A Trio of West Coast Regional Banks

12/16/2015 7:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Small-cap expert Richard Moroney has issued buy recommendations in three regional banks in the California area. Here, the editor of Upside explains why they warrant buy ratings.

None of the five analysts covering Banc of California (BANC) rate the stock better than a Hold.

Yet its shares have rallied 19% since the bank reported September-quarter results on October 29.

June-quarter results had raised concerns about swelling expenses. But the bank got a better grip on expenses last quarter as profit margins expanded.

Its total deposit base has also surged 50% over the past year. By growing its commercial bank, the company has reduced its reliance on the cyclical mortgage business, now generating just 22% of pretax income.

The consensus projects 13% higher per-share profits in 2016 and analyst estimates have risen in the past 30 days. Banc of California, yielding 3.2%, is a Best Buy.

Pacific Continental (PCBK) is a top pick among regionals; with $1.9 billion in assets, Pacific operates 15 branches in Oregon and Washington.

Among 393 regional banks in our research universe Pacific stands near the top, with an Overall score of 94 and impressive ranks for financial strength and performance.

Solid loan growth is driving earnings. Consensus estimates project per-share profits will climb 5% to $0.96 for full-year 2015. But December-quarter earnings are expected to surge 27% to $0.28.

For 2016, the consensus calls for per-share earnings of $1.15, up 20%. Revenue should climb 10%. Shares trade 22% below their five-year average P/E.

Should Pacific return to the historical norm, the stock would trade at $24 using the 2016 earnings estimate.

Pacific Continental, with a 2016 P/E—11% below the median for S&P 1500 regional banks—is being initiated as a buy.

TriCo Bancshares (TCBK) shares have gained 19% so far this year. In our view, the fast-growing California bank has room to run, reflecting a reasonable valuation and earnings momentum fueled by acquisitions and solid loan growth.

September-quarter earnings per share rose 10% to $0.55, above the consensus of $0.46. Revenue jumped 41% and also topped expectations.

Consensus estimates project robust growth this year, with per-share earnings up 30% on sharply higher sales, partly aided by acquisitions.

The bank has considerable appeal, as growth should continue if the housing market remains on track and short-term interest rates inch higher.

For 2016, the consensus calls for profit growth of 6%, a conservative figure in our view. TriCo is being upgraded to Best Buy.

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