CHICAGO, May 18, 2011 /PRNewswire/ -- Today, Zacks
Investment Ideas feature highlights Features: UMB Financial
Corporation (NASDAQ: UMBF), First Financial Bankshares,
Inc. (NASDAQ: FFIN) and Bank of the Ozarks, Inc.
(NASDAQ: OZRK).
3 Stocks You Can Bank On
(Logo:
http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
While hundreds of financial institutions turned to the federal
government to keep them afloat during the financial crisis, there
were some banks that managed to navigate through the storm
virtually unscathed.
Most of these banks were ones that employed conservative lending
practices and had relatively simple, reasonably leveraged balance
sheets. Not coincidentally, many were also located outside of the
hardest hit real estate markets like California, Nevada, Arizona and Florida.
Improving Profitability
Overall, however, things are looking better for the banking
industry. According to the FDIC Quarterly Banking Profile, banks
earned net income of $87.5 billion in
2010, the highest amount since 2007.
The biggest reason for this rebound is because of improving
asset quality. Almost all major loan categories posted
year-over-year declines in charge-offs in the fourth quarter of
2010. Additionally, noncurrent loans (those more than 90 days late)
fell 4.7% over the same period.
Another potential catalyst for the industry has to do with the
potential steepening of the yield curve. Keep in mind that banks
make money on the spread between long-term and short-term rates.
They typically pay interest on deposits that are based on
short-term rates while taking in interest on loans that are tied to
longer-term rates, like a mortgage.
Right now the yield on 10-year Treasury notes remains remarkably
low. Back in early February, the yield was close to 3.74%. Despite
QE2 coming to an end in June and rising inflation fears, the
10-year currently yields just 3.15%.
Many people believe that once the Fed ends QE2 in June, the
yield on the 10-year will start to move significantly higher. And
if the yield on the 10-year moves higher, mortgage rates will move
higher too. Assuming the Fed keeps short-term rates low, banks will
earn a wider spread, and, thus, more money.
Be Selective
Although credit quality has been improving and the yield curve
could be steepening, don't expect an industry-wide recovery just
yet. Overall credit quality is still historically poor, and high
unemployment and further declines in housing prices threaten many
of the weakest banks.
However, if you're selective there are several buying
opportunities among bank stocks right now. Below are three bank
stocks with strong credit quality, rising earnings estimates and
solid growth projections. They are also reasonably valued and pay a
dividend that yields more than 1.5%.
UMB Financial Corporation (NASDAQ: UMBF) never took TARP
money and never cut its dividend during the financial crisis. In
fact, the company has managed to increase net interest income after
loan loss provisions for the last six years and actually raised its
dividend twice in 2008, and again in 2009. It currently
yields 1.9%.
UMB recently reported solid Q1 results in which EPS beat the
Zacks Consensus Estimate by 31% thanks in large part to improving
its already strong credit quality.
Earnings estimates have been soaring, and analysts are currently
projecting 15% EPS growth in 2011 and 10% growth in 2012. It is a
Zacks #2 Rank (Buy) stock.
Valuation is reasonable too, with shares trading at 15.5x
12-month forward earnings, a significant discount to its 10-year
median of 19.0x.
UMB Financial is headquartered in Kansas City, Missouri and operates
approximately 130 banking centers in seven states. It was founded
in 1913 and has a market cap of $1.7
billion.
First Financial Bankshares, Inc. (NASDAQ: FFIN) is
another small cap bank that survived the financial crisis without
the help of TARP.
In fact, the company has been thriving thanks to fat margins and
relatively strong credit quality. It has also strung together five
consecutive positive earnings surprises.
The 2011 Zacks Consensus Estimate is currently $3.10, up from $2.97 before its latest earnings beat. This
corresponds to 11% EPS growth. It is a Zacks #2 Rank (Buy)
stock.
The company held its dividend steady throughout the financial
crisis but has yet to raise it. It currently yields 1.8%.
The stock is trading at 17.0x 12-month forward earnings,
essentially in-line with its 10-year median. FFIN is headquartered
in Abilene, Texas and operates 52
banking centers throughout Texas.
It has a market cap of $1.1
billion.
Bank of the Ozarks, Inc. (NASDAQ: OZRK) also came through
the financial crisis on solid footing. The company has delivered 11
consecutive positive earnings surprises dating back to 2008 and
managed to hold its dividend steady throughout the Great
Recession.
Over the last six quarters, OZRK has raised its dividend five
times. It currently yields 1.5%.
Estimates have been soaring since the company posted a 14%
positive earnings surprise back in April. Its net interest margin
was a remarakably high 5.61% in Q1, while its nonperforming loan
ratio was a remarkably low 0.77%.
The company has also been acquiring failed banks to expand its
footprint with explicit guarantees from the FDIC on loan losses.
Moreover, earnings per share is expected to grow 208% in 2011. It
is a Zacks #2 Rank (Buy) stock.
Despite the strong growth projections, shares trade at just
15.0x forward earnings, a discount to the industry average of
15.7x.
Bank of the Ozarks, Inc. is headquartered in Little Rock, Arkansas and has 94 branches,
including 66 in Arkansas, 12 in
Georgia, 9 in Texas, 3 in Florida, 2 in North
Carolina, and 1 each in South
Carolina and Alabama. It
has a market cap of $823 million.
Conclusion
Although the housing market is expected to continue to decline,
it looks like much of the industry is seeing an improvement in
credit quality. Additionally, banks stand to benefit from a rise in
long-term Treasury yields after the Fed ends QE2.
Be cautious when selecting which bank stocks to buy, however.
These three small caps all have solid earnings projections, rising
estimates and attractive dividends.
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