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What Makes Regional Banks Darlings Of Stock Markets?

|Includes:Center Bancorp, Inc. (CNBC), PPBI

Small and regional banks represent a thorny issue with some policymakers advocating for consolidated larger banks, while other groups bat for locally-oriented, lending-focused banks. Regional banks currently fall in the second category and are far more profitable than their larger, complex counterparts. Although critics demand smaller banks should be subjected to the stringent capital adequacy requirements their larger siblings are exposed to, it appears the Federal Deposit Insurance Corporation (FDIC) is in no mood to do so. However, the regulator has renewed its push to split commercial banks from broker-dealer activities. As such, it comes as no surprise that stocks of smaller banks such as Center Bancorp, Inc. (NASDAQ: CNBC) and Pacific Premier Bancorp Inc. (NASDAQ: PPBI) continue to reward shareholders smartly.

Center Bancorp, Inc. (holding company of Union Center National Bank) has gained nearly 58 percent so far this year. A consistent growth in financial results means the stock is still undervalued after this sharp run on the bourses. From a net income of $3.8 million in 2009, Center Bancorp's bottom line grew to $17.5 million last year. It has already earned $14.8 million in the first nine months of 2013, with profits jumping 14.5 percent to $5.1 million in the third quarter alone. The stock's current market price of $17.9 values it at a forward price earnings ratio of just 13.9. This is rather low when considered with annual dividend yield of 1.7 percent and a clean balance sheet. Strong operating margin of 57 percent just goes on to sweeten the deal. Center Bancorp has cash of $28 per share and considering the debt equity ratio of just 0.03, shareholders are technically getting the business for free.

Similarly, Pacific Premier Bancorp, Inc. has gone up more than 40 percent so far in 2013. As of September 2013, the bank operated 13 full-service depository branches in Southern California. In 2013, the company made two strategic acquisitions: FAB, a Texas based chartered bank and SDTB, a California based chartered bank. Although Pacific Premier has seen a contraction in margins in recent months, an operating margin of 35.5 percent is still good enough. The decline comes on account of older loans maturing with higher rates than the new ones being initiated at lower rates. On the flipside, the bank is seeing good traction in reduction of deposit costs, a phenomenon that is expected to gain momentum in the fourth quarter. At a forward price earnings ratio of 12.9 and a debt equity ratio of just 0.06, the stock is placed attractively to its competitors.

Stocks: CNBC, PPBI