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Stodgy Bank Rules = Opportunity

04/25/2013 10:15 am EST


John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

Simply due to merger accounting requirements, this company’s shares are ripe for the picking, says John Dobosz of Forbes Dividend Investor.

The first three months of 2013 have been very good for banks big and small. Both the SPDR KBW Regional Banking (KRE) and the SPDR KBW Bank (KBE) ETFs are up almost 12% year-to-date, although there are some laggards that look poised to close the performance gap.

Frequently, this is where you'll find some fat yields and good value in the financial sector. Among the regional banks we've had success with in the past are Penns Woods (PWOD), First of Long Island (FLIC), Bridge Bancorp (BDGE), and TrustCo Bank (TRST).

Today we are adding another regional bank—this one a smaller outfit based in Danville, Virginia.

American National Bankshares (AMNB) is the holding company for American National Bank and Trust Company, a traditional community bank with 25 branches in Virgina and North Carolina. In 2011, American National merged with MidCarolina Bank in a $34.7 million deal that added eight branches in the Tar Heel State.

Because of accounting rules for bank mergers and the loans that are purchased, American National has had to mark those loans to market at conservative values. This affects recognized revenue and profits in a negative way, even though there are no cash losses.

Revenue is expected to dip 11.4% to $44 million in 2013, with earnings per share dipping from $2.00 to $1.58. It does carry $5.86 per share in cash on the books and generated 85 cents per share in free cash flow over the past 12 months.

American National has paid steady and rising dividends since September 1999. For the past six years, the quarterly payout has been 23 cents. The 96 cents in annual dividend payments works out to a juicy 4.5% yield that appears to be safe.

On valuation, AMNB is cheap. Its average price-to-sales ratio over the past five years is 3.2, more than 30% higher than its present multiple of 2.32 times the past year of sales. It also trades at 9.7 times trailing earnings versus its average P/E multiple since 2008 of 14.1.

Even using next year's lower EPS forecast that produces a 12.9 forward multiple, there is still a decent 8.5% discount.

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