As Dodd-Frank celebrates its fifth anniversary, and the near-complete collapse of our financial system celebrates its eighth, the debate over precisely how much regulation of the financial industry is necessary or beneficial rages on.
One interesting wrinkle recently came from the pairing of Senators Elizabeth Warren and John McCain, who cosponsored a bill that would reinstate the Glass-Steagall Act of 1933. The initial act, which created strict boundaries between investment and commercial banking, was passed in the aftermath of the great Wall Street crash of 1929 and kept companies engaged in risky investment banking that’s separate from commercial banks in the name of broader systemic stability.
The act was repealed in 1999 with bipartisan support, and some people (like Elizabeth Warren, John McCain, and me) would argue that it’s not entirely coincidental that less than a decade later the banking system required a massive bailout to survive.
How to Play a Glass-Steagall Return
So what would reinstatement of Glass-Steagall really mean? It’s obviously impossible to say with certainty, but for any small-cap investor with a healthy appetite for risk, that sort of shift in the landscape should be exciting. With great change comes great opportunity…even when it’s impossible to say exactly what that opportunity might be.
One investment thesis we’re prepared to explore would be that a new Glass-Steagall Act would ultimately benefit the nation’s small-cap regional banks. If the nation’s biggest banks break up, it would mean that their commercial banking arms would be forced to focus on traditional sources of banking revenue — taking deposits, maintaining checking and savings accounts, and extending personal and small-business loans — without the benefit of being able to rely on the huge asset base associated with investment banking.
And those more traditional forms of banking are precisely where regional banks tend to excel – wielding a closer relationship with the communities they serve, and more expertise for how to best operate within the theater where they’re located. Regional banks are specialized and knowledgeable in ways national chains can’t hope to replicate.
Small Banks with Big Potential
So, which companies would stand out as potential ways to play something like this? This could be where things get easier. The fact is that a good regional bank is frequently a solid investment, regardless of whether or not Glass-Steagall Part II passes or not. In particular, we’re focusing on a solid return on equity, a strong dividend yield, and a low price-to-book ratio as indicators of strong regional bank stocks.
CNB Financial Corp (CCNE)
Market Cap: $263.81 million
Dividend Yield: 3.6%
CNB Financial is a regional bank located in the Northeast and primarily servicing customers in Pennsylvania and Ohio. I’m not ultimately going to go into much detail here because, well, whatever I write would pale in comparison to the in-depth, comprehensive breakdown done by our Research Team.
You can visit our research section and download the full report on CNB Financial and why our research team saw some real potential in the company.
Park National Corp (PRK)
Market Cap: $1.37 billion
Dividend Yield: 4.23%
Ohio-based Park National Corp. operates in the commercial banking and trust segments. It’s the largest company on this list, almost qualifying for mid-cap status. Park has some 116 banking offices throughout Ohio in its 11 banking divisions. The company’s commercial loan portfolio is just shy of $2 billion, about half of which is in the commercial real estate side. The company also has almost $900 million in consumer-facing loans, like auto and home loans.
Park may land on the higher end in terms of its P/B ratio, but that’s probably because people are willing to pay a premium due to it also falling on the higher end of our dividend yields. The company’s also in an extended uptrend in terms of its stock price, gaining over 15% in the last year and over 30% in the last five.
That could mean that it’s currently a little pricey, meaning waiting for a correction downward might make sense, but there are some technical indicators that the current uptrend may continue. The company’s 20-day SMA crossed its 50-day SMA from below in mid-June, and the 9-day signal line crossed the MACD indicator from below in the last week. Both could be a sign that Park will keep gaining in the short term
City Holding Co. (CHCO)
Market Cap: $781.91 million
Dividend Yield: 3.27%
West Virginia-based City Holding Co. does the majority of its business through the wholly-owned subsidiary City National Bank. The company has some 82 banking offices operating primarily in the areas of Southeastern Ohio, Kentucky, West Virginia, and Northwestern Virginia.
