by Staff Reports Money Morning, Money Morning
Special Report from Money Morning
The almost-continuous stream of good news about a COVID-19 vaccine finally revived community and regional bank stocks in November. The SPDR S&P Regional Banking ETF (NYSE Arca: KRE) bounced back more than 25% in November after being down more than 50% at its lowest point.
The index is still down 15% year to date, but it has been an impressive recovery. It may continue to go in that direction, which will fuel some of the best bank stocks we’re covering today.
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The widespread distribution of a vaccine and improving prospects for at least some form of stimulus from Congress means the worst-case scenario for banks is off the table.
The worst case was potentially pretty dire, with widespread mortgage defaults and the commercial real estate industry’s crumbling. That combination would have made 2008 look like a picnic.
Instead, we are now looking at a world where things can get back to normal. The result of that is banks that will continue to be in great shape.
What most investors have overlooked when it comes to banks is that the banking industry had more capital than ever before the pandemic tried to shut down the world.
Credit conditions were also as good as they had ever been, with minuscule loan losses at most banks.
It would have taken the worst-case scenario to harm most of the U.S. banking industry permanently. That didn’t happen, so the picture will get brighter by the day for bank stocks.
Some will shine brighter than others. Here’s our first, a profit machine….
This Bank Stock Had Record Profits in 2020
ESSA Bancorp Inc. (NASDAQ: ESSA) of Stroudsburg, Pa., has seen record levels of net income in 2020.
ESSA was a stellar producer of Payroll Protection Program loans with 637 loans for $75.6 million originated through June 30, 2020.
Many of those were for new customers whose bigger banks could not process the loans quickly enough. Many of those customers will transfer a significant portion of their business to ESSA Bancorp. These new business customers should help drive continued growth for the bank.
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ESSA Bancorp has total assets of $2.0 billion and has 22 community offices throughout the Greater Pocono, Lehigh Valley, Scranton-Wilkes-Barre, and suburban Philadelphia areas.
Most banks have been told by the FDIC and other regulatory bodies to cut back on stock buybacks in 2020 to preserve capital. ESSA Bancorp is so strong that the regulators recently approved a 500,000-share stock buyback program.
That’s about 5% of the bank, and that type of buying power should help push the stock price higher as we head into 2021.
ESSA Bancorp shares still trade at a discount to book value. Buying back shares to this level should help push earnings higher, which will also help the stock price.
Our next bank stock pays a sweet dividend in addition to growth potential.
Bank Stock Pays More Than 5%
Pittsburgh-based F.N.B. Corp. (NYSE: FNB) is a larger regional bank with over 360 branches and $37.4 billion. The bank was founded in 1864 in Pittsburgh and now has branches in Pennsylvania, Ohio, Maryland, West Virginia, North Carolina, and South Carolina.
This is a well-run bank trading at a very low price/earnings ratio right now. F.N.B. shares fetch just 10 times earnings despite excellent results so far in 2020.
It is not setting records like some smaller, nimbler banks, but it’s seeing double-digit loan and deposit growth this year. It is also earning an operating return on tangible equity of 14%, which is impressive for a bank its size.
The stock needs to rise by about 50% to regain its pre-pandemic highs. While you are waiting, you will be very well paid, as the current dividend yield is 5.2% for this stock.
If you’re looking for even more growth, this next one is probably the best bank stock to buy now…
The Best Bank Stock Today
Home Bancshares Inc. (NASDAQ: HOMB) of Conway, Arkansas, is one of the best-run banks in the industry. The story of how CEO Johnny Allison and his partner Robert “Bunny” Adcock took a $20 million bank in a small town in Arkansas and turned it into an $11 billion regional powerhouse should be taught in business school.
Allison is fond of saying he is not a banker but a businessman who happens to be in banking.
Allison and his team run Home Bancshares like a private equity fund in many ways.
They buy underperforming banks and fix them up to perform at the organization’s high level.
It is working.
Home Bancshares has had back-to-back record quarters even as the pandemic raged throughout the United States. Credit conditions remain healthy as they have been careful about who they lent money to even before the crisis began.
The stock is priced at just 13 times forward earnings, so a combination of expansion and continued profit growth could send these shares skyrocketing in 2021.
If you only buy one bank stock in your lifetime, it should probably be this one.
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