8 Top Regional Bank Stocks

When considering bank stocks, most investors look to the large, well-known national and international players. Lesser known are the opportunities to invest in local and regional bank stocks. Several MoneyShow.com contributors highlight their top regional banking bets from Hawaii to Utah, Ohio to Tennessee, California to Memphis and New Jersey to Rhode Island. Mark Skousen, High-Income Alert We are in a near-ideal environment for bank stocks. With more people working, more borrowers qualify for loans. Both consumers and businesses are eager to borrow. Banks also thrive on higher interest rates as they earn higher rates on new loans and pay low rates on deposits. Based in Memphis, First Horizon International is a holding company for First Tennessee Bank, offering savings, checking, credit cards, mortgages, investment banking, insurance, consumer and business loans, mutual funds and both discount and full-service brokerage services. Sales and earnings here have been exceptional. In the most recent quarter, net income soared 295% on a 94% increase in revenue. The bank enjoys a 44% operating margin and its management is earning a healthy 11% return on equity. Earnings have met or exceeded estimates in each of the last four quarters. Yet, shares of First Horizon have declined from a 52-week high of nearly $21 to less than $17 today. That has brought the stock down to around 1.2 times book value and just 10 times my earnings estimate for the next 12 months. This has created a super bargain. And the insiders know it. In mid-October, First Horizon International Director Scott Niswonger purchased 50,000 shares between $15.73 and $15.80 for a total investment of $788,000. He knows earnings are likely to hit $1.60 a share in 2019. And the dividend yield -- already attractive at around 3.00% -- is likely to rise, too. This is a fast-growing and undervalued bank that also is an attractive takeover candidate. Another great bank is PacWest Bancorp . Based in Beverly Hills, California, the bank holding company has 75 branches and over $24 billion in assets. The bank offers checking and savings accounts, credit cards, mortgages, consumer and business loans, wealth management services and venture capital lending. Business at PacWest Bancorp is robust. In the most recent quarter, earnings jumped 15% on an 11.2% increase in revenue. Management is earning a double-digit-percentage return on equity. And the bank's operating margin is a whopping 59%. The stock also yields an attractive (and growing) 5.8%. I estimate that PacWest Bancorp will earn $3.72 a share this year and well over $4 in 2019. And that may prove too conservative. Indeed, CEO Mark Wagner seems to think so. He just bought 21,000 shares at $39 a share, an investment of $816,000. (This was hardly his first trip to the well. He owns over a half million shares.) Director John Eggemeyer also bought 10,000 shares, too, for an investment of $412,000. In short, this is a high-quality bank in a favorable lending environment with excellent upside potential. Neil Macneale, 2-for-1 Stock Split Newsletter First Defiance Financial announced a 2-for-1 split last June and the stock was added to our model portfolio in August. First Defiance is a holding company for a community banking and insurance operation serving northern Ohio, southeast Michigan and northeast Indiana. This is a small-cap ($650 million) company incorporated in 1995 in Defiance, Ohio. Since then, and especially over the last 10 years, First Defiance has grown steadily and has become, in my opinion, a great example of the opportunity for success that exists in the small, locally focused community banking space. First Defiance has better valuation numbers now than when purchased in August, with a P/E of around 12.9 and a price-to-book of 1.43, both far lower than average for its peers. Its profit margin and balance sheet are very healthy. The current dividend yield is 2.50% after an increase for the latest quarter. The financial sector has suffered right along with the rest of the market during the October correction. However, at the moment, it seems on the fast track to recovery, so the current bargain pricing of First Defiance Financial looks like a buying opportunity. Richard Moroney, Dow Theory Forecasts For the September quarter, Providence, Rhode Island-based Citizens Financial Group earned $0.93 per share excluding special items, up 37% and $0.03 above the consensus. Total revenue advanced 8% to $1.56 billion, in line with analysts' expectations. Net interest income grew 8%. Total loans and leases increased 4%, total deposits 3%. Citizens Financial's net interest margin lags its industry average but is rising fast, reaching 3.19% last quarter versus 3.05% for the same time last year. Looking ahead to the December quarter, management expects loans and net interest margin to climb from September-quarter levels. The stock looks unusually cheap versus other banks in the S&P 1500 index. At 11 times trailing earnings, Citizens Financial trades at a 17% discount to its peer-group average. Management plans to raise its quarterly dividend 19% to $0.32 per share in the March quarter. That will mark the bank's sixth dividend hike in 12 quarters. With this latest dividend hike, the stock would yield around 3.4%, above its three-year average of 1.8% and peer-group average of 2.5%. Citizens Financial is a long-term buy. A regional bank that operates in 11 western states, Zions Bancorp -- based in Salt Lake City, Utah -- said per-share profits jumped 44% to $1.04 in the September quarter, comfortably ahead of the consensus of $0.96. Net interest margin expanded to 3.63% from 3.45%. Net interest income grew 8%, benefiting from higher interest rates and loan growth. Average loans grew 4%, with consumer loans up 7%, commercial loans up 4%, and commercial real estate loans down 1%. Average deposits increased 3%. Non-interest expense rose 2%, while deposit costs are creeping higher but remain manageable. Classified loans, defined as loans in danger of default, fell 37%, prompting Zions to release some of its reserves that had been earmarked to cover potential losses. The stock's trailing P/E ratio of around 13 lingers 18% below the average for S&P 1500 banks. Since 1994, Zions has averaged a 10% premium to its industry-group average. Looking out over the next 12 months, management continues to expect moderately higher net interest income. It has become more cautious on its loan outlook but still expects slight-to-moderate growth. The company also approved plans to repurchase up to $250 million of stocks in the December quarter. Zions, yielding around 2.6%, is a long-term buy. Hilary Kramer, Value Authority Valley National Bancorp , a regional bank based in Wayne, New Jersey, reported third-quarter EPS of $0.20, which was $0.02 below expectations and below the $0.21 realized in the second quarter of this year. The main culprit behind the disappointment was the company's investments to improve efficiency. However, this spending should pay off in the long run as the company expects to drive down its expense-to-revenue ratios, which currently are at 57.85% but should fall to 50% by 2020. Valley National's stock, like those of all regional banks, has taken a significant hit from concerns that interest margins will be hurt by the flattening yield curve, and that slowness in the housing market raises the risks of higher credit costs. At this point, a lot of potential bad news is priced into the stock, and future factors that potentially negatively impact earnings could be offset, in large part, by the expected improvement in the expense ratio. Buy Valley National. My new buy under price is $10.50, while my target is now $13. First Hawaiian Bancorp , based in Honolulu, reported in line a third-quarter 2018 EPS of $0.50 versus $0.42 a year ago. The improvement came strictly from a lower tax rate and a reduced share count, as results were hurt by loan prepayments and higher wages for employees. However, while loan growth was flat from the second quarter due to the prepayments, loan production was strong, and the company continues to look for 5% loan growth next year. With the stock now at less than 12 times forward earnings per share with a dividend yield of around 4.0%, the shares are very cheap, and I look for strong returns over the next year if the economy remains healthy. Buy First Hawaiian; my new buy under price is $26 and my target is now $30. Doug Gerlach, Investor Advisory Service East West Bancorp has a unique focus on Chinese-American communities. Most of the bank's 130 branches are in California where it makes 65%-75% of its loans depending on category. The Pasadena-based bank also has branches in Texas, New York, Washington, Georgia, Massachusetts and Nevada. It serves its customers by maintaining bilingual personnel in the branches and embedding itself in the communities where they live, work, and build businesses. East West also provides a banking connection to mainland China and Hong Kong, but this business represents a manageable 6% of its assets. As was the case with many banks, East West Bancorp suffered mightily in the recession. But the East West of today bears little resemblance to the East West of 2008-2009. It has a much more diversified balance sheet with land and construction loans down to 2% of the loan portfolio compared to 17% at the peak. There is no longer a mention of interest only or no doc mortgages. The average mortgage loan-to-value is about 50%. An impressive 28% of East West's total deposits do not pay interest. This helps it generate a strong 3.76% net interest margin (NIM). It is well insulated from rising interest rates as 92% of loans have some sort of variable interest rate; only 8% are fixed rate loans. While deposit costs may start rising faster than loan yields, East West's NIM outlook is among the most favorable we've seen. Its balance sheet is also relatively clean with borrowed money comprising less than 2% of total liabilities (the remaining 98% being deposits). CEO Dominic Ng has been an executive and director of East West Bancorp since 1992 and at age 59 could continue for many more years. He is involved in numerous business, cultural and philanthropic organizations in California. Averaging 14.1% over the past five years, East West Bancorp's return on equity is relatively high for a bank. This allows it to pay a dividend and still produce fairly attractive growth. We believe that it can grow earnings at least 10% annually. This could result in EPS as high as $6.59. A repeat of the average high P/E ratio of 17.1 could produce a stock price approaching $113. The potential total return exceeds 16% annually. The downside risk to its share price is 14% to $48, its recent low price from 2017. -- This commentary was originally published Nov. 8 on Real Money

8 Top Regional Bank Stocks

From Hawaii to Rhode Island and in between, investors should look to take advantage of lesser-known opportunities in local and regional bank names.

Columnist Conversation

Options Action Adds Bets to Bigger Pullback for Signet

Don't Count on Technicals to Curtail Signet's Crash

Sarepta is Sneaking Up

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.