warren buffett bank stocks

Warren Buffett Likes Bank Stocks, So Should You

Every now and then, the stock market overreacts. Investors sell stocks because of fear, and solid businesses are mispriced.

Savvy investors take advantage. For example, Warren Buffett’s net worth has grown to over $100 billion by purchasing mispriced stocks and waiting. Also, Warren Buffett is seemingly a fan of bank stocks. His investment vehicle, Berkshire Hathaway, owns Bank of America (BAC), The Bank of New York Mellon (BK), U.S. Bancorp (USB), American Express (AXP), and Ally Financial (ALLY). However, Buffett’s investment size limitations probably keep Buffett from buying smaller, regional, and community banks.

But retail investors can take advantage of the failure of two regional banks and market fears. Banks’ share prices plunged because of fears of a larger financial crisis. However, a more significant problem has yet to materialize. Even Janet Yellen says the bank situation is stabilizing.

As a result, the selloff may be excessive and a chance for investors to scoop up mispriced shares of banks.

Below, we discuss three high-yield regional and community bank stocks to consider.


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Warren Buffett Likes Bank Stocks, So Should You

The PNC Financial Services Group

The PNC Financial Services Group (PNC) is one of the largest regional banks. The firm was founded in 1845 in Pittsburgh, Pennsylvania. Today, the bank has a presence in many states, but its retail branch network is concentrated in the mid-West and mid-Atlantic states. PNC operates through retail banking, corporate & institutional segment, and the asset management group. It has over 2,600 branches, 9,500 ATMs, offices dedicated to mortgages, and corporate & institutional banking office.

At the end of Q1 2023, PNC had $325.5 billion in loans, $436.2 billion in deposits, and $562.3 billion in assets. According to the U.S. Federal Reserve statistics, it is the 6th largest bank by assets in the United States. PNC has a strong capital position based on its Basel III regulatory ratios. Furthermore, credit quality is strong, with net charge-offs at 0.24% and non-performing loans at 0.62%.

Market action has caused the share price to drop nearly 22% this year. Hence, the dividend yield has risen to almost 4.8%, nearly as high as during the COVID-19 pandemic bear market. Also, this value is about 1.6 percentage points more than the 5-year average. 

Besides the yield, PNC’s dividend growth rate is attractive. The firm is a Dividend Contender with 13 years of growth and has increased the dividend at 14% CAGR in the last decade. Moreover, the payout ratio is only around 41%, providing confidence about dividend safety and future increases. In addition, it receives a dividend quality grade of B+. 

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.

Portfolio Insight - P_E Fair Value (Non-GAAP EPS) PNC
Source: Portfolio Insight*

Arrow Financial Corporation

On the other end of the market capitalization spectrum is Arrow Financial Corporation (AROW. It is a small community bank founded in 1851. Today, Arrow’s footprint covers several counties in upstate New York. The firm offers consumer and commercial banking, insurance, and wealth management 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 bank is much smaller than PNC, with roughly $4.0 billion in assets, $3.0 billion in loans, and $3.5 billion in deposits. Moreover, credit quality is excellent, with net loan losses at 0.08% and non-performing assets at 0.32%. Additionally, Arrow is well-capitalized compared to regulatory standards.

Arrow’s stock price has plunged more than 33% because of relatively poor Q4 2022 results, followed by the 2023 banking crisis. Moreover, Arrow is late filing its annual 10-K because it is assessing internal controls. But the bank indicated “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 falling stock price has pushed the dividend yield up to ~4.75%, the highest in a decade and 1.5% more than the 5-year average. Arrow is attractive to dividend growth investors because of its 30-year streak of increases, making the stock a Dividend Champion. The bank usually increases the dividend by approximately 4% to 5% annually. Dividend safety is excellent, with a conservative earnings payout ratio of ~36% and an ‘A’ dividend quality score.

Arrow is undervalued based on the earnings multiple of 7.9X, less than its 10-year average. Consequently, the bank is another good choice for those seeking income and possibly price appreciation as valuation returns to the long-term average.

Portfolio Insight - Dividend Yield History AROW
Source: Portfolio Insight*

Bank of Marin

From the east coast, we head to the west coast for another small community bank, The Bank of Marin Bancorp (BMRC). This young bank started in 1989 and transitioned to a holding company in 2007. Today, it offers personal and commercial to customers in ten counties of Northern California. The bank has 31 branches, and eight commercial banking centers focused on small and mid-sized customers.

The Bank of Marin is comparable in size to Arrow Financial, with approximately $4.3 billion in assets, $2.1 billion in loans, and $3.6 billion in deposits. Also, asset quality is good, with non-accrual loans at 0.12% and non-performing assets at 0.21%. In addition, the Bank of Marin is well-capitalized according to regulatory standards.

The stock price is down nearly 36%, and thus the dividend yield has spiked to ~4.75%, a decade high. This value is also 2.3 percentage points more than the trailing 5-year average. The Bank of Marin is a Dividend Contender with 18 years in a row of increases. The 5-year growth rate is about 12%, but it is slowing because the payout ratio is up to 33%. However, the rate is modest, and the bank has an ‘A’ score for dividend quality.

The declining stock price has caused The Bank of Marin’s valuation to plummet. As a result, the forward P/E ratio is now ~8.0X, materially below the 5-year and 10-year ranges. As a result, the bank’s stock is a deal for those seeking income and future price appreciation.

Portfolio Insight - Dividend Yield History BMRC
Source: Portfolio Insight*

Disclosure: None

A version of this post by Dividend Power originally appeared on Investor Place and was republished with permission.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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