Goldman Who? Small Bank Stocks to Own

TALLAHASSEE, Fla. (TheStreet) -- German American Bancorp (GABC) and Bank of Marin Bancorp (BMRC) probably haven't been considered by investors who scooped up financial firms JPMorgan Chase (JPM) and Goldman Sachs (GS) on the cheap.

Although the largest banks, such as JPMorgan, Goldman Sachs, Wells Fargo ( WFC), Bank of America ( BAC) and Citigroup ( C), have posted stellar returns since financial stocks bottomed March 6, some small community banks have given them a run for their money as long-term investments.

TheStreet.com Ratings has "buy" recommendations for 32 of 439 bank holding companies. Most are unknown, including German American Bancorp and Bank of Marin Bancorp. Three other obscure picks are National Bankshares ( NKSH), Norwood Financial Corp. ( NWFL) and First of Long Island Corp. ( FLIC).

GRAPHIC: Interactive Bank Failure Map.

Our Five Bank-Stock Picks

An analysis of the recommended bank stocks shows that most had strong capital ratios and credit quality as of March 31, as well as low ratios of net charge-offs (loan losses) to average loans during the first quarter of 2009 and for all of last year.

We have taken a very conservative approach in narrowing the list to five bank holding companies with the highest 2008 returns on average assets that also met the following criteria:

1. Price-to-tangible-book-value ratio of less than 2. Tangible book value is defined as total equity capital minus goodwill and other intangibles, such as loan-servicing rights.

2. Net charge-off ratios of less than 1 for 2008 and the first quarter of 2009.

3. Nonperforming assets and nonperforming loan ratios of under 1%.

The following table includes total returns:

City
State
Symbol
Price to Tangible Book
Dividend Yield
Closing Price - 3/6/09
Closing Price - 7/28/09
Total Return from 3/6/09
1 Year Total Return
National Bankshares, Inc.
Blacksburg
Va.
NKSH
1.73
3.09%
$18.03
$25.39
43%
36%
Norwood Financial Corp.
Honesdale
Pa.
NWFL
1.47
3.30%
$23.64
$32.52
40%
16%
First of Long Island Corp.
Glen Head
N.Y.
FLIC
1.76
2.75%
$19.90
$26.31
34%
41%
Bank of Marin Bancorp
Novato
Calif.
BMRC
1.61
1.73%
$17.80
$32.05
81%
15%
German American Bancorp
Jasper
Ind.
GABC
1.75
3.23%
$10.51
$17.18
67%
52%
Sources: Yield and Price-to-tangible-Book ratios - SNL Financial.
Stock returns - Bloomberg.

The group of five haven't matched their larger rivals' incredible run-up from the March 6 bottom. But a glance at one-year returns is an eye opener, as all have had strong returns when many bank stocks were clobbered.

Here are basic capital, earnings and asset-quality ratios for the group. Data is as of March 31, since uniform information for June isn't available for all banks:

Bank Holding Companies - March 31, 2009 (Millions of dollars)
Total Assets
Net Income
ROA
ROE
Total Risk-based Capital Ratio
Tangible Common Equity Ratio
% NPA
Net Charge-offs/ Avg. Loans (Annualized)
National Bankshares
$980
$3.39
1.41
11.98
16.71
10.36
0.50
0.08
Norwood Financial Corp.
$511
$1.74
1.37
11.64
17.77
11.74
0.48
0.05
First of Long Island Corp.
$1,260
$3.93
1.26
15.02
17.80
8.53
0.01
0.00
Bank of Marin Bancorp
$1,075
$3.23
1.22
10.13
11.28
9.33
0.69
0.37
German American Bancorp
$1,205
$2.94
0.98
11.04
11.63
8.01
0.88
0.10
ROA - Return on average assets, based on income before extraordiary Items, annualized.
ROE - Return on average equity, based on income before extraordiary Items, annualized.
NPL - Nonperforming Loans - Loans past due 90 days or more, or in nonaccrual status, less government-guaranteed balances.
NPA - Nonperforming Assets - NPL and repossessed real estate.
Source: SNL Financial

The ratios show that this group carries lower risks than most of the large banks, with high capital ratios along with low nonperforming-asset ratios and limited loan losses. Here's a breakdown of the group of five.

