Regional Banks: Five Favorite Stocks for Growth & Income

Regional banks are rarely in the spotlight, but they have gotten increased attention lately from their role in helping disburse stimulus funds. Several MoneyShow.com contributors highlight their favorite regional banking buys, which cover markets from Florida to the Carolinas, Alabama to Texas and New York to California. Brett Owens, Contrarian Income Report Regional bank Synovus Financial , with branches and ATMs in Georgia, Alabama, Tennessee, South Carolina and Florida, is one of the best-run banks in America. Current CEO Kessel Stelling is no stranger to financial crises; he was a regional manager when the firm needed a $968 million TARP loan from Uncle Sam to stay in business after the last financial crisis. Kessel was promoted up several ranks to the top spot to save the day. In July 2013, Synovus repaid its TARP loan in full. By fourth-quarter 2011, the bank was profitable again. And in late 2014, the bank hiked its payout for the first time in seven years. It was the start of an incredible run for the firm's dividend, which has increased an amazing 230% over the last five years. In early 2019, investors were paying 2.2-times book value for shares of Synovus. (For banks, book value is approximately equal to the liquidation value of its holdings, total assets minus total debt. Banks usually trade for more than book value because their actual business is worth something, too!) Synovus had impressive business momentum driving its dividend growth, and last year's 2.2x book multiple reflects the enthusiasm that investors had about the company. In just a few manic months that has all been replaced with despair, with shares now trading hands at just 67% of book value. Buying a bank for less than book is as close to free money as it gets on Wall Street. The dividend is safe and the 10% raise that shareholders just received should stay. This means shares will pay a fat 5.7% in the year ahead. The firm is pausing its share repurchases to shore up its tier one capital ratio (CET1) and provision for pandemic-related losses. At two-thirds book value, Synovus offers plenty of buffer to protect our investment here, and also provide us with big upside potential. John Dobosz, Forbes Dividend Investor Wayne, N.J.-based Valley National Bancorp -- a new addition to our model portfolio -- is a bank holding company whose principal subsidiary is Valley National Bank, a regional bank with approximately $38 billion in assets and branch locations in New Jersey, New York, Florida and Alabama. In December, Valley completed its acquisition of Oritani Financial Corp., which had $4.3 billion in assets, $3.4 billion in net loans, $2.9 billion in deposits, and 26 branches. Valley offers mortgage loans, automobile loans and home equity loans, as well as wealth management services including trust, asset management, insurance services, and asset-based lending. Consumer and commercial lending increased 10% year over year in the fourth quarter of 2019, and the company forecasts 6% to 8% growth this year, with net interest income up 13% to 16%. Insiders including the CEO bought shares last month, and a company director purchased $2.45 million worth of stock at $7.54 per share. Doug Gerlach, SmallCap Informer We have been covering South State Corporation since July 2015, and while the bank has made substantial gains in revenues and earnings and increased its quality metrics since then, the stock's price has remained stubbornly low. With the recent market pullback in place, and a major merger set to complete in 2020, the bank's current yield and growth prospects make it worth another look. Founded in 1933, South State Corporation is the largest bank holding company headquartered in South Carolina, and following the merger with CenterState Bank expected to close in 2020 will be the eighth largest independent bank headquartered in the Southeast. Much of South State's growth has come from acquisitions, but organic growth has also been robust, and we expect this growth to continue. Analysts are looking for 12% annual EPS growth over the next few years, fueled by the continually improving Southern economy and rising interest rates. Both interest and non-interest income will likely generate healthy growth, with continuing improvements in operational efficiency driving EPS growth faster than sales. We are targeting minimal average growth of EPS and revenues of 10% a year through 2024. We expect 2020 to be a down year, but recovery should come relatively quickly for South State. Based on EPS in five years of $7.78 and a P/E ratio of 15.0, a future high price of $116 is indicated. Our projected low price of $48 is calculated using a low P/E of 10 multiplied by trailing 12-month EPS of $4.83. The lowest the stock reached in 2020 was $49, so this price is a realistic low price. From recent prices, the reward- to-risk ratio is 7.1 to 1, with a projected 17.4% annualized return (including an average yield of 2.0%. Jason Clark, The Prudent Speculator New York Community Bancorp released financial results that beat analyst expectations ($0.20 vs $0.18). Shares were up 9% for the week and have outperformed the KBW banking index by nearly 26% year-to-date. Deposits grew at an annualized rate of 4%, while net charge-offs were 0.02% of average loans, with a 20% decrease in the bank's non-performing assets. Management said that roughly 10% of its multi-family loan portfolio had entered 4-6-month deferral agreements as an accommodation amid the current health pandemic. Like much of the country, close to 100% of office employees are working remotely, as in-store branches are temporarily closed. While there are definitely operating headwinds given the turmoil in NYC, we like that NYCB has a solid balance sheet and is an experienced player in its market. Long-term, we believe there will be ample opportunity for NYCB to grow its balance sheet, redeploy excess cash into higher yielding assets and continue to tighten expense controls to drive EPS growth. Shares yield around 6.3%. Our target price is presently $14. Ben Reynolds, Sure Dividend Bank OZK , previously Bank of the Ozarks, is a regional bank that offers services such as checking, business banking, commercial loans, and mortgages to its customers in Arkansas, Florida, North Carolina, Texas, Alabama, South Carolina, New York and California. The company has a market cap of approximately $2.8 billion. On April 23, Bank OZK reported 2020 first-quarter financial results. For the quarter, total interest income declined 7.9% year-over-year. Diluted earnings-per-share declined 89.5% to $0.09 per share, as Bank OZK set aside $118 million as a provision for credit losses. On a positive note, the company also increased its quarterly dividend by 3.8% and has now increased its dividend for 39 quarters in a row. On a year-over-year basis, the dividend announcement represents an impressive 17% increase. Bank OZK not only remained profitable during the Great Recession but managed to grow its earnings as well. This performance speaks to the bank's strong management. In fact, according to Bank OZK it has achieved record net income in 18 of the 22 years it has been a public company. It has also achieved 40 consecutive years of positive net income, without generating a loss in any year. This is a particularly impressive accomplishment, given the Great Recession of 2007-2009 resulted in massive losses for many big U.S. banks. Therefore, we believe it will withstand this economic downturn, and potentially be an acquirer of weaker firms. Estimates for 2020 have come down substantially given the unique and unfortunate economic situation unfolding due to Covid-19. Still, the stock appears to be significantly undervalued. Based on expected EPS of $3.40 for 2020, shares are valued at just 6.8 times earnings. Should the stock revert to the fair value multiple of 10 over the next five years, shareholders would see an 8.0% positive impact on annual returns. Combining this with our estimate of 5% annual earnings growth and a recent 4.7% dividend yield, we see total returns of 17.7% annually over the next five years.

Regional Banks: Five Favorite Stocks for Growth & Income

From Florida to the Carolinas, Alabama to Texas and New York to California, these names fly under the radar.

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