5 Top-Rated Bank Stocks

NEW YORK ( TheStreet) -- Using a balanced, integrated approach, TheStreet Ratings has produced a list of its five top-rated actively traded bank stocks.

Rather than keying in on particular attributes, such as price-to-forward-earnings ratios or composite targets among sell-side analysts, TheStreet Ratings uses a proprietary model that incorporates a stock's price performance and fundamental performance against its peer group, performance against the broad indexes, price volatility, earnings and capital growth, and financial stability.

A stock's composite rating is a trade-off, seeking the ideal combination of risk and reward. "While our approach incorporates a company's financial performance, we operate under the theory that many of a company's attributes are baked into its stock's price performance and volatility," said Kevin Baker, senior financial analyst for TheStreet Ratings.

Many ratings approaches fail to sufficiently consider risk. TheStreet Ratings places significant weight on a stock's volatility and downside risk.

TheStreet Ratings has received several industry awards, including most recently Jaywalk's Independent Research Provider Performance Award, for the Best Bearish Stock Selection.

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The following are the five bank holding company stocks with the highest ratings, that also have three-month average trading volume of at least 50,000 shares. Price data is based on last Thursday's market close, since Friday was a market holiday.

The market strongly favors these names, which all trade at forward price-to-earnings ratios of over 13, based on consensus 2012 earnings estimates among analysts polled by FactSet. In comparison, the best-known U.S. banking names trade at much lower price multiples, as investors shy away from multiple political and regulatory challenges, as well as the risk of losses from mortgage buybacks.

For Bank of America ( BAC) was cheapest among the "big four" U.S. bank holding companies by forward P/E, which was 7.2, based on Thursday's closing price of $12.31 and the 2012 consensus earnings estimate of $1.72 a share. JPMorgan Chase ( JPM) was next, trading for 7.9 times the consensus 2012 earnings estimate of $5.66 a share, at Thursday's closing price of $44.68. Next was Wells Fargo ( WFC), trading for 8.1 times the 2012 consensus EPS estimate of $3.51 at Thursday's closing price of $28.54. Among the big four, Citigroup ( C) had the highest forward P/E of 8.6, based on Thursday's closing price of $4.55 and the consensus 2012 EPS estimate of $3.51.

Interestingly, out of all five of the ratings group's picks, only one has a "sell" recommendation from any sell-side analyst. None of the 10 picks owe bailout funds to the government.

The group also leans toward stocks with decent dividend payouts, as have the names have forward dividend yields exceeding 3.00%.

5. Commerce Bancshares

Commerce Bancshares ( CBSH) of Kansas City, Mo., saw its stock return 5% over the 52-week period through last Thursday, when the shares closed at $41.57. Based on a quarterly payout of 23 cents, the shares have a dividend yield of 2.21%. The shares were trading for 14 times the consensus 2012 earnings estimate of $2.98 a share.

The company had $19 billion in total assets as of March 31, with 360 offices in Missouri, Illinois, Kansas, Oklahoma and Colorado.

Commerce reported first-quarter net income of $60.5 million, or 69 cents a share, increasing from $44.8 million, or 50 cents a share during the first quarter of 2010. The main factor in the improvement was a decline in the provision for loan losses to $15.8 million, from $34.3 million a year earlier.

While net interest declined 1% year-over-year to $161 million, Commerce's net interest margin "remained stable" at 3.85% during the first quarter. Noninterest income was up 3% to $95.9 million in the first quarter, "as a result of solid growth in both bank card and trust fees, which grew 15.3% and 11.7%, respectively."

The first-quarter return on average assets (ROA) was a relatively strong 1.32%, improving from 1.00% a year earlier.

Following the first-quarter earnings release, Sterne Agee analyst Peyton Green reiterated his neutral rating for Commerce Bancshares, saying the company "should post solid results going forward, but loan growth is needed for stronger EPS momentum to develop."

All nine analysts covering Commerce Bancshares have neutral ratings on Commerce Bancshares.

