5 Expensive Bank Stocks Still Worth Buying (Update 3)

Updated with market close information.

NEW YORK ( TheStreet) -- For financial-stock investors, it can pay to step back and focus on actual success, rather than just looking for cheap prices in a recovering industry.

TheStreet has identified five quality banks showing strong asset growth over the past year, along with sequential and year-over-year net revenue growth.

These companies aren't cheap, but you get what you pay for, and quality names could be just the ticket for the more conservative portion of a diversified portfolio.

Despite weakness this week as investors worry over Greece and an expected mortgage settlement between the largest mortgage servicers -- including Bank of America ( BAC), JPMorgan Chase ( JPM), Wells Fargo ( WFC), Citigroup ( C) and Ally Financial -- we're in the midst of a major bank-stock rally, with the KBW Bank Index ( I:BKX) returning 14% this year through Monday's close.

Bank of America has been the bank-stock star, with shares rising 46% year-to-date, through Wednesday's close at $8.13, after dropping 58% in 2011.

The shares of the second-largest U.S. bank holding company (JPMorgan Chase is in the lead, with $2.3 trillion in total assets as of Dec. 30, followed by Bank of America, with $2.1 trillion) are still cheaply priced, at 0.7 times tangible book value, according to HighlineFI, but with the recovery in the share price and a slew of earnings estimate cuts by analysts, the shares now trade for 11 times the consensus 2012 EPS estimate of 72 cents, among analysts polled by Thomson Reuters.

Investors looking for bargains need to know that rest of the "big four" trade at cheaper multiples to forward earnings:
  • Shares of Citigroup closed at $34.25 on Wednesday, rreturning 30% in 2012. Like Bank of America, the shares trade for just 0.7 times tangible book value, but they also trade at a much lower multiple of nine times the consensus 2012 EPS estimate of $3.99.
  • JPMorgan Chase closed at $38.30 Wednesday, returning 16% year-to-date. The shares trade for 1.2 times tangible book value, and eight times the consensus 2012 EPS estimate of $4.67. With JPM, you also have a respectable dividend yield of 2.61%, based on a 25-cent quarterly payout.
  • Wells Fargo's shares returned 12% through Wednesday's close at $30.63. The shares traded for 1.7 times tangible book value -- reflecting the company's status as the most consistent earner among the big four over the past year -- and for 10 times the consensus 2012 EPS estimate of $3.20. With a quarterly payout of 12 cents, the shares have a dividend yield of 1.57%.

For Bank of America, quite a bit is riding on the mortgage settlement, as well as the improving prospects for the U.S. economy as the unemployment reports continue to improve.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

To come up with our list of five bank holding companies showing year-over-year revenue growth, we began with actively traded companies reporting the largest year-over-year increases in fourth quarter net revenue, which we defined as net interest income (tax-adjusted if available) plus noninterest income, less noninterest expense. In order to look beyond the distortion to revenue and earnings results from the release of loan loss reserves, these were excluded.

Very few of the holding companies showed both sequential and year-over-year revenue growth.

We further narrowed down the list to companies also showing quarter-over-quarter net revenue growth, and also those achieving returns on average assets (ROA) of at least 0.70%, over the past five quarters.

All data was provided by HighlineFI, using market close information from Monday.

Here they are, by ascending year-over-year net revenue growth.

5. Independent Bank Corp.

Shares of Independent Bank Corp. ( INDB) of Rockland, Mass., closed at $28.97 Monday, rising 6% year-to-date. Based on a 19-cent quarterly payout, the shares have a dividend yield of 2.62%.

Independent Bank Corp. had $5.0 billion in total assets as of Dec. 30, operating 67 Rockland Trust Co. offices in Eastern Massachusetts, as well as a network of loan production offices and investment management offices in Massachusetts and Rhode Island.

The company reported fourth-quarter earnings of $11.2 million, or 52 cents a share, declining from $12.0 million, or 56 cents, the previous quarter, and $11.8 million, or $56 cents a share, a year earlier.

The fourth-quarter results included a $757,000 prepayment penalty "that resulted in a $0.02 per share charge arising from the Company's use of excess cash to pay down borrowings."

Independent Bank Corp.'s net revenue -- tax-adjusted net interest income, plus noninterest income, less noninterest expense, excluding provisions for loan losses -- totaled $19.6 million, increasing 3% from the third quarter, but just 1% from a year earlier.

