A Recent Rally Has Soaked Up South State Bank's Undervaluation As It Repositions

I was a little surprised to see South State Bank (SSB) outperform so well since my last article – up more than 25%, beating regional banks by about 5% overall and a more direct set of peers by about 10%. While I thought the shares were undervalued on a longer-term basis, the Street isn’t famous for taking a longer-term perspective, particularly when near-term earnings growth potential is more limited by the bank’s ongoing restructuring efforts. Still, with many large regional banks announcing plans to expand into the U.S. Southeast, and the bank close to the end of that repositioning process, I suspect this outperformance could be due in part to expectations that a regional bank may look to M&A to accelerate its expansion plans.

I do think South State could make an attractive buyout candidate; while the loan-to-deposit rate isn’t perfect, the bank has an attractive core deposit franchise in attractive growth markets like Charleston, SC, and Charlotte and Raleigh, NC. While a bank like U.S. Bancorp (USB) could offer as much as a 20% premium in a cash deal and still see some accretion, South State’s valuation isn’t exactly cheap on a stand-alone basis. Much as I like the long-term story at South State, with a lot of smaller banks offering 10%-20%-plus discounts to fair value today, it’s hard to call this a must-buy at this price.

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A Recent Rally Has Soaked Up South State Bank's Undervaluation As It Repositions

BB&T Basically On Track Ahead Of Its Game-Changing Merger

Despite the significant long-term potential benefits of BB&T’s (BBT) merger of equals with SunTrust (STI), the market is still generally against M&A in the banking sector, and BB&T shares have lagged regional bank indices a bit since the deal announcement (about 300bp of underperformance). I continue to believe this is a strong merger, though, and I think BB&T shares remain one of the more interesting values among banks in its weight class.

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BB&T Basically On Track Ahead Of Its Game-Changing Merger

BB&T Shifts Gears In A Huge Way, Announcing A Value-Creating Mega-Merger With SunTrust

For a company that had repeatedly said it wasn’t all that interested in whole bank M&A, BB&T (BBT) shifted direction in the biggest way possible, announcing on Thursday that it had reached an agreement with SunTrust (STI) to combine in a true merger of equals that will create the sixth-largest bank in the U.S. and a major force in the Southeast.

There are heightened execution risks to this deal, but I basically like it. Cost savings should exceed initial targets, and the combined company will not only see significant synergy in areas like commercial banking and fee-generating operations (like insurance and investment banking), but also be better-able to compete with far larger banks like Bank of America (BAC), Wells Fargo (WFC), and JPMorgan (JPM) when it comes to investing in the technology and digital services that seem likely to drive the next wave of banking.

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BB&T Shifts Gears In A Huge Way, Announcing A Value-Creating Mega-Merger With SunTrust

South State Bank Still Grinding Through Some Repositioning

“Ground and pound” may be effective, even necessary, as a strategy, but it’s not a lot of fun to watch, and I believe the sluggish near-term results (and expectations) for South State Bank (SSB) continue to explain this bank’s relative underperformance to broader bank indices, as well as regional peers/rivals like BB&T (BBT), Bank of America (BAC), First Citizens (FCNCA), SunTrust (STI), and Wells Fargo (WFC). Although loan growth has perked up a bit and deposit costs remain low, real earnings acceleration is probably more of a 2H’19 event and the shares aren’t comparatively all that cheap now.

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South State Bank Still Grinding Through Some Repositioning

CenterState Is An Attractive 'Strong Getting Stronger' Story

This isn’t a great point in the banking cycle, as rate hike benefits are tapering off, the economy seems to be slowing, and credit costs are likely to increase substantially from here. That said, if you are still interested and willing to invest in banks, I think Florida’s CenterState (CSFL) is a name to consider. It’s a higher-risk, higher-growth story than ideas like SunTrust (STI), PNC (PNC), or BB&T (BBT), but management has generated some impressive results with a coherent, disciplined M&A and organic growth plan. Moreover, I think CenterState could be a “heads you win, tails you win” situation with respect to M&A – I believe CenterState would be an attractive target to many super-regionals, but they don’t need to get bought for this idea to work.

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CenterState Is An Attractive 'Strong Getting Stronger' Story

SunTrust Offering A Strong Story Going Into 2019

Both SunTrust (STI) and BB&T Corp. (BBT) seem to have a lot working for them going into 2019, including improving cost leverage from digital investments, stronger-than-average loan growth in relatively attractive regional markets, and strong deposit franchises anchored by long-term leadership in those same markets. And probably not so surprisingly, they’re both priced for things going relatively well.