4. Oritani Financial

Shares of Oritani Financial ( ORIT) of the Township of Washington, N.J., closed at $12.11 last Thursday, returning 14% over the previous year. Based on a quarterly payout of 10 cents, the shares have a dividend yield of 3.30%. The shares were trading for 21 times the 2012 consensus earnings estimate of 58 cents a share.

The company had $2.6 billion in total assets as of March 31, operating 23 branches in Bergen, Hudson and Passaic counties, in New Jersey.

Oritani's fiscal year ends in June. For the fiscal third quarter ended March 31, the company reported net income of $7 million, or 13 cents a share, increasing from $5 million, or nine cents a share a year earlier. The provision for loan losses in the fiscal third quarter was $2.3 million, declining from $2.5 million a year earlier.

CEO Kevin Lynch said there was "a 46% reduction in delinquent loans from the prior quarter," to $22.8 million as of March 31, mainly because of "the sale of the note securing a $14.1 million nonaccrual loan."

Oritani's asset quality is relatively strong, with nonperforming assets - including nonaccrual loans and repossessed real estate - making up 1.09% of total assets as of March 31.

Total loans were $1.65 billion as of March 31, increasing 15% from a year earlier, as the company continued its emphasis on originating multifamily mortgages and commercial real estate loans.

Net interest income increased 22% year-over-year to $20.6 million for the quarter ended March 31, as Oritani benefitted the loan growth and from a steepening yield curve, in the continued low-rate environment. Describing itself as "liability sensitive," the company said it had "begun addressing its exposure to higher market interest rates."

Following the earnings report, Sterne Agee analyst Mike Shafir reiterated his "buy" rating for Oritani with a $14 price target, emphasizing the company's "solid loan and deposit growth and a fiscal 3Q11 ROAA of 1.09%," and adding that "the shares remain attractive trading at 105% of tangible book value (TBV) compared to the peer group median of 123%".

Three of the four analysts covering Oritani Financial rate the shares a buy, while the remaining analyst has a neutral rating.

3. Northwest Bancshares

Northwest Bancshares ( NWBI) of Warren, Pa., saw its stock return 7% over the 52-week period through last Thursday, when the shares closed at $12.34. Based on an 11-cent quarterly payout, the shares have a dividend yield of 3.57%. The shares were trading for 16.2 times the consensus 2012 earnings estimate of 76 cents a share.

The company had $8.1 billion in total assets as of March 31, operating over 170 Northwest Savings Bank branches in central and western Pennsylvania, western New York, eastern Ohio, Maryland and southeastern Florida.

Northwest on Monday reported first-quarter net income of $17.3 million, or 16 cents a share, improving from $13.2 million, or 12 cents a share in the fourth quarter and $12.7 million, or 12 cents a share, in the first quarter of 2010. The earnings improvement reflected, in part, a lowering of the provision for loan losses to $7.2 million in the first quarter, from $8.8 million the previous quarter and $13.9 million a year earlier.

The company also lowered its interest expense significantly during the first quarter, to $24.1 million, from $31.1 million in the fourth quarter and $25.8 million in the first quarter of 2010, as Northwest's deposit mix improved.

The company increased its quarterly dividend by a penny to 11 cents and also announced that since December 20 it had repurchased 3.2 million shares for about $38 million, at an average price of $11.96 a share. Under Northwest's share buyback program, the company may repurchase a total of 10% or 11 million shares.

With a tangible common equity ratio of 13.99% as of March 31, Northwest had plenty of excess capital to support the buybacks.

After the first-quarter earnings release, Sterne Agee analyst Mike Shafir reiterated his "buy" rating for Northwest Bancshares, with a $14 price target, saying that "while non-performing assets rose slightly, tight expense controls, lower credit costs, and a higher than expected share repurchase highlighted the quarter." The analyst added that the company was continuing to "deploy its excess capital in a shareholder friendly manner."

Five out of six analysts rate Northwest Bancshares a "buy," while the remaining analyst has a neutral rating.

