Regional Banks Continue to Perform Well

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Regional banks, those that cater to a particular section of the nation as opposed to their bulge-bracket peers, might fly under the radar of investors interested in buying bank stocks. While nearly all the coverage of bank stocks from the financial media pertains to the banking giants of the United States, investors would be wise to dig deeper into smaller regional banks that are performing well and aren’t under nearly as much government scrutiny.

Compelling valuations and increasing shareholder rewards

One of the best regional banks to consider is KeyCorp (NYSE: KEY), which recently gave investors a 10% dividend increase. In addition, the bank intends to enact a share repurchasing program of up to $426 million.

On top of it all, KeyCorp is attractively valued. In addition to the company’s 2% dividend yield, new investors have an opportunity to snatch up shares of the bank which are trading at book value and for only 12 times trailing earnings.

Another regional bank rewarding shareholders is Fifth Third Bancorp (NASDAQ: FITB), which trades similarly to KeyCorp. Fifth Third exchanges hands for only 11 times trailing earnings and pays a solid 2.4% dividend yield at recent prices.

Fifth Third recently raised its dividend 10% to its current level, and will consider raising it again when the bank’s board of directors next meets in June. Furthermore, along with the recent dividend increase, Fifth Third approved a new share repurchase plan of up to 100 million shares.

Rapidly improving balance sheets and loan quality

Both KeyCorp and Fifth Third are excelling in cleaning up their balance sheets and placing themselves on solid financial footing to ensure further increasing shareholder rewards for many years to come.

KeyCorp's first-quarter earnings report contained great news across the board. Net interest income increased more than 5%, and average total loans increased 6.5% as compared to the same period last year.  Moreover, the company saw a massive decline in non-performing loans, as net loan charge-offs declined 51%, and now represent only 0.38% of the company's average total loans.

Not to be outdone, Fifth Third also certainly has the underlying financial strength to support its capital allocation strategy. The bank reported first-quarter earnings per share increased 2% from the same quarter in 2012. Moreover, the bank’s credit trends remain very favorable. Fifth Third’s net charge-offs decreased 40% in the first quarter, year over year.

A high-yield regional bank to consider

New York Community Bancorp (NYSE: NYCB) is a $6 billion regional bank that offers banking products and services in New York, New Jersey, Ohio, Florida, and Arizona. While the bank hasn’t rallied nearly to the extent of the broader market to begin 2013, the company had some good things to say in its first-quarter earnings report.

New York Community Bank’s diluted earnings of $0.27 per share were consistent with the year-ago quarter, but the bank’s loans held for investment grew at a 12% annualized rate in the three-month period. Moreover, the bank’s non-performing assets declined during the first quarter as well.

Importantly for investors, New York Community Bancorp declared the 37th consecutive quarterly dividend of $0.25 per share. At current prices, the bank’s $1 annualized dividend amounts to a yield exceeding 7%, which might be attractive for die-hard income investors.

Bright futures ahead for America's regional banks

Although these banks may be under the radar for most investors, they are currently operating profitably and offer dividends that compare favorably to the paltry yields of many of their large-cap banking peers.

While the nation’s bulge-bracket banks continue to struggle with massive legal fees and ever-increasing scrutiny from the government, regional banks have a lot to offer: namely, steadily improving fundamentals and increasing shareholder rewards.

Specifically, not only are KeyCorp and Fifth Third Bank providing solid current income, they're poised to continue their steady growth in the years ahead.  Both banks have seen great improvements in both loan growth and loan quality, and are likely to funnel their increasing profits through to shareholders in the form of compelling dividend increases and share buybacks for many years to come.

Many investors are scared about investing in big banking stocks after the crash, but the sector has one notable stand out. In a sea of mismanaged and dangerous peers, it stands out as The Only Big Bank Built To Last. You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.


Robert Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Fifth Third Bancorp and KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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