Upstanding banks you can invest in without losing sleep over an impending collapse or a federal takeover are rare these days. To find them, look for well-capitalized institutions that are expanding their lending activities and hold relatively few bad debts as a percentage of all outstanding loans.
Not long ago, when seemingly anyone could get a mortgage, Hudson City Bancorp (symbol HCBK) conserved its energy (and capital) like a predator waiting to pounce. Then, when the rest of the industry ran into trouble, Hudson City started raising its profile in the New York City metropolitan area it serves. Over the past year through June, deposits increased by 30%, to $21.7 billion, and loans by 13%, to $30.7 billion. In the second quarter of 2009, Hudson City earned 26 cents per share, or 18% more than in the second quarter of 2008.
The bank has a simple business model: It writes jumbo home loans to borrowers with immaculate credit histories. Hudson City requires big down payments in exchange for lower-than-average interest rates. At $14, the stock trades at 13 times estimated 2009 earnings of $1.05 per share and yields a generous 4.3% (all prices and related ratios are through July 28).
Although the real estate slump has been fierce in California, it hasn't filtered down to many business borrowers. The main customers of WestAmerica Bancorp (WABC) are small businesses in the San Francisco area. As a result of that focus, the San Rafael bank's ratio of nonperforming loans to total loans is an unusually low 0.89%.
WestAmerica seems to have a special relationship with its clients. Over the past five years, depositors have paid more in account fees than they have collected in interest. That suggests clients would rather pay WestAmerica to safeguard their money than go with another bank that pays higher rates or charges lower fees. Loans and deposits are up 39% and 31%, respectively, over the year through the end of June, to $3.3 billion and $4.2 billion. At $51, the stock is up 3% over the past year and trades at 16 times forecasted '09 profits of $3.13 a share.
After concluding that mortgage lending had become an impersonal, commodity-like business, executives of Cullen/Frost Bankers (CFR) decided to exit the home-loan business altogether in 2000. Today, the San Antonio bank focuses on industrial, construction, commercial real estate and other business lending. That focus has helped it stay on the sunny side of profitability. It has boosted deposits by 18% and lending by 3% over the past year through June. The bank, which rejected federal rescue money, opened six new branches in 2008. At $47, the stock surrendered 7% over the past year. Based on estimated '09 profits of $2.95 a share, the price-earnings ratio is 16.
Thanks to its physical distance from the housing carnage, the Bank of Hawaii (BOH) has contained nonperforming loans to a modest 0.63% of loans. Its borrowers are some of the safest bets in the nation: Out of the 50 states and Washington, D.C., Hawaii ranks 45th for delinquencies. At $39, the stock trades at 15 times estimated '09 profits of $2.66 per share and yields 4.6%.
As many megabanks scramble for capital, People's United Financial (PBCT) is finding it has more than it needs. The Bridgeport, Conn., firm, which has $3.4 billion in cash on its balance sheet, has said it's looking for acquisitions along the East Coast. People's earnings have climbed an annualized 6% over the past five years, and analysts think the bank will deliver 10% yearly growth over the next five. But, at $16, it trades at a fat 52 times estimated '09 earnings of 31 cents a share -- a high P/E fueled by expectations that People's will put its excess capital to use in a highly profitable way.