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The banking space has been on a tear since the November Presidential elections and the emergence of effective COVID-19 vaccines, after witnessing a free fall at the beginning of the pandemic last year. Although customer bank deposits soared during the pandemic,  banks have not been able to translate the swollen deposits into loan growth due to a fragile consumer loan market based on high unemployment and flagging national GDP.

While the banking sector is not yet out of the woods, there has been rising optimism among investors and the Street is witnessing a value rotation into banking stocks. This is evident from the SPDR S&P Regional Banking ETF’s (KRE) 96% gain over the past six months compared to the S&P 500’s 19.3% returns.

Federal Reserve Chair Jerome Powell has promised to maintain aggressive support of the U.S. economy and to hold interest rates near zero. In addition, long-term Treasury yields are rising sharply, indicating that the economy is improving.

It’s true that small-cap stocks typically carry higher risk profiles than their mid- or large-cap counterparts, but given their relatively smaller size, these companies have more room for growth. As such, we believe Customers Bancorp, Inc. (CUBI - Get Rating), HomeStreet, Inc. (HMST - Get Rating), Republic Bancorp, Inc. (RBCAA - Get Rating), and SmartFinancial, Inc. (SMBK - Get Rating) are the best small-cap regional banking bets to play the economic recovery.

Customers Bancorp, Inc. (CUBI - Get Rating)

CUBI is the bank holding company for Customers Bank, a full-service bank with $18.4 billion in assets as of December 31, 2020. Headquartered in Pennsylvania, the Bank operates 12 full-service branches and limited production and administrative offices around the United States. It provides financial products and services to individual consumers, and small- and middle-market businesses. CUBI operates primarily in two segments – Customers Bank Business Banking and BankMobile.

The COVID-19 pandemic presented severe challenges for small business owners trying to stay in business. Acknowledging the fact that many small businesses are still struggling, CUBI has recently introduced its newest financial product. It is ReStart America Biz Checking account provides a 1% annual percentage yield for 28 weeks. The product is designed specifically to help businesses through the accelerating economic recovery phase and enable small businesses to manage Paycheck Protection Program(PPP) funds and pay for eligible expenses while earning interest.

In the fourth quarter, ended December 31, CUBI’s net interest income totaled $122.9 million, increasing $15.5 million sequentially, due primarily to a $480.9 million rise in average interest-earning assets. Its total loans and leases increased 57.5% compared to the year-ago period to $15.8 billion. Its total deposits improved $2.7 billion, or 30.8% year-over-year, to $11.3 billion. Its non-performing assets were 0.39% of total assets, compared to 0.34% on  September 30, 2020. Its allowance for credit losses equaled 204% of non-performing loans. CUBI’s  EPS came in at $1.65, surging 121% compared to the year-ago value of $0.75.

The stock has gained more than 180% over the past year.

CUBI’s record earnings in 2020 were driven by a solid expansion in its net interest margins as well as PPP-related income and an expansion in its core net interest margin. The bank provided more than 100,000 small businesses and nonprofits access to PPP loans during the year. In addition,  CUBI managed to maintain superior asset quality during the pandemic while significantly improving the quality of its funding mix. Wall Street analysts further expect CUBI’s revenue and EPS for the current ongoing quarter to improve 58.7% and 8,000%, respectively.

CUBI’s POWR Ratings are consistent with this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

CUBI has a B grade of B for Growth, Value, and Sentiment. The stock is currently ranked #13 in the 64-stock, C-rated Northeast Regional Banks industry.

In total, we rate CUBI on eight different levels. Beyond what we stated above, we have also given CUBI grades for Momentum, Stability, and Quality. Get all CUBI’s ratings here.

HomeStreet, Inc. (HMST - Get Rating)

HMST is a diversified financial services company that operates as the parent company of HomeStreet Bank, a state-chartered commercial bank. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking services primarily in the Western United States.

On January 29, 2021, HMST’s Board of Directors approved an expansion of its share repurchase program that allows the bank to repurchase up to $25 million in an aggregate amount of shares of its common stock. The Board also declared a cash dividend of $0.25 per common share, reflecting a 67% increase from the prior payout of $0.15, on the back of its strong financial results for the full year ended December 31, 2020, and its strong capital and liquidity positions.

HMST reported a net interest income of $56 million in the fourth quarter, which was relatively flat to the preceding quarter. Commercial and consumer noninterest-bearing deposits improved 55% quarter-over-quarter, while loan portfolio originations increased 20% sequentially to $734 million, driven by a 10% rise in single-family loans held for sale originations to $629 million. Its nonperforming assets were 0.31% of its total assets, also flat sequentially. As a result, the bank did not recognize any provision for credit losses during the quarter. Its EPS came in at $1.25, surging 131% compared to the year-ago value of $0.54.

