2 Regional Banks with Growing Potential

Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the financial nation lost its bearings in 2007, many citizens turned to regional, local-owned institutions.  Basically, customers needed to trust their banking institutions. As a consequence, financial institutions like Pnc Financial Services (NYSE: PNC), Bok Financial (NASDAQ: BOKF), and Texas Capital Bancshares (NASDAQ: TCBI) experienced a pop in business.

Regional going national

Pnc is the largest of the three banks. It operates in 19 states and has 2,800 branches, with $300 billion in assets and $210 billion in deposits. Revenue has increased in all 5 of its financial services. And, net income is reported to have increased 23% in the first quarter.

The Great Recession had a positive impact on Pnc, as it helped the bank to double in size. Also, geographical expansion through cheap acquisitions, has allowed it to exponentially increase its customer base. Moreover, its client base has been widening considerably among all segments, seeing the biggest growth on the asset management side.

Financially, Pnc is in a better position than competitors since revenue has been rising since 2009. Also, assets have slowly, but steadily, risen since the same year. On the other side, cash flow decreased due to expansion and capital reinvestment but has been on an upward trend since 2010.

Lastly, management has proved to be intelligent about expansion as the balance sheet has remained spotless. Also, shareholders have been continuously rewarded with rising dividends.  The stock trades at around a 40% premium to book value, but given its management and its future prospects, it's worth a look.

Commercial banker

Geographic expansion can not only be a desired objective but also an obstacle. Bok has successfully expanded, and has recently been upgraded. The bank was born in Oklahoma, and today holds entities in the Southwest, Midwest, and Rocky Mountains, diversifying risks and transforming itself into a strong market competitor.

Bok generates most of its revenue from commercial banking, allowing the institution to expand through acquisitions at neighboring states and new banks. Part of its success has to do with local sentiment which generates repeat business and a great deal of loyalty and trust.

On the financial side, the company has gotten rid of non-performing assets and credit losses. Additionally, management proved itself when it rejected the Treasury’s Capital Repurchase Program, and then performed above regulatory standards. Capitalization, liquidity, and diversification have allowed the bank to obtain a rating upgrade, while the economy slowly recovers.

It also offers a 2.43% dividend yield –with special dividends, which helps to make Bok a good opportunity for investors. Analysts see Bok as well prepared to deal with future change in the banking industry. The low part of the cycle is about to end and now is the right time to look into this solid, locally focused, bank.

New bank, same management, old risks

Texas Capital has recently been able to perform above its peers, giving investors an opportunity to profit. Experienced management and wise underwriting, aided by a recovering market, allowed it to catch a growing market share.

Southern hospitality has been the most important value proposed by Texas Capital. The bank has been able to cash in on local businesses and high-value customers.  Above average growth is driven by increasing loans, deposits, and a low desertion rate.  And it's clear this strategy is working as Texas Capital has been enjoying higher revenue and net income.

But Texas Capital lacks the track record of its peers.  Additionally, as the US economy as a whole recovers, it may find it more difficult to compete.  Also, the bank is experiencing higher operating costs that may cut into revenue.  Despite its top level success, Texas Capital is currently cash flow negative. 

Bottom line

Due to strong dividend yields and solid management PNC and Bok Financial are very intriguing investment options.  Texas Capital is currently burning through cash and doesn't have a lengthy track record of outperformance, so you may want to wait.  Overall, you may find an investment in PNC or Bok is a good way to get some regional banking exposure.

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Victor Selva has no position in any stocks mentioned. The Motley Fool owns shares of PNC Financial Services. 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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