(05/21/14) Bank Trio: Value and Yield

It's been a while since we jumped into a regional banking stock; in 2013, we enjoyed big success with more than a dozen smaller financial institutions that pay reliable and sizable dividends, explains John Dobosz, editor of Forbes Dividend Investor.

Decent discounts from historical valuations, along with a well-covered yield just shy of 4%, are bringing us back into the smaller bank sector.

Founded in 1968 and based in Jackson, Mississippi, Trustmark Corp. (TRMK) is the holding company for Trustmark National Bank, which operates more than 200 branches in Alabama, Florida, Mississippi, Tennessee, and Texas.

Dividends have been paid without fail since May 1992 and at the current quarterly pace of $0.23 since November 2007. With a payout ratio of 54% of this year's expected EPS, Trustmark will not strain to maintain the dividend, or to boost it over time.

Valuations make a good case for buying Trustmark. It trades at discounts to its 5-year averages of price to sales, earnings, and book value. Multiplying its 5-year average P/E of 14.7 times expected 2014 earnings of $1.70 gets you a $25 price.

Another small bank, Pittsfield, Massachusetts-based Berkshire Hills Bancorp (BHLB) offers good value with a generous yield.

Berkshire Hills owns and operates 90 branches in Massachusetts, New York, Connecticut, and Vermont. In January, Berkshire acquired 20 Bank of America branches in Central New York.

Berkshire has paid dividends every three months since 2000. The current quarterly payout of $0.18 per share is good for a yield of 3%, and is to be paid on May 29 to shareholders of record at the close of business on May 15.

Since 2010, BHLB has traded for an average of 2.85 times revenue. Using that multiple—and $8.98 per share in revenue expected this year—gets a stock priced at $25.60.

Terra Haute, Indiana-based First Financial Corp. (THFF) is the holding company for First Financial Bank, which operates 74 branches in eastern Illinois and western Indiana.

First Financial has consistently hiked the dividend over the past 22 years it has paid them regularly.

Valuation makes a compelling case for buying THFF. Its five-year average price-earnings ratio of 14.7, applied to 2014 estimated EPS of $2.41, gets you a stock price of $35.43.

As a multiple of sales, you get a good whiff of value, too. Since 2009, THFF has traded for an average of 3.3 times sales, which are expected to be $11.30 per share in 2014. That gets you a $37.30 stock.