Like Park National, the P/B ratio is a little on the higher side of what we considered. Unlike Park National, that’s not due to a particularly high dividend, even though its current rate is nothing to scoff at. City Holding, though, has been enjoying the financial sector rebound in the aftermath of, well, its complete meltdown. The stock’s up over 15% in the last year, and up over 70% in the last five. Once again, one might be forgiven for waiting for a correction prior to jumping into this stock.
However, that would be ignoring the excellent 24% ROE the stock is currently generating, typically a very bullish indicator. What’s more, technical factors for City Holding have a pretty similar look to Park National, with the 20-day SMA crossing the 50-day SMA from below in the last five weeks and the signal line very recently crossing the MACD. The company also managed to maintain its dividend through the worst of the financial crisis and has raised it in 2012, 2013, 2014, and again earlier this year.
Summit State Bank (SSBI)
Market Cap: $63.41 million
Dividend Yield: 3.6%
Our last two banks are considerably smaller than the first three, coming in as micro caps rather than small caps. There’s a lot of inherent risk that comes with investing in companies of this size, but these two did meet our criteria, so I’m including them anyway.
Summit State Bank is a state-chartered commercial bank based out of Sonoma County in California and serves the county through just five locations. Its business is mainly in lending, with commercial and industrial loans making up the bulk of its business. Does the success of a bank with a mere five locations perhaps say something about the economic conditions of Sonoma County? You be the judge.
Summit State Bank currently has a P/B that would point to it being undervalued, and it’s currently in a triangle pattern, with converging support and resistance lines, that would imply that a breakout, either up or down, is in the works in the near future.
That said, a few of the technical factors would seem to indicate that it could be veering toward overbought territory. The stock’s price at the moment is pushing it against the upper Bollinger Band, and its 14-day RSI is at about 60, which is still within a normal range, but creeping closer to the 65 level that is traditionally viewed as overbought.
Elmira Savings Bank (ESBK)
Market Cap: $52 million
Dividend Yield: 4.6%
The name Elmira Savings Bank may SOUND like a cheap marketing ploy to make you imagine your quaint, trustworthy aunt, but it actually derives from Elmira, NY, where the bank is based out of. It has 15 locations servicing the citizens of upstate New York.
Elmira Savings, it should be noted, has a number of red flags. Its market cap is very low, and the stock doesn’t have a lot of liquidity with an average daily volume of just over 1,000 shares. However, despite some real risky aspects, the stock has plenty to like. The dividend is clearly a strong one, and the ROE would seem to show that, despite not having a ton of equity, it’s getting the most of what’s there.
The stock’s down over 11% over the last year, but it’s up over 55% over the last five, despite that swoon over the last 12 months. It’s also posted a few dividend increases over the last three years. If you’re ready to take the plunge on a small, thinly-traded stock, you usually don’t get a dividend yield in excess of 4.5% for your troubles, making Elmira an intriguing play in a lot of ways.
The Unlikely, but Potentially Lucrative Return of a Quaint, Capra-esque Banking Industry
Certainly, the odds of Glass-Steagall going back onto the books in the near (or even distant) future appear pretty limited. Given the pushback that already exists for the much milder provisions in Dodd-Frank, it’s hard to see the current congressional atmosphere reacting to Warren and McCain’s push for this return to a more-regulated atmosphere appear unlikely.
However, if this does begin to garner enough public support, it might ultimately manage to get passed. The populist branches of both major parties have an anti-corporate, anti-big bank bent to them, meaning a slow building of public pressure isn’t out of the question.
And, if we do get Glass-Steagall back, there seems to be a distinct chance that smaller, regional banks like these five could benefit. It’s impossible to say for sure, but if they can leverage their local-level expertise to outmaneuver their larger counterparts in the commercial banking segment once those large banks are stripped of their investment banking arms, the returns could be substantial.
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