With what appears to be somewhat limited capacity to fund attractively priced loan growth and the likelihood of higher provisioning expense in the coming years, SunTrust’s earnings growth potential looks lackluster (in the low single digits), but the company pays a good dividend, could have some upside/outperformance potential in the numbers, and the shares are still undervalued, even if not so much so as other Southeast banks like Regions Financial Corp. (RF), First Horizon National Corp. (FHN), or Synovus Financial Corp. (SNV).

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SunTrust Offering A Strong Story Going Into 2019

Bay Banks - Interesting Opportunity, But A Lot Of Work To Do

Investors have hundreds of bank stocks to choose from, and within that pool you can find a story to fit almost any preferred investment strategy. In the case of tiny Bay Banks of Virginia (OTCQB:BAYK), the opportunity here revolves around leveraging the Virginia Commonwealth acquisition to gain more low-cost deposits and gain share in the fragmented Richmond and Virginia Beach markets, while also pivoting towards a more commercial-oriented lending mix and building up the fee-generating treasury and asset management operations.

Although these shares have sold off since second quarter earnings, they’re still not all that cheap on a standalone or peer basis. I like the opportunity Bay Banks has to generate above-average growth from improving its deposit composition, gaining loan share in underserved markets, and leveraging its enhanced scale, but not enough to stretch for this stock today.

Readers should also note that Bay Banks has less than ideal liquidity, though the company is pursuing a NASDAQ listing, and that should ultimately improve liquidity.

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Bay Banks - Interesting Opportunity, But A Lot Of Work To Do

Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

I had thought BB&T (BBT) had been making some progress in resolving at least some of the issues that had led the bank to underperform peers like PNC (PNC), SunTrust (STI), Fifth Third (FITB), and Regions (RF) in recent years. One quarter doesn’t really change a story, but BB&T’s lackluster results and guidance do suggest that the turnaround isn’t happening quite as fast or smoothly as the bulls might hope.

While the sell-off after earnings was probably at least partly due to the lower guidance, I believe the market also didn’t like the indications that large bank M&A was likely coming back onto the near-term agenda once the bank is fully clear of its consent orders. Selling BB&T because you don’t like M&A seems pretty silly given that M&A has always been core to this company (and management has never backed away from that as an ongoing long-term driver), but then that’s Wall Street for you.

I can’t say that BB&T is all that cheap today, and I’m a little troubled that BB&T seems to be unable to generate the sort of growth initiatives that peers like PNC have put into place. Although the shares are somewhat undervalued on the assumption of mid-single-digit long-term earnings growth, I won’t make a forceful argument that investors should choose this stock over PNC, U.S. Bancorp (USB) or other options in the banking sector.

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Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

Renewed Operating Leverage From U.S. Bancorp Nice To See

Long one of the best-run banks out there, U.S. Bancorp (USB) has an interesting long-term challenge – as the performance of the “pack” continues to improve, does U.S. Bancorp still have levers to pull that can continue to allow it to stand out? This is, after all, a conservatively-run, very efficient, not especially asset-sensitive operation that already has sizable (and lucrative) fee-generating, non-banking businesses.

I thought U.S. Bancorp's shares were pretty richly valued at the start of the year, and the year-to-date performance, though positive, has lagged the S&P 500 and rival banks like Bank of America (BAC), PNC (PNC), JPMorgan (JPM), Citigroup (C), and SunTrust (STI). I expect profitability to improve next year, as the AML/BSA issue resolves, and asset sensitivity has been improving, but the shares still aren’t cheap. I wouldn’t suggest that long-term investors need to consider bailing out, but I do think the total return prospects are relatively modest.

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Renewed Operating Leverage From U.S. Bancorp Nice To See

Capital City Bank Needs Scale To Leverage A Good Deposit Franchise

As a bank focused largely on northern Florida, Capital City Bank Group (NASDAQ:CCBG) has had a tough go of it. The serious credit losses and recession that followed the housing bubble led to a significant contraction in the balance sheet and the firm's largely rural, largely retail branch network has established a high-cost base that has pushed returns on equity into the low single-digits.

