Anthony Speciale Stock Market Analyst

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These Two Small Banks Are Great Takeover Targets

Bank merger and acquisition (M&A) activity is back, and it’s back with a vengeance!

Just over the last few weeks, we saw US Bancorp announce that they are buying Mitsubishi UFJ Financial Group for about $8 billion.

Then, Home BancShares announced that they are buying Happy Bancshares, which will give them an entry into the very strong and profitable Texas market.

And we also saw that Citizens Financial Group is set to acquire Investors Bancorp to consolidate that franchise in the New York and New Jersey area.

So, we’re seeing M&A activity perk up now, which isn’t really a surprise. The pandemic really accelerated digital banking, so more traditional banks have had to adapt and spend a ton of money on technology and cybersecurity.

We’re also likely to see regulatory costs rise, so being a small bank is going to get a lot tougher. And for that reason, I think we’ll continue to see bank M&A activity spike.

So, if you’re not buying bank stocks with low price-to-earnings ratios and high dividend yields right now, what you’re telling me is you don’t like money!

This strategy has provided extraordinary returns over the past 20 years, and today I’m going to give you a couple of quick bank picks that fit those criteria.

Financial Institutions, Inc.

The first pick is Financial Institutions, Inc. (FISI), which is a bank in upstate New York with 48 branches and $5.2 billion in assets.

They have a unique loan portfolio, as they have a fantastic direct lending business with auto dealers. They’ve established relationships with new car dealers all over upstate New York, and they’re processing indirect car loans for these dealers.

The percentage of these loans that are more than 90 days past due is ridiculously low at just 0.4%, so they’re doing a great job of underwriting and evaluating this portfolio of higher-yielding car loans.

They also have some small business and residential mortgage lending, and it’s a very well-run bank overall. There has also been some insider buying, as officers and directors have a lot of skin in the game.

It’s only trading at about 7.5 times earnings, and there is a 3.5% dividend yield, which is a great combination of yield and value. I think Financial Institutions, Inc. could easily attract a buyer at its current size.

United Bancorp, Inc.

Next up is United Bancorp, Inc. (UBCP), which is located in eastern Ohio, with branches in West Virginia as well. The company has about 20 branches and $733 million in total assets.

This bank has a really balanced loan portfolio that includes some single-family loans, some commercial real estate and some small business loans, with just about 0.4% of all assets being non-performing.

Insiders own about 12% of the shares, and the bank has lots of cash and securities that can be redeployed as interest rates continue to rise.

This is a really attractive opportunity for another bank looking to buy up some deposits, and I will not be shocked when we finally see a takeover announcement.

The company is trading for about nine times earnings, with the dividend yield at about 4% right now.

If you own a portfolio of these banks that meet these criteria, I expect you to do extraordinarily well. This strategy has worked throughout my career, and I see absolutely no reason it will ever stop working and providing profits well above anything you thought possible.