The Best Small Bank for Your Portfolio

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With earnings season winding to a close, I have started to search for the next investment to add to my portfolio. Since I spent most of April looking at bank earnings, I figured financial companies would be as good as any place to start looking. Not all financial companies are created equally, however, so I have decided to break my search into four distinct groups: "too big to fail" banks, banks with over $1 billion in market cap, banks with under $1 billion in market cap, and other financial service companies. From each group, I plan on selecting one potential company to add to my portfolio, but in the meantime, I will make a CAPScall with hopes that they can help my CAPS score.

Under $1 billion is small
The second group of banks I will be examining were chosen from a group of 67 banks that currently have a market cap under $1 billion. Most of the banks of this size tend to fly under the radar for one reason or the other, but they are still an important piece of the financial industry. The five banks below are representative of many of the banks of their size and are some of the more intriguing options available when it comes to smaller banks.

Company

Total Assets

Market Cap

P/E Ratio

P/B Ratio

Dividend Yield

Astoria Financial (NYS: AF) $17.1B$891.0M17.40.701.8%
Provident Financial Services (NYS: PFS) $7.1B$864.2M13.10.903.6%
Citizens Republic Bancorp (NAS: CRBC) $9.6B$649.5M8.40.63N/A
Heartland Financial USA (NAS: HTLF) $4.3B$315.5M10.90.872.1%
Rockville Financial (NAS: RCKB) $1.9B$318.1M26.51.003.2%

Source: Finviz.com and Motley Fool CAPS; N/A = not applicable.


On with the eliminations!
Rockville Financial is the first bank to get cut. The Connecticut bank is still new to the public markets, having celebrated its one-year anniversary last month. However, the bank's size is troubling to me, and I am worried that it could become a target of some of the larger banks in its region. It is also the most expensive bank according to P/E, so there are other cheaper alternatives available.

Astoria Financial is the next to get cut. Not only is the bank the second most expensive on the list, it also recently reduced its dividend in an attempt to get its payout ratio more in line with the rest of the financial industry. Any time a financial company takes actions to shore up its books is typically a good thing, but I think the remaining three banks offer better opportunities at this time.

And then there were three...
With three banks remaining, Heartland Financial is the next to go. Despite record income during its most recent quarter, with net income more than triple the same period last year, I am personally hesitant to invest in a bank which has a market cap hovering around $300 million. Like Rockville Bank before it, the Iowa bank's size could work against it despite its attractive numbers -- it is the second cheapest bank according to P/E and also trades at a discount to book value.

There can be only one
With only two banks left, the decision was difficult. Provident Financial sports the largest dividend of any of the banks on the list, while Citizens Republic doesn't even pay a dividend because it still owes the government the total amount from its $300 million bailout. Provident, though not as "cheap" as Citizens, still trades at a slight discount to book value despite its high P/E. However, my choice here is Citizens Republic.

After spending the previous two years writing off bad loans and experiencing losses, Citizens returned to profitability this year after posting its fourth consecutive profitable quarter with its most recent quarter. The bank was the best performing regional bank of 2011, with share price appreciating over 80%. Though past performance is no indicator of future performance, I have faith that the Michigan bank will continue its recovery in 2012, repay Uncle Sam as it said it plans to begin doing, and reinstitute a dividend that was last paid early in 2008.

Accountability time
Though I am not planning on purchasing shares of Citizens Republic at this time, I will be keeping an eye on the company and tracking its performance at Motley Fool CAPS. I will be giving the bank the coveted "green thumb" rating indicating it will beat the market for the foreseeable future. I encourage you to do the same.

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At the time this article was published Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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