When the Federal Reserve raised short-term interest rates by 0.25% last December, there was no shortage of investment professionals with opinions on which sectors the rate increase would ultimately benefit. One industry frequently cited was financials—banks, investment firms, insurance companies, etc. The thinking was this: rising rates (at least in the short-term) generally make interest margins expand, which adds to income. And secondly, rising rates usually mean the economic picture is improving, thus boosting loan growth—and income.
The first couple of months after the rate increase, financial stocks essentially went nowhere. But in the past few weeks, we’ve definitely seen improvement, with prices beginning to show momentum.
Regional Banks: Well-Capitalized, Good Dividends and Takeover Candidates
I’ve always loved bank stocks, perhaps because that’s where I began my career in the financial industry. I spent eight years in the banking business, in mortgage, consumer and commercial lending, operations, business development and running branch banks—at the regional bank level.
And when I began my career in the investment industry, it stood to reason that the companies I initially followed were financials—both at the regional and national level. I soon saw a very big difference in efficiency between the smaller and larger banks. Like any business, once growth begins to accelerate, efficiency often stumbles. The bank becomes too bulky, builds up too much overhead, and frequently, decisions are not made at local levels, which causes a new set of problems. Not so with most regional banks.
They are my favorite financial stocks for that reason, but also because they tend to be well-run in many respects, little cash cows, and often attract interest—and buyout offers—from the large banks who are seeking to expand in their markets. And when that happens, the bank being acquired often sees its stock rise to premium levels—a great selling point for its shareholders.
As well, regional banks generally pay a decent dividend—somewhere between 2% and 4% on average. And that helps boost your return, while you wait for the shares to rise.
Sound Returns with Cash Flow
Throughout my years writing investment newsletters, I’ve bought quite a few regional bank stocks. And most have treated my subscribers very well. Two that come immediately to mind were southern banks—National Commerce Financial and Colonial Bancgroup. The first stock gave us a gain of 48.84%, and the second, 50.47%. Pretty nice returns.
Both of those banks had all the features I love in regional banks—healthy market share, growing at double-digit rates, excellent loan portfolios with few charge-offs and good dividends.
We often recommend regional banks in our Wall Street’s Best publications. And now seems to be a good time to take a focused look at the sector. After all, we’re still seeing large banks get their hands—and pocketbooks—slapped due to their excesses during the pre-recession subprime lending debacle. Not so much the regional banks; most kept their hands—and balance sheets—clean, so as the economy and markets improve, they are starting from a stronger base with an abundance of capital and safe, income-producing loans.
Three Bank Stocks to Consider
I’ve just run some stock screens to look at regional banks across the nation and found six that looked interesting. I further narrowed them down, and came up with three that seem to have good potential.
Chemical Financial (CHFC) has the best technical ranking right now, and three analysts have recently upgraded its shares. TriCo Bancshares (TCBK) beat its estimates last quarter, and analysts have just increased their EPS forecasts for the company. Eagle Bancorp Montana (EBMT) beat estimates by two cents.
The majority of the analysts that cover the three banks currently have ‘Buy’ ratings on the stock.
They all look interesting, but you do need to do your research to see if they might be good candidates for your own portfolio. Two out of the three are very small-cap companies, so their shares will tend to be pretty volatile. Consequently, if you decide to purchase shares, buy judiciously and make sure you set stop-losses to protect your positions.
Happy investing,
Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks
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