There are some intriguing opportunities here. The bank has the capital to do some M&A and its core north Florida markets seem to be poised for above-average growth. If management can find the way to better-leverage its branch network and reduce operating costs, the profit leverage would be substantial. Likewise, with the bank having made meaningful progress on credit clean-up, larger banks could find the combination of low-cost deposits and elevated expenses very appealing as a takeover target. Unfortunately, the stock has shot up almost a third since the election, and it is difficult to see the obvious upside now.

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Capital City Bank Needs Scale To Leverage A Good Deposit Franchise

Seeking Alpha: Regions Financial Has Capital To Spare, But What About Quality?

The fact that the shares of Regions Financial (NYSE:RF) are only up about 15% since mid-2011 doesn't tell you everything you need to know about this Southeastern regional bank, but its relative performance next to the likes of BB&T (NYSE:BBT), SunTrust (NYSE:STI), and Wells Fargo (NYSE:WFC) does underscore some of the issues of this asset-sensitive bank over the past few years.

Although management has outlined a credible plan to reduce expenses and has ample capital to deploy, I'm still concerned about the underlying credit quality of the bank and its ability to earn its cost of equity. On the other hand, those concerns appear to be more than accounted for by the share price. If the U.S. economy stays healthy enough to support higher rates and the economy in the Southeastern U.S. stays healthy enough to support Regions' loan book, the rewards here could be significant when compared to what most other banking stocks are offering in terms of prospective returns.

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Regions Financial Has Capital To Spare, But What About Quality?

Seeking Alpha: Reality Has (Slowly) Caught Up With First Horizon Shares

I liked First Horizon (NYSE:FHN) about three and a half years ago and again a year ago, and though the stock has lagged Regions Financial (NYSE:RF) and SunTrust (NYSE:STI) since October of 2011, it has been a relative outperformer over the last year. First Horizon continues to make credible progress on running off its non-strategic loan book and reducing operating expenses while also slowly moving back to a growth footing.

The odds may still favor First Horizon becoming an acquisition target in a few years, but in the here and now, the company still has significant scope to improve its efficiency ratio and perhaps take advantage of higher rates. I think First Horizon is more or less fairly valued now, but I still see opportunities for the bank to outperform and start earning a bigger benefit of the doubt in analyst models.

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Reality Has (Slowly) Caught Up With First Horizon Shares

Seeking Alpha: First Horizon Still Muddling, But Still Holding Upside Too

It has been quite a while since I've written about First Horizon (FHN), but this Tennessee-based regional bank continues to operate under a cloud. The market remains concerned about the impact of the company running off its non-strategic loan book and its as-of-yet-unresolved mortgage repurchase liabilities. With that, the shares have nearly doubled since late 2011, but still significantly lagged regional peers/comps like Regions (RF) and SunTrust (STI).

There aren't a lot of clear bargains left in the banking sector, but I believe First Horizon could be an outperformer as it continues to clean up its business. Not only does First Horizon have additional cost-cutting leverage, but the bank's trading operations and core lending are still in doldrums that I do not believe will persist indefinitely. Moreover, I think the quality of the company's past mortgage loans will serve it well in repurchase settlements. All told, while the performance over the next year is not likely to be scintillating, I'll argue that fair value is around $13 today on the basis of the company's long-term profitability potentia
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First Horizon Still Muddling, But Still Holding Upside Too

Seeking Alpha: Facing Up To A Bad Call On Synovus

Admitting mistakes is never fun, but if you're going to write about stocks in public fora it is a part of the job description. Four months ago, I thought Synovus (SNV) shares had gone far enough, as I saw the probable lack of revenue and operating profit growth, coupled with a potentially slower credit recovery and the need to pay back TARP as limiting factors. Since then, the shares are up 19%. Now, in fairness to myself, the stocks I liked better at the time - including BB&T (BBT) and Bank of America (BAC) - haven't exactly been embarrassments (up 14% and 21%, respectively), but Synovus' 19% gain is definitely more than I thought was likely to come.

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Facing Up To A Bad Call On Synovus

Seeking Alpha: Bank Of The Ozarks Growing Gangbusters, But Not At All Cheap

For as long as I've followed Arkansas's Bank of the Ozarks (OZRK) (which is quite a few years now), I've been very impressed with this company's aggressive but extremely focused strategy. While it's true that having a loan book tilted heavily towards commercial real estate (CRE) and construction lending is risky, it's sort of like walking a high-wire - it's risky, but the risk doesn't matter if you don't fall off, and Bank of the Ozarks has a system in place that has kept the falls to a minimum.

