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Banking without the Surprises For Dividend Investors
On Thursday, May 10th, after the market's had closed, J.P. Morgan Chase (JPM – Free Value Line report on J.P. Morgan Chase) disclosed an over $2 billion loss related to a trading strategy meant to hedge the banking giant's overall credit exposure. Clearly, that hedge didn’t pan out the way that the banking behemoth had hoped. The company expected the trading loss to be partially offset by securities gains, allowing it to report a profit in the June quarter. However, losses associated with the hedge could cost up to $4 billion in the coming year related to the trading positions in question, including an additional $1 billion over the next two quarters alone. This is the type of revelation that most investors would prefer to live without.
In fact, management’s admission that the strategy was flawed, poorly reviewed, and poorly monitored is of little value to investors already shell shocked by the financial meltdown that was an integral part of the 2007 to 2009 recession. Moreover, while management’s plan to launch an extensive review of the situation is nice, most investors would argue that closing the barn door after the cow has left isn’t all that useful. Even a few high-level resignations are a little too late, it would seem.
Investors seeking dividend income used to be able to rely on bank stocks for solid and reliable income streams—this is just one more instance that proves the industry isn’t what it used to be. Still, there are some banks that are run more conservatively than the rest. That isn’t to say that there is no possibility of a shock, but that the chances of a shock are probably fairly slim. Below are a few of the names that came to the minds of Value Line bank analysts. Subscribers can click the bank names to see Value Line’s full reports on the banks.
Cullen/Frost Bankers (CFR)
Cullen/Frost Bankers has over 115 Frost National Bank offices across Texas. It also has insurance and other financial services subsidiaries. The company’s loans breakdown in 2011 was commercial 48%, commercial real estate 38%, residential and home equity 10%, and consumer 4%. Although price competition in the bank’s markets has intensified, Cullen has been aggressive in seeking out new business. We believe this will fuel further growth in loans and net interest income, though we expect that growth to be modest. The March quarter was, in fact, Cullen's best ever for loan requests. This bank isn’t likely to knock anyone’s socks off, which is part of the allure—slow and steady does sometimes win races. Of particular note is the fact that Cullen/Frost actually raised its dividend each year through the recession. The bank had 3,848 employees on 12/31/11 and officers and directors own almost 6% of common stock. The company’s website is www.frostbank.com.
As of the end of 2011, Commerce Bancshares, Inc. had 363 bank/ATM locations in Missouri, Illinois, Kansas, Oklahoma, and Colorado. It has subsidiaries that are engaged in mortgage, credit insurance, venture capital, and real estate activities. Its loans were made up of commercial 31%, commercial real estate 28%, residential mortgage 16%, and consumer 25%. Commerce didn’t cut its dividend in the recession. Our long-term projections assume loan demand, which has yet to stage a meaningful pickup, will strengthen gradually. That said, this stable bank’s growth is likely to be limited, making the stock most appropriate for conservative investors. The bank had 4,745 full time equivalent employees, and directors and officers own just over 5% of the common stock. Its Internet site is www.commercebank.com.
Hancock Holding Company is a bank holding company that provides a range of financial services to consumers, and small and middle market businesses in Mississippi, Louisiana, Alabama, Florida, and Texas. The bank maintained its dividend through the recession. As of 12/31/11 the company operated over 300 banking offices and almost 400 ATMs. The bank’s loan portfolio was made up of commercial 34%, real estate 27%, consumer 14%, residential mortgage 13%, and construction 12%. The bank is in the midst of digesting an acquisition, including the closure of some branches. While the core business is doing well, merger costs are taking a near-term toll. This issue is probably most appropriate for longer-term investors. It has 4,745 full-time employees and officers and directors own 2.8% of the common stock.; Hancock Bank Trust Dept., 15.2% (3/11 proxy). Chairman: James B. Estabrook, Jr. Co-CEO's: Carl Chaney & John Hairston. Inc: MS. Address: One Hancock Plaza, Gulfport, MS 39501. Telephone: 228-868-4000. Internet: www.hancockbank.com.
Bank of Hawaii Corp., formerly Pacific Century Financial, is the largest bank holding company in Hawaii. It has 83 offices in Hawaii, the West Pacific (Guam, Northern Marianas, Palau), and American Samoa. At the end of 2011, its loans were comprised of business 20%, construction 2%, residential mortgage 41%, commercial mortgage 17%, commercial leases 1%, and consumer loans 19%. The bank was able to get through the financial crisis without a dividend cut. Bank of Hawaii has been performing well of late, though financial regulations threaten to take some wind out of its sails. One other concern here is the bank’s concentration in Hawaii, which is heavily dependant on tourists. At the end of last year, the bank had 2,370 full-time equivalent employees, and officers and directors owned about 1.5% of the outstanding stock. The bank’s Internet address is www.boh.com
U.S. Bancorp was formed by the merger of Firstar and U.S. Bancorp in early 2001. Unlike the other banks noted here, U.S. Bancorp is a rather large bank, though not nearly as big at J.P. Morgan Chase and its mega-cap brethren. The bank has over 3,000 offices in 25 states. As of year-end 2011, its loan portfolio consisted of commercial 27%, commercial real estate 17%, residential 18%, consumer 31%, and FDIC-covered assets 7%. The bank was forced to cut its dividend in 2009 but has since gotten back to raising it. Indeed, the recovery in the bank’s earnings that began in late 2009 continued into 2011. We believe it faces some near-term challenges, but that longer term it is a well-run, conservative bank. Now that it is back to raising dividends, income oriented-investors may want to take a second look. U.S. Bancorp has about 61,000 full-time equivalent employees and officers and directors own less than 1% of its shares. The company’s website is www.usbank.com.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.