6 Banks Actually Growing Their Banking Business

NEW YORK ( TheStreet) -- Now that the bulk of first-quarter earnings season has passed, TheStreethas identified six actively traded banks that grew their net interest income and their net interest margins.

And that's no mean feat in a prolonged low-rate environment.

While so much of the earnings coverage this season has focused rightly on recovering trading revenues for the largest U.S. banks, and also on confusing one-time items, some banks have also managed to grow their actual banking businesses.

Using data provided by HighlineFI, we isolated six actively traded names that grew their first-quarter net interest income sequentially and year-over-year, and to keep things honest, since these numbers could easily go up just from acquisitions, we only included banks that also saw sequential and year-over-year increases in net interest margin, which is the difference between the average yield on loans and investments and the average cost for a bank's deposits and wholesale borrowings.

We limited the list to actively traded names with average trading volume of at least 40,000 shares.

This type of approach excludes a couple of solid earners that grew their net interest income very nicely, but saw their net interest margins decline, along with other credit card lenders:
  • Discover Financial (DFS) grew its first-quarter net interest income by 3% sequentially and 10.5% year-over-year, to $$1.3 billion during the first quarter. The company was excluded from our list because its net interest margin declined to 7.63% during the first quarter from 7.95% in the fourth quarter. Discover's first-quarter return on average assets (ROA) was 3.63% and its return on average equity (ROW) was a world-beating 29.57%, according to HighlineFI.
  • Capital One Financial (COF) saw its first-quarter net interest income increase by 7% sequentially and 9% year-over-year, to $3.4 billion. The company was excluded from our list because its first-quarter net interest margin of 6.20% declined from 7.26% the previous quarter, reflecting the fact that the deposits gained through the company's ING Direct (USA) acquisition have yet to be deployed through the purchase of HSBC's (HBC) U.S. credit card portfolio, which is expected to be completed during the second quarter. Capital One's first-quarter ROA was 2.28% and its ROE was 17.02%, according to HighlineFI.

Here are the six actively traded bank stocks, for companies that through Tuesday had reported sequential and year-over-year increases in net interest income, as well as in their net interest margins, ordered by ascending year-over-year growth in net interest income:

6. CVB Financial

Shares of CVB Financial ( CVBF) of Ontario, Calif., closed at $11.66 Tuesday, returning 18% year-to-date, following a 19% return during 2011.

Based on a quarterly payout of 8.5 cents, the shares have a dividend yield of 2.92%.

CVB Financial reported first-quarter net interest income of $58.6 million, increasing 6% from the previous quarter and 3% year-over-year. According to HighlineFI, the first-quarter net interest margin -- not adjusted for taxes -- was 3.85%, increasing from 3.65% in the second quarter, and 3.77% in the first quarter of 2011.

First-quarter net earnings were $22.3 million, or 21 cents a share, increasing from $21.7 million, or 21 cents a share the previous quarter, and $16.6 million, or 16 cents a share, a year earlier.

The main factor in the year-over-year earnings improvement has been a reduction in credit-related expenses. The company has not made quarterly provisions for loan losses for four straight quarters. The provision for loan losses during the fourth quarter of 2011 was $7.1 million.

CVB's improved net interest income and margin reflected both improved yields on earning assets and a decline in interest expenses.

The first-quarter return on average assets (ROA) was 1.36%, while the return on average equity was 12.21%, according to HighlineFI. Those are solid numbers in the current banking environment, and represent, by far, the strongest first-quarter performance among the banks listed here.

The shares trade for 1.8 times tangible book value, according to HighlineFI, and for 13 times the consensus 2013 earnings estimate of 91 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 86 cents.

FIG Partners analyst Timothy Coffey on Monday upgraded his rating on CVB Financial to "Outperform," from "Market Perform," while raising his price target for the share by two dollars to $13.50, which is 13.5 times the analyst's 2013 EPS estimate of $1.04, and "190% of forward tangible book."

Coffey said "the stock can maintain the 3 year median Price-to-Forward EPS of 13.5x due to substantial improvements in expenses," which include "lowering debt and borrowings as a percentage of interest-bearing liabilities and reducing operating expenses as a percentage of average assets." The analyst added that "expansion of the price multiple is possible with an expansion of earning assets through, among other means, an acquisition," and that CVB Financial's "management is actively discussing options with potential targets, yet none appear imminent.

Interested in more on CVB Financial? See TheStreet Ratings' report card for this stock.

5. Washington Federal

Shares of Washington Federal ( WAFD) of Seattle closed at $17.17 Tuesday, returning 23% year-to-date, following a 16% decline last year.