The company's return on average assets (ROA) has ranged from 0.92% to 1.3% over the past five quarters.

Guggenheim Securities analyst David Darst has a neutral rating on Independent Bank Corp., and while he lowered his 2012 earnings estimate for the company by four cents to $2.13 and his 2013 estimate by a dime to $2.25 on Jan. 23, the analyst raised his price target for the shares to $28, "which represents 13x 2012E EPS and approximates INDB's 5-year median P/E."

The shares trade for 1.9 times tangible book value, according to HighlineFI, and for 14 times the consensus 2012 earnings estimate of $2.12 a share, among analysts polled by Thomson Reuters.

The shares rose 1% on Wednesday, to close at $29.27.

Interested in more on Independent Bank Corp.? See TheStreet Ratings' report card for this stock.

4. U.S. Bancorp

Shares of U.S. Bancorp ( USB) of Minneapolis closed at $29.16 Monday, returning 8% year-to-date. Based on a quarterly payout of 12.5 cents, the shares have a dividend yield of 1.71%.

U.S. Bancorp reported fourth-quarter earnings of $1.35 billion, or 69 cents a share, improving from $1.27 billion, or 64 cents a share, during the third quarter, and $974 million, or 49 cents a share, during the fourth quarter of 2010. The company has been one of the strongest earnings performers among regional banks, with its ROA increasing from 1.37% in the fourth quarter of 2010 to 1.61% in the most recent quarter, according to HighlineFI.

The company's fourth-quarter net revenue increased 4% from the third quarter and 7% year-over-year, to $2.4 billion.

Please see TheStreet's detailed earnings coverage for much more on U.S. Bancorp's fourth-quarter results.

During the fourth quarter, the company repurchased 6 million shares under its 50 million share authorization.

CEO Richard Davis said on Jan. 18 that following the completion of the Federal Reserve's stress tests in March, U.S. Bancorp would look "forward to moving closer to our long-term goal of returning a majority of our earnings to shareholders in the form of dividends and buybacks."

Morgan Stanley analyst Betsy Graseck on Jan. 18 reiterated her "Overweight" rating for U.S. Bancorp, with a price target of $32, and said she expected the "quarterly dividend to increase +31% from 13c to 17c in 2012, total yield from 2.3% to 5.1%, and total payout ratio including dividends and share buybacks from 28% to 58%."

The shares trade for 2.7 times tangible book value and for 11 times the consensus 2012 EPS estimate of $2.68.

The shares rose 1% on Wednesday, to close at $29.63.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

3. Bank of the Ozarks

Shares of Bank of the Ozarks ( OZRK) of Little Rock, Ark., closed at $29.23, declining 1% year-to-date. Based on a quarterly payout of 9.5 cents, the shares have a dividend yield of 1.27%.

The bank expanded through three failed-bank purchases from the FDIC during 2011, following four in 2010. The 2011 acquisitions included The Park Avenue Bank of Valdosta, Ga., which had total assets of $953 million when it was shuttered by state regulators last April.

Bank of the Ozarks reported fourth-quarter net income available to common shareholders of $17.6 million, or 51 cents a share, declining from $18.9 million, or 55 cents a share, in the third quarter, but increasing from $16.9 million, or 49 cents a share, a year earlier. The sequential earnings decline reflected an increase in the provision for loan losses to $4.3 million in the fourth quarter, from $1.5 million in the third quarter.

The bank's fourth-quarter net revenue grew 5% from the third quarter and 30% year-over-year, to $31.7 million.

Over the past five quarters, Bank of the Ozarks has seen a major boost in earnings from bargain purchase gains on its failed bank acquisitions, with ROA ranging from 1.75% to 5.23%. The bank was included among TheStreet's 10 Bank Stocks Bringing Home the Bacon in November, as one of the strongest and most consistent earnings among actively traded banks, for the preceding five years.

FIG Partners analyst Brian Martin on Jan. 20 reiterated his "Market Perform" rating on Bank of the Ozarks, "primarily due to valuation," with a $29.50 price target, saying the bank remained "an active bidder and is optimistic more deals are on the horizon and that covered loans will continue to be a key driver of balance sheet growth in 2012."

The shares trade for 2.4 times tangible book value and for 14 times the consensus 2012 EPS estimate of $2.04. The shares are expensive when compared to the many of the largest U.S. banking names, yes, however, the bank's long-term track record speaks for itself.