As much as I like this bank, it rarely gets very cheap and this is not one of those times. I had hoped that investors might misread this second quarter earnings report and sell the shares, but it appears that that's not happening. In any case, while I wouldn't sell these shares if I owned them, I need at least a 10% pullback before I could be enticed to think about buying.

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Bank Of The Ozarks Growing Gangbusters, But Not At All Cheap

Seeking Alpha: Eagle Bancorp Could Be A Long-Term Love Story

This may be the early stages of a banking love story, or at least a crush, and it goes to show that sometimes the process of digging up information and research on a company can lead you to an even better idea. That seems to be case with Eagle Bancorp (EGBN), a stock which I've followed intermittently, but didn't really dig into until after writing an article on regional peer Sandy Spring Bancorp (SASR).

I walked away from Sandy Spring thinking it was an okay idea, and the stock is up about 15% since then. While Eagle Bancorp is up less (about 11%) over the same stretch, this may be the stock to watch in the metro D.C. area. Management here runs a pretty tight ship, with a clear focus on organic share growth against regional rivals and disciplined underwriting. Even though the stock is near a new 52-week high as of this writing, my analysis suggests that this stock may be undervalued by 10% to 30%.

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Eagle Bancorp Could Be A Long-Term Love Story

Seeking Alpha: CenterState Bank An Odd Mix Of Performance Potential And Iffy Valuation

Bank stock investing is not for the investor who likes things neat, tidy, and easy. Although the basic operation of banking is simple in theory (borrow at one rate, lend at a higher rate, and what's left over after expenses is profit), the accounting rules muddy the waters considerably.

Even among those banks with relatively simpler operations, community banks that don't engage in extensive trading, leasing, or multi-state operations, you can find curious disconnects between value and operations. Florida's CenterState Banks (NASDAQ: CSFL) seems to be a case in point. While I think this bank offers good leverage to a recovery in Florida and has the potential to outperform with its covered loans, the company's high operating expenses and historical returns on assets and equity suggest that much of that value is already in the stock.

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CenterState Bank An Odd Mix Of Performance Potential And Iffy Valuation

Investopedia: Challenging Conditions And Conservatism Keeping U.S. Bancorp In Bargain Territory

Larger banks, particularly well-run companies like U.S. Bancorp (NYSE:USB), haven't been at the top of most investors' buy lists recently. While U.S. Bancorp shares are up about 10% from when I last wrote about the company (after first quarter earnings), there seems to be a general sense of “why bother?” on the Street, given weak loan demand, aggressive pricing, and limited scope for earnings leverage. While U.S. Bancorp's conservative ways will likely limit aggressive capital deployment and the bank is pretty economically-sensitive, even near a 52-week high these shares appear to offer solid long-term potential.

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Investopedia: Simpler Looks Better For First Horizon

It was all too common during the bubble years that began almost a decade ago to see quality community or regional banks de-prioritize their traditional businesses to reach for the fool’s gold offered by riskier lending. Very few of those stories had happy endings, and many ended like First Horizon National (NYSE:FHN), where the bank saw significant lending losses, putbacks, and the need to raise fresh capital to stay in business.

Now things are settling down and getting back closer to normal. First Horizon has retrenched around its core operations and is looking to reduce its non-strategic lending activity, while also looking to make the most of its sizable market share in Tennessee. The only real drawback to the story, aside from the risk of higher putbacks, is the fact that valuation already anticipates quite a lot of improvement.

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Seeking Alpha: Going It Alone Could Be A Tough Road For Synovus Investors

If I'm brutally honest, following bank stocks on a week to week basis is a challenging (and not particularly exciting) pursuit. While we all got a vivid lesson in just how badly wrong these business models can go, even on a quarter to quarter basis we're pretty much talking about submarine races - there's a lot going on below the surface, but you'll never see it.

That is relevant to Synovus (SNV) as these shares have enjoyed quite a run - up 35% over the past year, about 66% from the summer 2012 lows, and near a 52-week high on optimism about the prospects for improved performance, a TARP repayment, and a possible acquisition. That long-held expectation of a deal could actually be the biggest risk factor for these shares today. While the company could indeed hold value for an acquirer, it's much harder to find an attractive target price on its own operating credentials and a failure to see a bid materialize after the TARP repayment could set shareholders up for some depressing performance.

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Going It Alone Could Be A Tough Road For Synovus Investors