Based on an 8-cent quarter payout, the shares have dividend yield of 1.86%.

For its fiscal second quarter ended March 31, Washington Federal reported net interest income of $104.6 million, increasing 1% from the previous quarter and 3% year-over-year. The net interest margin for the fiscal second quarter was 3.29%, according to HighlineFI, increasing from 3.23% the previous quarter and 3.21% a year earlier.

Fiscal second-quarter net income was $34.1 million, or 32 cents a share, increasing from $33.4 million the previous quarter, and $25.8 million, or 23 cents a share, a year earlier. The year-over-year earnings improvement reflected a decline in the provision for loan losses to $18 million in the fiscal second quarter, from $30.8 million, in year-earlier period.

The fiscal second-quarter ROA was 1.00%, while the ROE was 7.12%.

The shares trade for 1.1 times tangible book value, according to HighlineFI, and for 11 times the consensus 2013 EPS estimate of $1.54. The consensus 2012 EPS estimate is $1.32.

Interested in more on Washington Federal? See TheStreet Ratings' report card for this stock.

4. Simmons First National Corp.

Shares of Simmons First National Corp. ( SFNC) of Pine Bluff, Ark., closed at $24.14 Tuesday, down 11% year-to-date, following a 2% decline during 2011.

Based on a 20-cent quarterly payout, the shares have a 3.31% dividend yield.

Simmons First National Corp. had a very strong tangible common equity ratio of 10.66% as of March 31. The company announced back in September that it planned to "allocate its earnings, less dividends, to its stock repurchase program." The company was authorized to repurchase 372,000 additional shares as of March 31.

The company reported first-quarter net interest income of $27.7 million, increasing 1.5% from the previous quarter and 3% year-over-year. The first-quarter net interest margin was 3.75%, according to HighlineFI, increasing from 3.71% in the second quarter, and 3.68% in the first quarter of 2011.

First-quarter net income was $6.4 million, or 37 cents a share increasing from $6.3 million, or 37 cents a share, in the fourth quarter, and $5.1 million, or 29 cents a share, during the first quarter of 2011. The earnings improvement reflected a decline in the provision for loan losses to $771,000 during the first quarter, from $2.8 million the previous quarter, and $2.7 million a year earlier.

The decline in credit expenses during the first quarter was more than offset by a $2.8 million reduction in indemnification assets from increased cash flows on acquired loans covered Federal Deposit Insurance Corp. loss-sharing agreements.

The first-quarter ROA was 0.77%, while the ROE was 6.22%.

The shares trade for 1.2 times tangible book value, according to HighlineFI, and for 14 times the consensus 2013 EPS estimate of $1.75. The consensus 2012 EPS estimate is $1.60.

Simmons First National Corp. trades for the highest forward P/E ratio among this group of six banks.

Stephens analyst Matt Olney on Monday reiterated his "Equal-weight" rating for Simmons First National, while lowering his price target for the shares to $26 fro $29, "as that represents a 1.25x TBV multiple applied to our forecasted 1Q13" tangible book value of $20.88." Olney's target "also equates to 15x our 2013 forecasted EPS of $1.75."

The analyst said that "Considering SFNC's patient growth strategy and its discount valuation (1.2x TBV), we think SFNC is an attractive investment for long-term shareholders that appreciate a healthy dividend (3.3% yield) and a risk averse appetite."

Interested in more on Simmons First? See TheStreet Ratings' report card for this stock.

3. TCF Financial

Shares of TCF Financial ( TCB) of Wayzata, Minn., closed at $11.30 Tuesday, returning 10% year-to-date, following a 30% decline during 2011.

Based on a five-cent quarterly payout, the shares have a dividend yield of 1.77%.

TCF reported first-quarter net interest income of $180.2 million, increasing 4% from the previous quarter and 3.5% year-over-year. The first-quarter net interest margin was 4.11%, according to HighlineFI, increasing from 3.94% in the second quarter, and 4.02% in the first quarter of 2011.

The company on March 13 announced it would prepay $3.6 billion in wholesale borrowings and sell $1.9 billion in mortgage-backed securities, as part of its strategy of moving away from longer-term residential and commercial real estate loans and MBS investments, to a focus on "originating high-yielding, low-risk, secured loans and leases funded by a low-cost, core deposit base," according to CEO William Cooper.

TCF said it had "replaced $2.1 billion of 4 percent weighted average fixed-rate, Federal Home Loan Bank advances with a mix of floating and fixed-rate borrowings with a current rate of .5 percent," while terminating "$1.5 billion of 4 percent weighted average fixed-rate repurchase agreement borrowings." The company expects its net interest income to improve by $74 million, annualized, and for its net interest margin to increase by 96 basis points on an annual basis.

