Community Banks: Small Size, Big Potential

Hingham Institution for Savings (NASDAQ: HIFS) is a name that’s probably not on the radar of most investors looking for growth stocks. But maybe it should be. The community bank, which operates just 11 branches in the Boston area has seen its stock price appreciate about 30% so far this year. It also pays an annual dividend of $1.12 per share.community-banks
Despite its small size, Hingham has demonstrated that it has staying power. It was founded all the way back in 1834, and its latest quarterly results showed a 22% increase in earnings.
While many larger financial institutions trump up their growth strategies when they report earnings, Hingham offered a much lower-key comment on earnings day, stating that its success has been based on “careful capital allocation, conservative underwriting, and cost discipline.”
President Robert Gaughen credited this strategy for the bank’s strong growth. “We remain committed to the fundamentally conservative strategies that have produced long-term value for our shareholders,” he said.
It’s been years since the term “too big to fail” became a household phrase used in reference to the nation’s largest financial institutions, and today many consumers and small businesses are turning to community banks. These banks offer many benefits, including more customized services and greater transparency. While the “too big to fail” set of banks engaged in some highly esoteric tech-driven activities that had nothing to do with consumers, community banks still focus on things like checking and savings and small-business lending.
This organic growth is one reason that many community banks make for good investments. There are some other reasons too:

  • A shifting regulatory environment – Over the summer I wrote about potential changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which would essentially make it easier for small banks to compete. Now, new Consumer Financial Protection Bureau regulations are set to go into effect that would make it easier for smaller banks to compete in the mortgage sector.
  • Rapid consolidation – There’s a long way to go before these banks will be anywhere close to “too big to fail.” But many of them are growing through acquisition – or have the potential to do so.
  • Generally low profiles – It’s human nature to think about the biggest players in a given sector when looking for good investments, and in many sectors that makes sense. But community banks are not really in competition with the major Wall Street players: Their strength comes from their comparatively small size. As a result, many of the most promising community bank stocks have simply been overlooked by investors.

Like Hingham, Access National Corp. (NASDAQ: ANCX), a community bank in northern Virginia, boasts strong earnings growth, a healthy dividend and a stock price that has defied current market trends, rising about 20% so far this year. The company offers commercial banking, mortgage banking and wealth management services. In its most recent quarter, it reported operating income grew 28%, helped in part by an increase in mortgage originations.
Hingham and Access National both have location on their side. Being based on the outskirts of major cities, they are both tethered to strong urban economies and able to take a more small-town approach to their suburban niche. But while location should be a key consideration to anyone seeking some strong community bank investments, they should not limit their search to community banks in or near big cities.
Banks in rural regions often thrive in markets where competition is low and consumer loyalty is high. Bank of the Ozarks (NASDAQ: OZRK) – which operates 159 branches in primarily rural southern regions in states, including Alabama, Arkansas and Texas – has enjoyed a 15% stock appreciation so far this year, along with strong earnings growth. It’s also actively acquiring other community bank chains.

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