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Roger Conrad, editor of the Utility
Forecaster and associate editor of Personal Finance, recommends two
smaller banks unscathed by the industry's excesses.
From June 2007 peak to March 2009 nadir the S&P 500 Financials Index
plunged 82.5%. Despite nearly tripling since the bottom the typical big bank is
still off 58% from the halcyon days.
With nearly 100 failures thus far in 2009 and the federal government still a
large shareholder, the industry is hardly out of the woods now. Last year’s
bailout plan remains deeply unpopular. Additional shocks to the system are
possible, from rising unemployment, surging mortgage and credit card defaults
and the sliding value of US commercial property.
The good news is odds of a late-2008-style systemic collapse are increasingly
remote. After more than a year of unprecedented intervention, monetary
authorities know where remaining weakness lies. And they stand ready to commit
whatever taxpayer funds are needed to seize insolvent institutions and keep
weaker ones afloat.
More important, the lending environment has thawed dramatically since the
dark days after Lehman Brothers fell. Investment-grade corporations and
better-capitalized investors are borrowing at the lowest
rates in a
generation. That’s the result of low Treasury yields combined with the lowest
risk spreads since early 2007.
Businesses’ access to capital markets has in turn taken pressure off banks.
And despite the weak economy, the industry is rapidly recapitalizing. Giant
JPMorgan Chase (NYSE: JPM), for example, reported an improvement in its third
quarter 2009 Tier 1 capital ratio—a primary measure of banks’ strength—to 10.2%
from 8.9% a year ago.
Smaller regional and community banks have once again proven their ability to
ride out industry crises. Upstate New York-based regional bank Arrow
Financial (Nasdaq: AROW ) is growing deposits and its low-risk loan portfolio
while holding nonperforming loans to just 0.32% of total loans.
Arrow’s key competitive advantage is its ability to build relationships with
individual customers. Under-the-hood knowledge helps it pinpoint risks that
larger banks are too big to identify. That, plus notoriously conservative
management, which largely avoided subprime and other lending frenzies, promises
to keep the bank on the right track in coming years.
Management boosted the cash dividend 4.2% over the past year and paid a 3%
stock dividend. Buy Arrow Financial up to 28 if you don’t already own it.
{Shares closed at $25.49 Friday—Editor.]
Penns Woods Bancorp (Nasdaq: PWOD) is a smaller, higher-yielding version of Arrow,
operating in rural Pennsylvania. The bank grew deposits 13% and its loan
portfolio 5.3% during the 12 months ended June 30, 2009.
Nonperforming loans to total loans remained at a low 0.68% thanks to
laser-like focus on customer relationships and risk management. Interest expense
was cut 15.1%. Not counting a loss on the value of securities held, earnings per
share covered distributions by a comfortable 1.26-to-1 margin. Penns Woods
Bancorp is a buy up to 35. [Shares closed at $31.51 Friday—Editor.]
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