields 2.5%. Dividends have grown at an annualized rate of 10% since 2009.

Oklahoma City-based BancFirst Corporation (BANF), with more than 100 locations throughout its home state, also sidestepped big losses during the housing bubble because home prices in Oklahoma never got too frothy. A relatively low unemployment rate in the state also helped. As a result, the stock gained 25.5% in 2008, though it has lagged over the past five years, with an annualized return of 10.8%. BancFirst shares yield 2.3% and trade at 1.6 times the bank’s tangible book value. As a testament to BancFirst’s strength, the company, with $6 billion in assets, announced in January that it had reached an agreement with the FDIC to assume operations of the failed Bank of Union, a local competitor.

Today, about 30% of BancFirst’s income-producing assets are in cash, as the bank waits for interest rates to rise. “That’s the potential,” says Brian Zabora, an analyst at Keefe, Bruyette & Woods. BancFirst “can deploy that cash into higher-yielding loans or securities in the future.” So although earnings are expected to climb a paltry 0.6% this year, profit growth could accelerate in 2015 if bond yields rise. In the meantime, the bank has increased its dividend at an annualized rate of 7% since 2009.



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