Looking for some bank stocks for your portfolio?
Back in March, after bank authorities intervened to safeguard depositors at numerous failing institutions, it appeared that the 2023 regional bank crisis was ended. But soon a group of other banks had to step in and save First Republic Bank. After a brief period of stability, its shares fell once more, causing the Federal Deposit Insurance Corp. to seize it and sell it to JPMorgan Chase on May 1. Investors are now keeping a close eye on the banking sector.
The demise of two regional banks and market jitters can be exploited by ordinary investors. Fears of a wider financial catastrophe caused banks’ share prices to plummet. The emergence of a bigger issue has not happened yet, though. Even Janet Yellen claims that things at the banks are getting better. As a result, the selloff could be excessive and an opportunity for investors to buy bank shares at a discount.
Financial Institution: Arrow
The company Arrow Financial Corporation (AROW) sits at the other extreme of the market capitalization scale. Small local bank established in 1851. Right now, various counties in upstate New York are covered by Arrow. Through the Glens Falls National Bank and Trust Company, Saratoga National Bank and Trust Company, North Country Investment Advisers, Inc., and Upstate Agency, LLC, the company provides personal and business banking services, insurance, and wealth management.
With around $4.0 billion in assets, $3.0 billion in loans, and $3.5 billion in deposits, the bank is significantly smaller than PNC. Additionally, the credit quality is very good, with non-performing assets at 0.32% and net loan losses at 0.08%. In addition, per regulatory requirements, Arrow has adequate capital.
The relatively weak Q4 2022 earnings, followed by the 2023 banking crisis, have caused a more than 33% decline in the price of Arrow’s stock. In addition, Arrow is behind schedule in submitting its yearly 10-K because it is evaluating internal controls. However, according to the bank, “the Company does not expect any material change to the financial results included in the 2022 Form 10-K compared to those included in the Company’s earnings press release.”
The dividend yield has increased to 4.75%, the highest level in ten years and 1.5% above the 5-year average, due to the declining stock price. Due to its 30-year streak of rises, which has elevated the stock to the status of a Dividend Champion, Arrow is appealing to dividend growth investors. The bank typically raises the dividend by 4% to 5% every year. A ‘A’ ranking for dividend quality and a conservative earnings payout ratio of 36% indicate outstanding dividend safety.
Based on an earnings multiple of 7.9X, which is less than its 10-year average, Arrow is undervalued. Consequently, the bank is another good choice for those seeking income and possibly price appreciation as valuation returns to the long-term average.
The Group of PNC Financial Services
One of the biggest regional banks is PNC Financial Services Group (PNC). In 1845, the company was established in Pittsburgh, Pennsylvania. The bank currently operates in a number of states, however the mid-West and mid-atlantic states account for the majority of its retail branch network. PNC does business through three divisions: retail banking, corporate & institutional, and asset management. It has offices specifically for mortgages, 9,500 ATMs, and corporate & institutional banking offices. It also has approximately 2,600 branches.
PNC had $562.3 billion in assets, $436.2 billion in deposits, and $325.5 billion in loans at the end of the first quarter of 2023. It ranks as the sixth-largest bank in terms of assets in the country, according to data from the US Federal Reserve. On the basis of its Basel III regulatory ratios, PNC is in a strong capital position. With net charge-offs of 0.24% and non-performing loans at 0.62%, credit quality is also excellent.
The share price has decreased by around 22% this year as a result of market activity. As a result, the dividend yield increased to approximately 4.8%, which is virtually as high as it was during the COVID-19 epidemic bear market. This number is also roughly 1.6 percentage points higher than the 5-year average.
In addition to the yield, PNC has a promising dividend growth rate. The company has 13 years of growth, is a Dividend Contender, and has increased its dividend at a CAGR of 14% over the past ten years. Furthermore, the payout ratio is only about 41%, giving investors confidence in the dividend’s sustainability and potential growth. It also obtains a B+ grade for dividend quality.
PNC is undervalued based on the historical price-to-earnings ratio (P/E ratio). It trades at a P/E ratio of ~9.0X, less than the 5-year and 10-year ranges. Hence, PNC is a solid pick for investors seeking income and potential capital appreciation.
Bank of Marin
We travel from the east coast to the west coast to visit The Bank of Marin Bancorp (BMRC), another tiny community bank. This new bank was founded in 1989, and in 2007 it became a holding company. It currently provides personal and commercial services to clients in ten Northern California counties. Eight commercial banking centers targeted at serving small and midsize customers are among the bank’s 31 locations.
With over $4.3 billion in assets, $2.1 billion in loans, and $3.6 billion in deposits, The Bank of Marin is equivalent in size to Arrow Financial. With non-accrual loans at 0.12% and non-performing assets at 0.21%, asset quality is also strong. The Bank of Marin is moreover well capitalized by regulatory norms.
Due to the approximately 36% decline in the stock price, the dividend yield shot up to 4.75%, a decade-high level. Additionally, this figure is 2.3 percentage points higher than the previous 5-year average. The Bank of Marin has increased dividends for 18 years running, making it a Dividend Contender. The payout ratio has increased to 33%, which is lowering the 5-year growth rate, which is roughly 12%. The rate is low, though, and the bank’s dividend quality rating is “A.”
The value of The Bank of Marin has fallen due to the falling stock price. Consequently, the forward P/E ratio is at 8.0X, which is significantly lower than the 5-year and 10-year norms. The bank’s shares is therefore a good investment for people looking for income.
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Mk
Doing a little “dumpster diving”? I own 2 of these three and currently don’t share your enthusiasm, although your writeup is accurate.
It appears the root cause of AROW’s late filing was a system conversion gone bad resulting in General Ledger reconstruction. My guess is there was a pre-conversion power struggle between the former CFO and the now former CEO resulting in the former CFO’s resignation (he wound up at Lowell 5). As of last week the CEO and board chair resigned which MAY indicate the worst is over (and maybe not). Their latest estimate for filing is June 2nd. One positive you failed to mention is their annual stock dividend.
PNC is a good bank but (in my opinion) erred when they sold their 22% stake in BLK (May 2020). Their acquisition of BBVA Americas (2021) reflects their current strategy of deposit growth through merger – which may have been premature (overpaid) given the current flux in the banking system.
Personally, I rate both as Holds with AROW a gamble.
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