In the banking business, size does matter, at least to an extent. But if the financial crisis of 2008 taught us anything about banks, it is that bigger isn't always better. The bigger a bank, the bigger its problems can be. As far as money center banks go, Goliath-sized Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) have branches in nearly every U.S. state. Then there are banks like BB&T (NYSE: BBT), PNC Financial Services Group (NYSE: PNC) and Wells Fargo (NYSE: WFC).
IN PICTURES: How To Make Your First $1 Million
Even though the latter three are considered regional banks, that tag seems to be misplaced as all three rank among the eight largest banks in the U.S. And their branch locations are hardly contained to just a few states. To be sure, these banks faced many of the same problems as their larger peers when things turned bad in the financial sector.
We decided to look for smaller banks that are truly regional, and we found an interesting pair in New England. They may not be small much longer, and they offer big potential for investors:
1) NewAlliance Bancshares (NYSE: NAL) - Market cap: $1.24 billion; Yield: 2.40%.
2) People's United Financial (Nasdaq: PBCT) - Market Cap: $5.57 billion; Yield: 3.80%.
On The Prowl For Deals
Connecticut-based NewAlliance Bancshares is the very definition of a small regional bank. The 171-year-old bank has 89 branches in its home state and two Massachusetts counties, and it offers traditional banking services as well as investment products and advice. But this sleepy New England outfit may not be slumbering for long.
NewAlliance has a sterling balance sheet, which features a tangible common equity ratio of 10.82 and $8.5 billion in total assets. In addition, nonperforming assets comprise just 0.63% of total loans, and net charge-offs as a percent of loans are just 0.34%. With a strong balance sheet like that, it's easy to see why NewAlliance has the ability to search for acquisitions. That's exactly what the company is doing.
NewAlliance has $400 million in excess capital and recently filed plans with the SEC for a shelf offering, indicating that a deal could be right around the corner.
One Deal Done, More To Come?
People's United Financial is another Connecticut-based bank with a sterling balance sheet that is on the hunt for acquisitions. The bank recently acquired Financial Federal Corp. (NYSE: FIF) for $738 million in cash and stock to bolster its presence in the equipment-leasing sector. The deal will positively impact People's United earnings and create the 13th largest U.S. bank-owned equipment finance firm.
People's United has $20.8 billion in assets and a tangible common equity ratio of 18.6%, which is exceptional. Its conservative lending practices helped the company come out of the credit crisis basically unscathed. Nonperforming loans account for about 1% of the total loan portfolio, and charge-offs as a percent of loans are a scant 0.26%.
The stock is down 8.3% in the past 52 weeks. But trading at just one times book value, and with a decent yield of 3.8%, there might be some value here for patient investors.
Bottom Line: Sometimes It Pays To Pass On The Giants
Size thrills, but agility kills, and it is worth remembering that a bank's impressive size can often belie its true financial health. With a "new normal" emerging for the banking world, banks that aren't flashy - like NewAlliance and People's United - may offer the flashiest returns for long-term investors. (Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!