7 Smaller Banks Worth Considering

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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%.

Company

P/E Ratio (TTM)

P/B Ratio

Dividend Yield

Astoria Financial9.960.725.56%
FirstMerit Corp. (NAS: FMER) 11.890.875.17%
First Niagara Financial (NAS: FNFG) 15.140.825.95%
FNB Corp. (NYS: FNB) 13.350.965.29%
Huntington Bancshares (NAS: HBAN) 11.400.843.12%
New York Community Bancorp (NYS: NYB) 10.920.987.69%
WesBanco11.960.803.43%

Source: FinViz.com. 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 want ones that are cheap in relation to profits, as well. Despite a low P/B multiple and high dividend yield, People's United Financial (NAS: PBCT) failed to make the list on this basis.

Hudson City Bancorp (NAS: 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 March-ended quarter, so 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.

At the time this article was published 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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