2. Bank of the Ozarks

Shares of Bank of the Ozarks ( OZRK) of Little Rock, Ark., closed at $44.42 last Thursday, returning 18% over the previous year. Based on a quarterly payout of 18 cents, the shares have a dividend yield of 1.62%. The shares were trading for 13.8 times the consensus 2012 earnings estimate of $3.23 a share.

The company had $3.3 billion in total assets as of March 31, operating 90 branches in Arkansas and six other states. Total assets increased 10%, in part from the purchase of four failed institutions from the Federal Deposit Insurance Corporation, including Woodlands Bank of Bluffton, S.C. in July; Horizon Bank of Bradenton, Fla. in September; Chestatee State Bank of Dawsonville, Ga. in December; and Oglethorpe Bank of Brunswick, Ga., in January.

For the first quarter, Bank of the Ozarks reported net income available to common shareholders of $14.6 million, declining from $16.9 million, or 99 cents a share in the fourth quarter and $16 million, or 94 cents a share, in the first quarter of 2010. Earnings declined because gains on the FDIC purchases during the first quarter declined to $3 million, from $8.9 million the previous quarter and $10.1 million a year earlier.

The bank's return on average assets for the first quarter was a strong 1.77%, although it declined from 2.32% a year earlier, again because of the outsized gains on the FDIC purchases reported in the earlier period.

Bank of the Ozarks reported a tax-adjusted net interest margin of 5.61% for the first quarter, improving from 4.99% a year earlier.

The company reported a tangible common equity ratio of 9.84% as of March 31, increasing from 9.17% a year earlier.

After the earnings report, Brian Martin of FIG Partners reiterated his neutral rating of "market perform," saying that Bank of the Ozarks was "trading at a premium to peers given its strong earnings power, enviable capital position, manageable credit issues and investors' focus on FDIC-assisted deals." Speaking of further FDIC deals, Martin said that the bank's "primary focus is to seize these opportunities," and that "OZRK intends to fill in its remaining geographic gaps through other FDIC deals, regular way M&A, or De Novo branching over time."

Out of 10 analysts covering Bank of the Ozarks, four rate the shares a buy, while five have neutral ratings and one analyst recommends investors sell the shares.

1. Prosperity Bancshares

The actively-traded bank stock with the strongest "buy" rating from TheStreet Ratings is Prosperity Bancshares ( PRSP) of Houston, which is rated an A-minus (Excellent). The stock closed at $44.63 Thursday, returning 5% over the previous year.

Based on a quarterly payout of 17.5 cents, the stock has a dividend yield of 1.57%.

The shares trade for 14.1 times the 2012 consensus earnings estimate of $3.17 a share.

Prosperity Bancshares had $9.7 billion in total assets as of March 31, operating 175 branches throughout Texas, with 60 in the Houston area.

First-quarter net income was $33.9 million, or 72 cents a share, increasing from $32.8 million, or 70 cents a share in the fourth quarter and $32.2 million, or 69 cents a share, in the first quarter of 2010. The first-quarter ROA was a strong 1.42%, slightly exceeding the prior periods. With the Texas economy generally performing better than most other states through the credit crisis, Prosperity Bancshares has had a stable run, with ROA exceeding 1% during 2008, 2009 and 2010, according to SNL Financial.

CEO David Zalman said that during the first quarter, prosperity achieved "linked quarter annualized loan growth in excess of 10% and linked quarter annualized deposit growth over 19%."

After the earnings report, Christopher Marinac of FIG Partners reiterated his neutral rating for Prosperity Bancshares, saying the stock was trading "at a premium valuation" which was expected to continue, since "credit quality is solid, credit costs are limited, real capital compared to risk-weighted assets is double-digits, and expense efficiency is terrific at just 41% of total revenues."

Out of 18 analysts covering Prosperity Bancshares, five rate the stock a buy, while the remaining analysts all have neutral ratings.

>>To see these stocks in action, visit the 5 Top-Rated Bank Stocks portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

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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.