The Case for Community Bank Stocks

community-bank-stocksIf you think “too big to fail” when you think about the American banking sector, you might be missing out on some solid investments in many little-known community banks around the country.
Despite a decades-long trend of consolidation that has put more of the country’s banking business in control of a smaller number of major banks (and put many community banks out of business), there are still plenty of small banks out there offering services to individuals and small local businesses.
Such community banks fall squarely outside of the big bank sector. They typically offer a more narrow range of typical banking services, such as small business lending and mortgages, and confine their operations to a smaller region. And because there are so many smaller community banks, even after so much consolidation, their performances vary significantly.
As a group, the sector has a few things going for it. First, many of these banks are growing rapidly by buying similarly-sized chains. Second, while it’s difficult to quantify, there is an undeniable appeal of doing business with the local bank rather than some distant, faceless conglomerate.
For many people, the appeal of community banks has grown in the wake of the last financial crisis. And it finally looks as if the Federal Reserve might be helping small banks gain a competitive edge – or at least compete on a level playing field. The Fed has expressed interest in tailoring regulations for banks of different sizes to make them less onerous on the small banks.
All that said, you can’t look at these diverse banks as a group. Performance varies significantly and is driven as much by management and local market conditions as by the strength of the industry. But if you poke around, you’ll see several community bank stocks that are showing strong growth and solid balance sheets. Here are a few:

Bank of the Ozarks (NASDAQ: OZRK)

This Little Rock, Ark. bank operates 159 chains across nine states, mostly in the South. It provides traditional banking services like checking and savings, mortgage lending and lending to small businesses, as well as mobile banking.
In two years its net income has grown from $77 million to $118.6 million and revenues have grown more than 31%. Its strong growth underscores how small banks have strong potential to grow through acquisitions.
Earlier this year, Bank of the Ozarks completed its acquisition of Intervest Bancshares Corp., a small chain with branches in New York and California. It recently announced plans to acquire Bank of the Carolinas, which will expand its presence in North Carolina.

East West Bancorp (NASDAQ: EWBC)

In addition to providing traditional consumer and commercial banking services, this Pasadena, Calif. bank also provides financing to facilitate clients’ transactions between the U.S. and Asia. It’s shown steady sales and earnings growth and in its most recent fiscal quarter reported a 35% increase in net income.
East West stock has grown 162% over the past five years and is up about 11% year-to-date.

Investors Bancorp (NASDAQ: ISBC)

Shares of this Short Hills, N.J. bank chain, which operates 131 branches in New York and New Jersey, are up more than 8% year-to-date. The company has produced strong results in virtually all metrics, from revenue and net income to profit margin and its healthy 1.7% dividend yield.
Investors Bancorp is both a possible acquisition target and a possible acquirer of another small bank. With an existing footprint in a major U.S. metropolitan area, it definitely has room to grow.

Columbia Banking System (NASDAQ: COLB)

This small chain of banks operates in the Pacific Northwest and has won widespread recognition as a leading regional bank, as well as a leading employer. Like many community banks, it’s focused on consumer and small business banking services. Net income last year grew more than 30% and the stock has risen more than 20% over the last year.
To be clear, this list represents a sampling, not a comprehensive list of the country’s best community bank stocks. If you’re interested in investing in this often overlooked sector, take a careful look at the bank’s financial performance over time, as well as its management team and the economy in the region or regions in which it operates. Also consider its potential to grow, either by expanding its base business or by acquiring other businesses.
When you find a good solid performer, it could be a great way of expanding your exposure in the financials sector.

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