Zacks Investment Ideas Feature Highlights: UMB Financial Corporation, First Financial Bankshares and Bank of the Ozarks

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May 18, 2011, 09:30 ET

CHICAGO, May 18, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: UMB Financial Corporation (NASDAQ: UMBF), First Financial Bankshares, Inc. (NASDAQ: FFIN) and Bank of the Ozarks, Inc. (NASDAQ: OZRK).

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While hundreds of financial institutions turned to the federal government to keep them afloat during the financial crisis, there were some banks that managed to navigate through the storm virtually unscathed.

Most of these banks were ones that employed conservative lending practices and had relatively simple, reasonably leveraged balance sheets. Not coincidentally, many were also located outside of the hardest hit real estate markets like California, Nevada, Arizona and Florida.

Improving Profitability

Overall, however, things are looking better for the banking industry. According to the FDIC Quarterly Banking Profile, banks earned net income of $87.5 billion in 2010, the highest amount since 2007.

The biggest reason for this rebound is because of improving asset quality. Almost all major loan categories posted year-over-year declines in charge-offs in the fourth quarter of 2010. Additionally, noncurrent loans (those more than 90 days late) fell 4.7% over the same period.

Another potential catalyst for the industry has to do with the potential steepening of the yield curve. Keep in mind that banks make money on the spread between long-term and short-term rates. They typically pay interest on deposits that are based on short-term rates while taking in interest on loans that are tied to longer-term rates, like a mortgage.

Right now the yield on 10-year Treasury notes remains remarkably low. Back in early February, the yield was close to 3.74%. Despite QE2 coming to an end in June and rising inflation fears, the 10-year currently yields just 3.15%.

Many people believe that once the Fed ends QE2 in June, the yield on the 10-year will start to move significantly higher. And if the yield on the 10-year moves higher, mortgage rates will move higher too. Assuming the Fed keeps short-term rates low, banks will earn a wider spread, and, thus, more money.

Be Selective

Although credit quality has been improving and the yield curve could be steepening, don't expect an industry-wide recovery just yet. Overall credit quality is still historically poor, and high unemployment and further declines in housing prices threaten many of the weakest banks.

However, if you're selective there are several buying opportunities among bank stocks right now. Below are three bank stocks with strong credit quality, rising earnings estimates and solid growth projections. They are also reasonably valued and pay a dividend that yields more than 1.5%.

UMB Financial Corporation (NASDAQ: UMBF) never took TARP money and never cut its dividend during the financial crisis. In fact, the company has managed to increase net interest income after loan loss provisions for the last six years and actually raised its dividend twice in 2008, and again in 2009. It currently yields 1.9%.

UMB recently reported solid Q1 results in which EPS beat the Zacks Consensus Estimate by 31% thanks in large part to improving its already strong credit quality.

Earnings estimates have been soaring, and analysts are currently projecting 15% EPS growth in 2011 and 10% growth in 2012. It is a Zacks #2 Rank (Buy) stock.

Valuation is reasonable too, with shares trading at 15.5x 12-month forward earnings, a significant discount to its 10-year median of 19.0x.

UMB Financial is headquartered in Kansas City, Missouri and operates approximately 130 banking centers in seven states. It was founded in 1913 and has a market cap of $1.7 billion.

First Financial Bankshares, Inc. (NASDAQ: FFIN) is another small cap bank that survived the financial crisis without the help of TARP.

In fact, the company has been thriving thanks to fat margins and relatively strong credit quality. It has also strung together five consecutive positive earnings surprises.

The 2011 Zacks Consensus Estimate is currently $3.10, up from $2.97 before its latest earnings beat. This corresponds to 11% EPS growth. It is a Zacks #2 Rank (Buy) stock.

The company held its dividend steady throughout the financial crisis but has yet to raise it. It currently yields 1.8%.

The stock is trading at 17.0x 12-month forward earnings, essentially in-line with its 10-year median. FFIN is headquartered in Abilene, Texas and operates 52 banking centers throughout Texas. It has a market cap of $1.1 billion.

Bank of the Ozarks, Inc. (NASDAQ: OZRK) also came through the financial crisis on solid footing. The company has delivered 11 consecutive positive earnings surprises dating back to 2008 and managed to hold its dividend steady throughout the Great Recession.

Over the last six quarters, OZRK has raised its dividend five times. It currently yields 1.5%.

Estimates have been soaring since the company posted a 14% positive earnings surprise back in April. Its net interest margin was a remarakably high 5.61% in Q1, while its nonperforming loan ratio was a remarkably low 0.77%.

The company has also been acquiring failed banks to expand its footprint with explicit guarantees from the FDIC on loan losses. Moreover, earnings per share is expected to grow 208% in 2011. It is a Zacks #2 Rank (Buy) stock.

Despite the strong growth projections, shares trade at just 15.0x forward earnings, a discount to the industry average of 15.7x.

Bank of the Ozarks, Inc. is headquartered in Little Rock, Arkansas and has 94 branches, including 66 in Arkansas, 12 in Georgia, 9 in Texas, 3 in Florida, 2 in North Carolina, and 1 each in South Carolina and Alabama. It has a market cap of $823 million.

Conclusion

Although the housing market is expected to continue to decline, it looks like much of the industry is seeing an improvement in credit quality. Additionally, banks stand to benefit from a rise in long-term Treasury yields after the Fed ends QE2.

Be cautious when selecting which bank stocks to buy, however. These three small caps all have solid earnings projections, rising estimates and attractive dividends.

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