The shares rose slightly on Wednesday, to close at $29.05.

Interested in more on Bank of the Ozarks? See TheStreet Ratings' report card for this stock.

2. Texas Capital Bancshares

Texas Capital Bancshares ( TCBI) of Dallas has seen its stock rise 8% year-to-date, through Monday's close at $33.09.

The company had $8.1 billion in total assets as of Dec. 30, with full-service offices in Austin, Dallas, Fort Worth, Houston and San Antonio, focusing on "commercial businesses and high net worth individuals." The company is a warehouse mortgage lender, quickly packaging new mortgage loans for sale, usually within 20 days of origination.

Texas Capital Bancshares reported fourth-quarter earnings of $25.7 million, or 67 cents a share, increasing from $21.7 million, or 56 cents a share, in the third quarter, and $12.1 million, or 32 cents a share, in the fourth quarter of 2010.

The company's fourth-quarter net revenue grew 15% from the previous quarter and 53% year-over-year, to $46.9 million. Net interest income increased 34% year-over-year to $88.1 million, as Texas Capital grew its deposits by 26%, while cutting its interest expense in half, to $4.8 million in the fourth quarter. The deposit mix improved, with coveted demand deposits increasing 21% year-over-year, while total deposits increased only 2%.

The company's ROA has ranged between 0.77% and 1.29% over the past five quarters.

Morgan Keegan analyst Robert Patten rates Texas Capital Bancshares "Outperform," with a $38 price target, saying on Jan. 26 after the fourth-quarter results were announced that the company's "stellar returns...with return on equity of 17.1% and ROA of 1.3% for 4Q11, were the best in TCBI's 13 year history."

Patten calls Texas Capital "a pure Texas organic growth story that still has plenty of legs," that is "positioning and managing the warehouse growth to achieve sustainable revenues, taking advantage of ongoing dislocations and market exits by some major warehouse players though using participations and driving fee income."

The analyst expects the company's "momentum to continue through 2012 and consider TCBI as a must-own stock for any bank stock portfolio and project Y/Y EPS growth of 24% in 2012 (versus the 1% median of Morgan Keegan small-cap peers) and 12% in 2013."

The shares trade for 2.1 times tangible book value and for 14 times the consensus 2012 EPS estimate of $2.68.

The shares pulled back slightly on Wednesday, to close at $32.90.

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

1. City National Corp.

Shares of City National Corp. ( CYN) of Los Angeles closed at $47.14 Monday, returning 7% year-to-date. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 1.70%.

The company had $23.7 billion in total assets as of Dec. 30, and has expanded, in part, through purchases of failed banks from the Federal Deposit Insurance Corp., including most recently Nevada Commerce Bank of Las Vegas, last April.

City National reported fourth-quarter net income available to common shareholders of $43.9 million, or 82 cents a share, increasing from $41.4 million, or 77 cents a share, in the third quarter, and $39.7 million, or 74 cents a share, in the fourth quarter of 2010.

Net revenue grew 32% from the previous quarter and 36% year-over-year, to $94.5 million in the fourth quarter.

During the fourth quarter, City National booked $7.6 million in income from FDIC loss-sharing agreements, compared to loss-sharing expenses of $14.2 million the previous quarter and positive loss-sharing income of $26.3 million a year earlier. The major year-over-year improvements were growth of fourth-quarter net interest income to $201.6 million from $185.1 million, and a decline in noninterest expenses to $198.3 million, from $204 million.

Average loans grew 7% year-over-year, to $12.2 billion in the fourth quarter, while average deposits grew 12% year-over-year, to $20.5 billion.

The company's ROA has ranged from 0.72% to 0.86% over the past year.

Morgan Stanley analyst Ken Zerbe has a neutral rating on City National, saying on Jan. 19 that aside from a higher-than-expected tax rate and the FDIC "covered loan accounting noise," the company achieved a "solid quarter," with loan growth and net interest income "outpacing expectations."

The shares trade for 1.5 times tangible book value and for 14 times the consensus 2012 EPS estimate of $3.48.

The shares rose slightly on Wednesday, to close at 47.58.

Interested in more on City National Corp.? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Expensive Bank Stocks Still Worth Buying portfolio on Stockpickr.

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-- 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.