NEW YORK (
) -- "With investors becoming more hesitant about an extended bank stock market, we see less value than earlier in the year."
Sterne Agee analyst Brett Rabatin's above comment in a note to clients on Thursday sums up the changing landscape for investors looking for bargain bank stock picks. Over the last few years, as the banking industry has recovered from the credit crisis, investors have been able to pretty much rely on a continued upward movement in earnings, while also enjoying plenty of heavily discounted stocks to pick from.
KBW Bank Index
has returned 18% this year, following a 30% increase during 2012. The KBW Regional Bank index is up 13% year-to-date, after rising 10% last year, showing that the smaller banks had not fallen quite as far as the large-cap banks.
"Clearly 1Q13 earnings for many institutions were not impressive enough to move estimates higher," Rabatin wrote, "with generally weak revenues and those beating expectations generally doing so on lower expenses."
The focus on cutting expenses has been a major theme for many of the nation's largest banks, which feature branded cost-cutting programs, including
Bank of America's
"Project New BAC,"
"Project Compass," and some cute names, such as
"Keyvolution" program, and
"Playbook for Profitable Growth." Other major cost-cutters, including
, have chosen not to put an attractive name on cost-cutting moves that cost many thousands of employees their jobs.
The industry's depressing focus on lowering expenses underscores the reality of a hostile market environment, including historically low interest rates, that continue to narrow net interest margins (NIM) for most banks. Meanwhile, mortgage lending volumes are down significantly this year, and for commercial and industrial lending -- a high point for loan demand over the past couple of years -- loan pricing is "getting unruly," according to Rabatin.
"As such, we view the institutions with less commoditized lending operations as likely to have less NIM pressure than peers," Rabatin wrote.
Western Bank Stock Picks
"With investors becoming more hesitant about an extended bank stock market, we see less value than earlier in the year," Rabatin wrote. "We have already lowered recommendations on some of our favorite growth companies such as
to a neutral rating... as the valuations fully reflect the fundamentals in the environment, in our view."
Among the 22 Western banks covered by Sterne Agee, "there are a select few institutions... that should still be looked at as having upside relative to the group in the environment," according to Rabatin:
Western Alliance Bancorp
Western Alliance Bancorp
of Phoenix closed at $14.34 Thursday, returning 36% this year, following a 69% return during 2012.
The shares trade for 12.0 times the consensus 2014 earnings estimate of $1.20 a share, among analysts polled by Thomson Reuters.
The company on April 30 completed its acquisition of Centennial Bank of Fountain Valley, Calif., for $57.5 million in cash, plus up to $1 million on the "assumption of Centennial Bank's transactional expenses," bringing on a $413 million loan portfolio, mainly consisting of commercial real estate loans.
Western Alliance had $8.2 billion in total assets as of March 31. The company reported first-quarter earnings available to common stockholders of $20.6 million, or 24 cents a share, increasing from $9.5 million, or 12 cents a share, a year earlier. Credit improvement was a major factor in the earnings improvement. The bank's first-quarter provision for credit losses was $5.4 million, declining from $13.1 million in the first quarter of 2012. Meanwhile, first-quarter losses on the sale of repossessed assets declined to 519,000 from $2.7 million a year earlier.
Western Alliance reported first-quarter net interest income of $76.2 million, increasing from $70.1 million a year earlier, mainly from the acquisition of Western Liberty Bancorp during the fourth quarter. The bank's net interest margin (NIM) -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- was a very impressive 4.36%, although it was down from 4.53% a year earlier, in line with the industry trend.
The company reported a first-quarter return on average assets (ROA) of 1.08% and a return on tangible common equity of 13.91%.
"Our thesis around the name continues to be the dual catalysts of growth and profitability improvement from credit leverage," Rabatin wrote, adding "we believe WAL will move from a discounted name to more of a quality-peer valuation as profitability will likely remain above 1%, on a core ROA basis (and potentially higher) as the year progresses."
According to Rabatin, "recent lending additions/hires in several key markets should result in above-peer average loan growth over the next several quarters. Management's target for $100 million in quarterly net loan growth... should prove obtainable."
Sterne Agee estimates Western Alliance will earn $1.14 a share this year, with EPS growing to $1.28 in 2014.
Interested in more on Western Alliance Bancorp? See TheStreet Ratings' report card for this stock.
of Spokane, Wash., closed at $22.86 Thursday, returning 10% this year, following a 30% return during 2012.
The shares trade for 13.7 times the consensus 2014 EPS estimate of $1.52.
Based on a quarterly payout of 20 cents, the shares have a dividend yield of 3.50%, which is very well supported by the bank's earnings.
The company on May 10 purchased the Seattle-area operations of
Boston Private Financial Holdings
, adding $276 million in loans and $172 million in deposits.
