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The financial sector is going through a rough period. On March 10^th, Silicon Valley Bank collapsed, as its depositors lost faith in the bank after it reported losses of $1.8 billion on its bonds due to high-interest rates. The collapse of that bank caused a loss of confidence in the global financial system. As a result, Credit Suisse collapsed and was rescued by UBS.

Due to this turmoil, U.S. regional banks, which are more vulnerable to a potential bank run than large banks, have incurred a fierce sell-off. Even the stocks of banks with solid business fundamentals have been sold off to the extreme. As a result, rare investing opportunities have shown up lately. In this article, we will discuss the prospects of three deeply undervalued regional banks, namely Bank OZK (OZK), M&T Bank (MTB), and Community Trust Bancorp (CTBI). These stocks are likely to offer excessive returns to their shareholders as soon as the ongoing downturn passes.
 

Bank OZK

Bank OZK, previously known as Bank of the Ozarks, is a regional bank that offers services such as checking, business banking, commercial loans, and mortgages to its customers in Arkansas, Florida, North Carolina, Texas, Alabama, South Carolina, New York, and California. Bank OZK is the largest bank in its home state of Arkansas.

The key competitive advantage of Bank OZK is its competent management. The company has proved exceptionally resilient to recessions thanks to its rock-solid business execution, which results in superior asset quality. In the Great Recession, the worst financial crisis of the last 90 years, most banks saw their earnings collapse and cut their dividends. On the contrary, Bank OZK remained highly profitable and continued raising its dividend.

Bank OZK has grown its earnings per share almost every year since the Great Recession. During the last decade, the company has grown its earnings per share by 16% per year on average. The impressive growth has resulted, not only from organic growth but also from high-return acquisitions.

Thanks to its solid performance record, Bank OZK has raised its dividend for 27 consecutive years. It has also raised its dividend in every single quarter since 2010. This is an impressive dividend growth streak for a bank. Due to a 27% decline in its stock price in the last two months, Bank OZK is currently offering a nearly 10-year high dividend yield, with a rock-solid payout ratio of 25%. Moreover, the stock is trading at a 10-year low price-to-earnings ratio of 6.5.

Thanks to its resilient business model, Bank OZK can easily endure the ongoing downturn of the financial sector. Whenever the turmoil passes, the stock is likely to highly reward patient investors, who can ignore the negative market sentiment and remain focused on the solid business fundamentals of this high-quality bank.
 

M&T Bank

M&T Bank is a regional bank with branches in New York, Maryland, Pennsylvania, and West Virginia. It has more than 800 branches spread out among these four states. Almost half of the loan book of the bank is composed of commercial real estate (47% of the portfolio), with the remainder of the loans consisting of consumer real estate (8%), commercial loans (29%), and consumer loans (16%).

M&T Bank incurred a 43% plunge in its earnings per share in the Great Recession, but it recovered swiftly in the ensuing years. Since 2009, there have been only two other years (2014, 2020) in which the company did not grow its earnings. This consistent performance is a testament to the disciplined business model of the bank, which is also confirmed by the superior record of the bank with respect to credit losses.

M&T Bank has grown its earnings per share at a 7% average annual rate over the last decade. Moreover, due to its recent sell-off, the stock is currently offering a 10-year high dividend yield of 4.3%. M&T Bank has a healthy payout ratio of 26% and a reliable business model. As a result, its dividend has a wide margin of safety.

In addition, the stock has become markedly cheap lately. To be sure, M&T Bank is trading at a 10-year low price-to-earnings ratio of 6.7, which is less than half of the 10-year average of 13.8 of the stock. Thanks to its disciplined management, M&T Bank is likely to endure the ongoing crisis without any problem and thus its stock will recover strongly whenever the current headwind subsides.
 

Community Trust Bancorp

Community Trust Bancorp is a regional bank with 84 branch locations in 35 counties in Kentucky, Tennessee, and West Virginia. It is the second-largest bank holding company in Kentucky, with a $5.5 billion balance sheet. The bank has raised its dividend for 42 consecutive years but it is not considered a Dividend Aristocrat due to its small market capitalization.

Just like Bank OZK and M&T Bank, Community Trust Bancorp is a best-of-breed bank thanks to its prudent and conservative management. Its business model results in slower growth during boom times but robust performance during recessions. During the Great Recession, Community Trust Bancorp kept thriving and raising its dividend.

Due to its 19% decline in less than three months, Community Trust Bancorp is currently offering a nearly 10-year high dividend yield of 4.6%. Thanks to its healthy payout ratio of 39% and its robust business model, the bank is likely to keep raising its dividend for many more years.

Moreover, Community Trust Bancorp is now trading at a nearly 10-year low price-to-earnings ratio of 8.4, which is much lower than the 10-year average earnings multiple of 12.4 of the stock. Whenever the investing community regains its confidence in the financial system, it is likely to reward Community Trust Bancorp with a much higher valuation level. It is thus evident that the stock has great upside potential.
 

Final Thoughts

Sell-offs of an entire sector usually present rare investing opportunities, as these sell-offs tend to punish strong companies along with weak ones. The current financial turmoil is not an exception. The above three banks, which have proved resilient even under the most adverse economic conditions, have seen their stock prices plunge unjustly and thus they are likely to offer excessive returns to patient investors in the upcoming years.

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