5 Big Values in Small Bank Stocks

Big banks may get the headlines, but the newsletter advisors surveyed in this year's MoneyShow Top Picks 2020 report see more opportunity among lesser-known regional banks. Here are five banks that were chosen as best buys for the year ahead. Ben Reynolds, Sure Dividend Bank OZK is a top pick for income investors from the financial sector -- where higher yields are difficult to find. Among the biggest U.S. bank stocks, many such as JPMorgan Chase , Citigroup , and Bank of America have dividend yields between 2%-2.6%. Bank OZK is a smaller regional bank, and it is a more attractive choice for income investors as it offers a 3.5% dividend yield. It also offers very strong dividend growth -- the company has increased its quarterly dividend in each of the last 37 quarters. The most recent quarterly dividend of $0.25 per share was increased 19% from the same quarter last year. Another advantage is that Bank OZK has more room to grow than the mega-cap bank stocks. Bank OZK has a market capitalization of $4 billion. Its service territory mainly includes Florida, North Carolina, Georgia, Arkansas and Texas, but it also has locations in five other states. Bank OZK has a very strong history of growth, compounding earnings at a 22% annual rate from 2009 to 2018. The bank has generated strong growth due to a combination of organic and acquired growth. Even in a challenging environment for banks this year, with interest rates on the decline throughout 2019, Bank OZK has still generated growth. Over the first three quarters of 2019, diluted earnings per share increased 7.2% from the first nine months of 2018. While valuations have increased across the financial sector, Bank OZK remains a modestly valued stock. The shares trade at a price-to-earnings ratio of 9. We believe the valuation could expand in 2020, while earnings and dividend should continue to grow. As long as the U.S. economy avoids recession, Bank OZK could be among the top financial stocks to buy for 2020. John Dobosz, Forbes Dividend Investor San Jose, Calif.-based Heritage Commerce Corp. is a small-cap regional bank holding company; the bank has a market cap of around $758 million and offers a dividend yield of 3.9%. The bank owns the Heritage Bank of Commerce, which has branches throughout Silicon Valley in cities including Palo Alto, Sunnyvale, Pleasanton, Redwood City, San Francisco, San Jose, and Walnut Creek. It also owns Bay View Funding, which provides working capital factoring financing throughout the United States. Net interest income is expected to grow 8.3% this year, with earnings per share rising 13% to $0.95 per share, giving Heritage a price-earnings ratio of 13. The stock has traded for an average of 20.7 times trailing 12-months of earnings over the past five years, and 14.6 times forward earnings. The company pays $0.48 in annual dividends, well below $1.12 in free cash flow per share generated over the past 12 months. Insiders have been bullish on Heritage Commerce, with three members of the board of directors making significant purchases at prices just below where the stock currently trades. Benj Gallander, Contra the Heard Investment Letter First United Corporation -- our top conservative idea for the coming year -- is based in Oakland, Maryland with 25 locations in Maryland and West Virginia. Established in 1900, this enterprise got beaten up like most banks during the recession but has been profitable since 2011 with the bottom line almost tripling in 2018 to $1.51 a share. The first three quarters in 2019 have been even better with EPS at $1.50 already, while touching $0.63 the past quarter. The rising earnings led to a dividend jump from $0.09 to $0.13 this past quarter to boot. Prior to the recession it was as high as $0.20. While another dividend increase this year is not expected, one could easily be in the offing before the end of 2021. Strong capitalization ratios should help to support this too. There is a current wild card in that activist investors Driver Management and Rangeley Capital have been looking to get their members on the board while pushing for a sale of the organization. They opine that the company could fetch between $26 and $33 a share, a reasonable premium to the current trading value. Insiders continue to believe there is upside too, demonstrated in particular by the recent purchases by Chairman/Pres/CEO Carissa Rodeheaver, bringing insider holdings to about 4.25%. Given that there is just north of seven million shares, it would not take a lot of money for an acquisition by a bigger player. First US Bancshares was our top speculation last year and it has moved up more than 38% since then -- but far more is expected and it remains our top idea for 2020 for more risk-oriented investors. Given that it is a small regional bank, it is somewhat riskier than the major players in this sector. But the company makes money virtually every year, revenues have been trending upwards, and it sells at a large discount to book value. Capital ratios are solid, and the dividend was delivered once again at the two-cent level. Prior to the recession it paid a regular quarterly dividend of $0.27 a quarter, which is one reason that we stand by our belief that this will be hiked, and likely before the end of next year. The share count has remained flat at six million shares meaning that an increase should not ding the bottom line very much. Insiders own about six percent. FUSB is based in Birmingham, Alabama. Founded in 1952, there are 20 bank branches in Alabama and Virginia. The latter state joined the bank through a takeover of the Peoples Bank in 2018 and the digestion process appears to have gone well. James House, the President/CEO since 2011 stated, As we complete the integration of our organizations and move beyond the nonrecurring acquisition expenses, the acquisition should quickly begin to bring improved efficiency and earnings growth. That seems to be occurring. In addition, there is stellar loan expansion. One aspect in particular that we like about this organization is that it is the same old management so to speak. Besides long-serving House, many of the other key personnel have been with the bank for years. That is also true of their Board of Directors. While an investor might fear that management could become stale, at our end that is not a concern. First U.S. used to trade north of $33. It would not surprise to see this one move back to the $25 level, so better than a double from here. And it could be a good tuck-in takeover for a larger player that wants to expand, while buying assets at a very reasonable price. Doug Hughes, BankNewsletter GNB Financial Services started in 1934, and then waited 72 years to open a second branch -- both were in east central, Pennsylvania. GNB Financial is a money machine. I have followed hundreds of banks over the past 20 years; this is one the best, hands down. Loan growth is robust at 8.5% in this market; they do a great job and always seem to make good money. In 1996 they had $24 million in loans, today they have over $243 million. They show one of the best returns on average assets that you will see in today's banking world. They are in the sweet spot for earnings today and could fetch at least two times book maybe 2.20 times with their stellar earnings power. Based on expected fiscal 2020 earnings, the stock's P/E multiple could be 9 or less. Banks like this also usually get a P/E of like 20 in a deal, so you get to a $95 to $105 price - or a 100% premium from today's levels. The book value should also grow by about 5%-10% per year, depending on the dividends paid out. The stock offers a stable 2% yield; management just raised the cash dividend to $0.028 up from $0.025. They just earned $1.21 a share in the latest quarter, a 9% increase from the same period last year. The bank also loves to pay stock splits the last one was a 25% stock dividend in 2016. This is the second largest holding in our model portfolio. Insiders own about 25% of the stock and should be ready to retire. But if they don't sell the bank this year, you will make 12% on your money year in and year out until they do sell. There are just 777,543 shares outstanding so please buy slowly and use limits. You never have to watch, keep buying it any time you see shares for sale at a fair price. I would put this stock away for any non-trading account and hold it till they sell. Click here for access to MoneyShow's 100+ page Top Picks Report featuring the nation's most respected and well-known newsletter advisors favorite investment ideas for 2020.

5 Big Values in Small Bank Stocks

There are attractive opportunities in 2020 among lesser-known regional banks.

Columnist Conversation

This Weekend on Real Money

AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

Selling Some of This Surging AI-Related Stock

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.