HMST has gained 133.1% over the past year. The bank’s net interest margin has been rising as a result of improving funding costs and profitability in its single-family mortgage banking business. In fact, HMST  generated record origination volumes in commercial real estate loan sales that allowed it to offset the high levels of pre-payments resulting from the low-interest environment. HMST’s management aims to continue to grow the bank’s earnings this year through the normalization of the single-family mortgage market. The Street expects HMST’s current-quarter revenue and EPS to grow 13.7% and 270%, respectively.

It’s no surprise that HMST has an overall B rating, which translates to Buy in our POWR Ratings system. HMST has a B grade for both Growth and Value. It is ranked #3 in the 44-stock Pacific Regional Banks industry.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the HMST ratings for Momentum, Stability, Sentiment, and Quality here.

Republic Bancorp, Inc. (RBCAA - Get Rating)

Kentucky-based RBCAA operates as the financial holding company of Republic Bank & Trust Company. The bank has 42 full-service banking centers and two loan production offices in five states across the United States. RBCAA offers personal and business banking services, operating through the following segments – Traditional Banking, Warehouse, Mortgage Banking, Tax Refund Solutions, and Republic Credit Solutions.

RBCAA reported impressive earnings for the fourth quarter, ended December 31, 2020. The bank generated $49.64 million in net interest income, improving 6% year-over-year. Its average loan balance at the end of quarter increased 9% to $4.87 billion. RBCAA recognized $4.8 million of fee income in its PPP portfolio, driven significantly by the forgiveness and payoff of $127 million of PPP loans. Its nonperforming loans to total loans came in at 0.50%. The bank’s core provision swung to a charge of $1.6 million during the quarter, primarily reflecting continued concerns over commercial real estate values in its market.  RBCAA  reported adjusted EPS of $0.98, rising 13% year-over-year.

In a fourth-quarter letter to shareholders, CEO Steven Trager wrote: “The story for our success in 2020 was a diversity of revenue sources among our various operating segments. We grew our total mortgage loan production to over $1 billion for the year.” This also pushed RBCAA’s mortgage banking income to record levels.

In addition, the bank supported the origination of home mortgages through its Warehouse Lending segment, which hit record outstanding average balances for the year and, correspondingly, its best year ever of net income. RBCAA has returned 61.2% over the past year. Analysts expect this momentum to continue this year. RBCAA’s current-quarter revenue and EPS are expected to grow 7% and 40.6%, respectively.

RBCAA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. RBCAA has an A grade for Sentiment, and B for both Value and Stability. It is ranked #1 in the 28-stock C-rated Southeast Regional Banks industry.

Click here to see the additional POWR Ratings for RBCAA (Growth, Momentum, and Quality).

SmartFinancial, Inc. (SMBK - Get Rating)

SMBK operates as the bank holding company for SmartBank, a full-service commercial bank with 35 full-service branches, along with two loan production offices, in a footprint spanning Tennessee, Alabama, and Florida Panhandle. SMBK has grown both organically and inorganically through multiple acquisitions and has more than $3 billion in assets.

SMBK reported total interest income of $29.8 million for the fourth quarter (ended December 31, 2020), increasing 10.3% year-over-year. Its deposits surged 27% year-over-year, to $2.81 billion, while its loans increased 20% to $2.38 billion. Its nonperforming loans as a percentage of total loans were 0.24% at the end of the quarter. It made no provision for loan losses during the quarter, compared to $2.6 million in the preceding quarter. Its cumulative allowance for loan losses was  $18.3 million. SMBK delivered EPS of $0.59, compared to the year-ago value of $0.48.

Lower market interest rates continue to negatively impact earning-asset yields, but these declines have been largely mitigated by a lower cost of funds. Consequently, the stock has surged 99%, nearly doubling over the past year. SMBK’s management expects to continue focusing on diversification of revenue and working on efficiency gains. Wall Street analysts also estimate the bank’s revenue and EPS for the current quarter to grow 21.6% and 178.9%, respectively.

It’s no surprise that SMBK an overall B rating, which translates to Buy in our POWR Ratings system. SMBK has an A grade for Sentiment, and B for both Growth and Stability. It is ranked #2 in the Southeast Regional Banks industry.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the SMBK ratings for Value, Momentum, and Quality here.

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CUBI shares were trading at $31.45 per share on Monday afternoon, down $0.68 (-2.12%). Year-to-date, CUBI has gained 72.99%, versus a 5.34% rise in the benchmark S&P 500 index during the same period.