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5 Bank Stocks That Need a Higher Dividend (Update 1)

5. Prosperity Bancshares

Prosperity Bancshares (PB) of Houston has seen its stock rise 2% year-to-date, closing Friday at $41.32. Based on a quarterly payout of 17.5 cents, the shares have a dividend yield of 1.74%.

The company has been expanding a series of small deals, including an agreement announced on Jan, 19 to buy The Bank Arlington, with one office in Arlington, Texas and total assets of $37 million, following the completed purchase earlier this month of Texas Bankers of Austin, which included three branches and roughly $71 million in assets. Prosperity also has a pending deal announced on Dec. 9, to acquire East Texas Financial Services (EFBT) of Tyler, for about $20 million.

Prosperity reported fourth-quarter net income of $36.4 million, or 77 cents a share, which was flat from the third quarter, but up from $32.8 million, or 70 cents a share, a year earlier.

The company bucked the industry trend, with income from debit card and ATM fees increasing to $4.2 million in the fourth quarter from $3.9 million the previous quarter and $3.3 million a year earlier, despite the Federal Reserve's implementation of the Durbin Rule's limits on debit card interchange fees, on Oct. 1.

Total loans increased slightly during the fourth quarter and 8% year-over-year, to $3.8 billion as of Dec. 31.

Coveted noninterest-bearing deposit balances grew 6% sequentially and 18% year-over-year, to $1.98 billion as of Dec. 31.

The fourth-quarter net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings -- was 3.82%, narrowing from 4.02% the previous quarter and 3.99% a year earlier, with the fourth-quarter margin "impacted by increased amortization expense from the securities portfolio."

The company's ROA has ranged between 1.41% and 1.50% over the past five quarter, according to HighlineFI.

The shares have a rather high valuation in the current market, reflecting Prosperity's expansion and strong earnings, trading for 3.1 times tangible book value, according to HighlineFI, and for 14 times the consensus 2012 earnings estimate of $3.02 a share, among analysts polled by Thomson Reuters.

Prosperity is clearly a growth story, but the earnings could support a dividend increase.

FBR analyst Scott Valentin on Jan. 23 reiterated his "Market Perform" rating for Prosperity Bancshares, with a price target of $42, describing the company as "among the best-managed institutions in our coverage Universe," and "saying that the company's small recent acquisitions "reflect the company s willingness to transact accretive deals that enhance its deposit franchise, and as an alternative use for capital given the lack of loan growth."

Reversing direction, Valentin added that although the company is expected to continue being "an opportunistic acquirer," Prosperity's "attractive deposit franchise makes the company an attractive takeout target for a larger bank looking for an entry point into the Texas market."

Interested in more on Prosperity Bancshares? See TheStreet Ratings' report card for this stock.
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