National Bankshares of Blacksburg, Va. Its main subsidiary, National Bank of Blacksburg, has maintained strong earnings and stellar asset quality in its commercial and residential real estate portfolios in southwest Virginia, while avoiding securities losses and write-downs that hurt many community banks during 2008 and through the first quarter. The holding company's total assets were $980 million as of March 31, a 7% increase over the previous year.

Norwood Financial Corp., whose main subsidiary is Wayne Bank of Honesdale, Pa. Wayne Bank is a community lender, with six offices in northeast Pennsylvania concentrating in commercial real estate lending. Through the banking crisis of 2008 and 2009, Wayne Bank has maintained high capital ratios while sticking to a healthy dividend-payout ratio ranging from 38% to 46%. Although commercial mortgages account for 29% of the balance sheet, charge-offs have remained low, a remarkable track record. Norwood Financial's current dividend yield is 3.3%, the highest of the group of five.

First of Long Island Corp. is the holding company for First National Bank of Long Island of Glen Head, N.Y. First of Long Island is also the largest of the five, with $1.3 billion in total assets and 28 offices in Nassau County on Long Island and in Manhattan. While the bank focuses on business services, it's a conservative lender, with loans comprising just 53% of total assets. First National Bank of Long Island has been rated an A-minus (excellent financial strength) by TheStreet.com Ratings for several years. It's been growing, with total assets increasing 18% during 2008.

Bank of Marin Bancorp is the only one of the five to have received TARP money. The Novato, Calif.-based holding company got a $28 million capital infusion Dec. 5 by selling preferred shares and warrants to the Treasury.

Bank of Marin Bancorp repurchased all the preferred shares June 30, repaying the Treasury $28 million, although the company has decided not to repurchase the warrants. The warrants don't represent a serious threat of dilution to shareholders. The Treasury is still working out an auction process for warrants it received when providing TARP money to banks.

Bank of Marin operates 12 branch offices in Marin and southern Sonoma counties, as well as a loan office in San Francisco. The bank is highly focused on commercial lending, with commercial real estate loans comprising 42% of total assets as of March 31, and construction loans making up another 12%. commercial and industrial loans accounted for 11%. A focus on commercial lending helps the bank maintain a very healthy net interest spread, which was an annualized 5.15% for the first quarter. The spread is the difference between a bank's average rate on its earning assets (loans and securities) and its average cost of funds (deposits and wholesale borrowings).

Bank of Marin's asset quality is remarkable for a community bank heavily focused on commercial lending in a post-real-estate bubble. While net loan charge-offs were the highest for the five holding companies, they were a minuscule 0.37% of average assets (annualized) for the first quarter and 0.33% for 2008.

German American Bancorp of Jasper, Ind., rounds out the list. Its shares returned about 52% over the past year. While the company's one-bank subsidiary is also called German American Bancorp, some of its 28 branches located throughout southern Indiana continue to operate under the names of previous banks acquired by the holding company, including Citizens State Bank, First American Bank, First State Bank, Peoples Bank and Stone City Bank.

German American Bancorp, like some of the other small banks, has a heavy focus on commercial lending, with commercial real estate loans comprising 24% of total assets, and commercial and industrial loans another 16%. While its returns on assets during 2008 and the first quarter of this year haven't matched those of the other four holding companies, German American Bancorp's return on equity for 2008 was 12.84%, the second-highest.

This is a quality franchise with excellent credit quality and potential for earnings improvement if the bank can attract more low-cost deposits (such as business checking accounts) and increase its efficiency.

-- Reported by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined TheStreet.com Ratings. in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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