On May 2, Sterling announced an agreement to acquire Commerce National Bank of Newport Beach, Calif., for $15.10 a share in cash, with total consideration of about $42.9 million, "including the planned redemption of outstanding CNB stock options and warrants for cash." Commerce National Bank had $242.7 million in assets as of March 31. The deal is subject to the approval of CNB shareholders and regulators.
Sterling Financial had $9.3 billion in total asset as of March 31 and reported first-quarter net income of $22.7 million, or 36 cents a share, increasing from $13.3 million, or 21 cents a share, in the first quarter of 2012. Contributing the improved earnings was a significant decline in credit costs. During the first quarter, Sterling made no provision for loan losses. A year earlier, the provision, which directly lowered pretax earnings, was $4.0 million.
During the first quarter, Sterling also booked a bargain purchase gain of $7.5 million from its acquisition of Borrego Springs Bank of La Mesa, Calif.
Sterling's first-quarter net interest margin was 3.69%, expanding from 3.38% a year earlier. The company's first-quarter ROA was 1.00% and its return on common equity was 7.0%.
Sterling's March 31 Tier 1 common equity ratio was a very strong 14.1%. The shares trade for a relatively low 1.2 times their reported March 31 tangible book value of $19.21.
"We increasingly believe STSA will over time become more valued on earning power as capital continues to be deployed and profitability from efficiency and balance sheet improvement transpires," Rabatin wrote.
As Sterling continues its expansion, Rabatin expects further balance sheet restructuring to lead to more improvement in the net interest margin. "We think the southern California franchise can experience meaningful organic growth in the next year, and still view STSA as having fully leveraged earning power in the $2.25-$2.50 per share range."
Sterne Agee estimates Sterling will earn $1.45 a share this year, with earnings increasing to $1.60 a share in 2014.
Interested in more on Sterling Financial? See TheStreet Ratings' report card for this stock.
Texas Capital Bancshares
Texas Capital Bancshares
of Dallas closed at $42.33 Thursday, down 6% year-to-date, following a 46% return last year.
The shares trade for 11.1 times the consensus 2014 EPS estimate of $1.44.
The company had $10.0 billion in total assets as of March 31 and is a major mortgage warehouse lender, meaning that it finances the mortgage lending activities of other lenders, making profits as new loans are quickly sold into the secondary market.
Texas Capital Bancshares reported first-quarter net income available to common shareholders of $33.1 million, or 80 cents a share, increasing from $27.1 million, or 70 cents a share, during the first quarter of 2012. Net interest income rose to $98.1 million in the first quarter from $88.3 million a year earlier. This reflected strong loan growth, offsetting a narrowing of the net interest margin to 4.27% in the first quarter from 4.54% in the first quarter of 2012.
The bank's first-quarter ROA was an impressive 1.38% and its return on average common equity was 15.82%.
"Given the amount of controversy around TCBI and concern over mortgage warehouse contribution to earnings (which declined from 42% to 38% during 1Q13), we believe sentiment has been so negative on the name that solid profitability, a likely base on the mortgage warehouse, and strong anticipated growth of the commercial bank should result in outperformance going forward," Rabatin wrote.
Sterne Agee estimates Texas Capital will earn $3.30 a share this year, with EPS increasing to $3.56 in 2014.
Interested in more on Texas Capital Bancshares? See TheStreet Ratings' report card for this stock.
of Dallas closed at $16.03 Thursday, returning 18% this year, following a 60% return during 2012.
Hilltop is a financial holding company "that endeavors to make acquisitions or effect business combinations," according to its SEC filings. Through its main subsidiary, PlainsCapital Corp., it holds
of Dallas, which had $6.5 billion in total assets as of March 31.
Hilltop also holds NLASCO, a property and casualty insurer.
The company had $7.2 billion in assets as of March 31 and reported first-quarter earnings of available to common stockholders of $32.4 million, or 39 cents a share, compared to earnings of just $343,000 during the first quarter of 2012. With PlainsCapital Bank being acquired in December, there's no meaningful year-over-year comparison for Hilltop's numbers.
Hilltop's first-quarter ROA was 1.87% and its return on average equity was 11.46%.
"We still like HTH as an undervalued name in Texas and continue to expect improved visibility of earning power and solid growth prospects (both in the commercial bank and purchase mortgage volumes) to be catalysts going forward," Rabatin wrote.
Addressing concern over exposure to the recent tornadoes, Rabatin wrote that "while HTH has some exposure to the Moore, Oklahoma tornado (capped by re-insurance at $8 million) and there were storms last week in Cleburne and Granbury, TX, we point out the insurance subsidiary NLASCO had experienced higher frequency of storms last year. We do not view the recent tornado as likely to be a prominent factor in 2Q13 results."
Sterne Agee estimates Hilltop will earn $1.54 a share this year, with earnings increasing to $1.61 a share in 2014.
Interested in more on Hilltop Holdings? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.