Some four years after the incredible financial collapse in the U.S., much talk has been made about how to prevent such catastrophic events from happening again. While many factors played roles in this calamity over the decade leading to the dramatic climax, the underlying theme was quite pronounced: an over concentration of assets in too few institutions pose unimaginable systemic risks.
This concept became known by the coined term "Too Big To Fail", and stands as code for those banking firms that are almost assured of government stepping in to rescue them should they stumble. This rather exclusive and infamous club includes the likes of JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), and Citigroup Inc. (NYSE:C).
All of these imposing dons of the money world have dealt with numerous issues since the Great Bailout of '08, from not being well capitalized and selling off parts of their operations, to being caught in corrupt business practices.
Heat being turned up on Too Big To Fail
Many influential voices have spoken out against the mafia-like untouchable status of the mega-banks. Federal Reserve Governor Daniel Tarullo, Dallas Fed President Richard Fisher, St. Louis Fed President James Bullard, and even Chairman Ben Bernanke himself are on record against any perception that the U.S. taxpayers subsidize their existence and would bail them out once more should they face financial perils.
Clearly there remains a need to address the lingering disease plaguing the country’s banking industry, as both Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC) have cannibalized themselves by selling off assets in order to maintain adequate capital ratios, and the well-publicized multi-billion dollar trading loss by J.P. Morgan last spring.
Washington has explored various means to tighten regulations on the “Big Four”, including capping their total size and creating more onerous criteria aimed at discouraging mergers.
Real strength in financials found at the regional level
There is some belief that if the federal oversight could be enforced rigorously enough in combination with strict adherence to new capital requirements, the largest institutions would make the decision to restructure themselves. Until such wisdom prevails on Capitol Hill, investors can look at regional firms in the financial sector to uncover attractive alternatives to the “Money Center Mafia.”
To uncover regional banks that would outshine the largest dons of the finance world, I focused on the following criteria:
Return on Equity (ROE) of 10% +
Operating Margin of 30% +
Beta of 0.80 or less
Dividend Yield of 1.5% +
Minimum three month average volume of 5000 shares traded
From these statistical factors, you find three institutions that standout. Penns Woods Bancorp, Inc. (NASDAQ:PWOD) of Williamsport, PA is the holding company of Jersey Shore State Bank. Penns Woods is the best of the bunch in this analysis with an ROE of 15.90%. The operating margin of 44.74% shows incredible efficiency in their business model. The firm has been noted by Forbes as a “Top Dividend Stock” based on the 4.6% dividend and insider purchases by the bank’s leadership. Penns Woods has almost 25% less volatility than the general market with a beta of 0.76.