The balance sheet repositioning led to one-time charges totaling $295.8 million, leading to a first-quarter net loss of $282.9 million, or $1.78 a share, compared to fourth-quarter earnings of $16.4 million, or 10 cents a share, and first-quarter 2011 earnings of $30.3 million, or 21 cents a share.

On a positive note, TCF reported very strong sequential growth in average loans during the first quarter of 7%, to $15.2 billion, primarily through its inventory finance business.

The shares trade for 1.4 times tangible book value, according to HighlineFI, and for 10 times the consensus 2013 EPS estimate of $1.15. The consensus 2012 EPS estimate is for a loss of $1.20.

Deutsche Bank analyst Matt O'Connor last Thursday reiterated his "Buy" rating for TCF Financial, with a $13 price target, saying that "from here, EPS should accelerate nicely given strong loan growth, a full quarter's impact of the balance sheet restructuring and an eventual decline in credit costs."

Interested in more on TCF Financial? See TheStreet Ratings' report card for this stock.

2. Cathay General Bancorp

Shares of Cathay General Bancorp ( CATY) of Los Angeles closed at $17.4 Tuesday, returning 17% year-to-date, following a 10% decline last year.

The company owes $258 million in TARP money.

Cathay General reported first-quarter net interest income of $80.6 million, increasing 2% from the previous quarter and 7% year-over-year. The first-quarter net interest margin was 3.29%, according to HighlineFI, increasing from 3.22% in the second quarter, and 3.00% in the first quarter of 2011.

The company reported first-quarter net income attributable to common stockholders of $24.8 million, or 32 cents a share, increasing from $23.6 million, or 30 cents a share in the fourth quarter, and $18.0 million, or 23 cents a share, in the first quarter of 2011.

The company transferred $4 million from loan loss reserves during the first quarter, compared to provisions for reserves of $2 million the previous quarter, and $6 million a year earlier. Factoring-in loan losses, the company released $11.5 million in reserves during the first quarter, directly boosting operating earnings.

The shares trade for 1.4 times tangible book value, according to HighlineFI, and for 11 times the consensus 2013 EPS estimate of $1.56. The consensus 2012 EPS estimate is $1.31.

D.A. Davidson analyst Gary Tenner rates Cathay General a "Buy," with a 12-18 price target of $21, and a five-year price target of $25, saying on April 18 that the expansion of the bank's net interest margin was "driven by additional debt repayments as well as continued focus on reducing deposit costs," and that Cathay's "management is now focused on loan growth."

Tenner s estimates that Cathay General will earn $1.34 a share this year, followed by 2013 EPS of $1.70.

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

1. Brookline Bancorp

Shares of Brookline Bancorp ( BRKL) of Brookline, Mass., closed at $9.02 Tuesday, returning 8% year-to-date, following last year's 19% decline.

dividend

Brookline Bancorp reported first-quarter net interest income of $43.6 million, increasing 49% from the previous quarter and 70% year-over-year, reflecting the company's Jan. 1 acquisition of Bank Rhode Island. The first-quarter net interest margin was 4.62%, according to HighlineFI, increasing from 3.99% in the fourth quarter, and 3.74% in the first quarter of 2011.

The company itself said on April 25 that its first-quarter net interest margin "should have been reported a 3.87%," although its first-quarter interest income and expenses were reported correctly on April 19. In comparison, Brookline reported a net interest margin of 3.80% in the fourth quarter, and 3.74% in the first quarter of 2011.

First-quarter net income was $6.3 million, or nine cents a share, declining from $7.1 million, or 12 cents a share, the previous quarter, and $7.3 million, or 12 cents a share, a year earlier. The first-quarter results included $4.0 million in after-tax expenses associated with the acquisition of Bank Rhode Island.

With the Bank Rhode Island acquisition, Brookline's total assets grew by nearly 50% during the first quarter, to $4.9 billion as of March 31.

The shares trade for 1.5 times tangible book value, according to HighlineFI, and for 12 times the consensus 2013 EPS estimate of 74 cents. The consensus 2012 EPS estimate is 70 cents.

KBW analyst Damon DelMonte rates Brookline Bancorp "Market Perform," with a $9.00 price target, and said on April 18 that "Despite the shortfall to expectations, we are not overly concerned as we figured there are some timing issues related to the expected accretion from the merger deal."

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

>>To see these stocks in action, visit the 6 Banks Actually Growing Their Banking Business portfolio on Stockpickr.

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

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.
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.

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