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5 Small Banks to Consider: Bank of Marin Bancorp (BMRC), Lakeland Financial Corporation (LKFN)

A few weeks ago, I sold all of my shares of Bank of America. In the article, Why This Bank Is a Clear Sell, I explained my rationale for selling that stock.

Since making that decision, shares are down roughly 5% from the price that I sold them at.  Needless to say, I am not regretting the decision.

But I am considering reallocating that capital and purchasing a bank – maybe a small bank. They are a better bet than large banks for 2013–after all, there are quite a few small banks that have very attractive valuations. Plus they have the potential to grow.

Lakeland Financial Corporation (NASDAQ:LKFN)Smaller is better right now for three reasons: (1) smaller banks aren’t subject to the additional capital requirements placed on larger banks; (2) the Volcker Rule will have no impact on smaller banks; and (3) the ongoing crisis in Europe will have virtually no impact on smaller banks.

That means that smaller banks are well-positioned to buy back shares and raise dividends!  And you might see some consolidation among smaller banks as they look to leverage scale.

After a few screens, I came up with 5 banks to consider investing in.

Bank of Marin Bancorp (NASDAQ:BMRC)

Bank of Marin is headquartered in California.  On Oct. 18, 2012, the Board of Directors declared a quarterly cash dividend of $0.18 per share – the company’s 30th consecutive quarterly cash dividend.  Overall, last year was a record year for Bank of Marin, and according to the CEO, “credit quality remains very strong throughout our loan portfolio.”  Even in an environment of weak loan demand, low interest rates and compressed margins, and an increased need for internal resources to comply with regulatory demands, this bank continues to deliver solid results for its shareholders.  Bank of Marin consistently outperforms its peers because it focuses on developing relationships, is disciplined, and has an in-depth understanding of its customer base.  This bank has a return on equity of 12.4% vs. the industry average of 9.27%, and trades at a price to earnings multiple of less than 12.

Lakeland Financial Corporation (NASDAQ:LKFN)

Lakeland Financial is the third oldest financial institution headquartered in Indiana.  Similar to other small banks, this company’s business strategy is to maintain a traditional community banking approach while at the same time concurrently leverage the strength and size of its balance sheet to effectively compete with larger regional and national competitors.  Although this strategy encompasses all phases of traditional community banking, including consumer lending, wealth advisory, trust services and retail brokerage, Lakeland Financial is primarily focused on building expansive commercial lending and deposit relationships and pursuing retail deposit gathering strategies through high levels of relationship-based client services.  This company has a net profit margin of more than 31% vs. the industry average of less than 24%, and trades at a price to earnings multiple of around 11.

Penns Woods Bancorp, Inc. (NASDAQ:PWOD)

Penns Woods is a bank headquartered in Williamsport, Pennsylvania.  Services offered by this bank include accepting time, demand and savings deposits, including super negotiable order of withdrawal accounts, statement savings accounts, money market accounts, fixed rate certificates of deposit, and club accounts.  It also makes secured and unsecured business and consumer loans that include financing commercial transactions, as well as construction and residential mortgage loans and revolving credit loans.  This bank has a dividend yield of 4.65% and trades at a price to earnings multiple of around 12.

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