Expert Sterne Agee Analyst Shares His Top Financial Stock Picks; His 2011 Picks Ozark (OZRK), Signature (SBNY) And Lakeland Financial (LKFN) Outperformed Peers, And He Now Recently Upgraded SCBT Financial (SCBT)

Wall Street Transcript

67 WALL STREET, New York - February 7, 2012 - The Wall Street Transcript has just published its Southeast and Midwestern Banks Report offering a timely review of the sector to serious investors and industry executives. This special report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Consolidation in Regional Banking - Growth in U.S. Midwest - Regulatory Outlook Gains Clarity

Companies include: BBCN Bancorp (BBCN); Bank of America (BAC); Cathay (CATY); CenterState Banks (CSFL); Citigroup (C); Comerica (CMA); Farmers Capital Bank Corporation (FFKT); Fifth Third (FITB); FirstMerit (FMER); Huntington (HBAN); JP Morgan (JPM); Lakeland Financial (LKFN); Old National Bancorp (ONB); SCBT Financial (SCBT); Signature Bank (SBNY); Wells Fargo (WFC); Zions (ZION) and many more.

In the following brief excerpt from the Southeast and Midwestern Banks Report, expert analysts discuss the outlook for the sector and for investors.

Kenneth James has worked as a Research Analyst with Sterne Agee & Leach, Inc., covering small and midcap community banks in the Midwest and Southeast since 2009. Mr. James has over nine years experience covering financials. Mr. James started his career equity research at FTN Financial (2003-2007) covering community banks and also covered banks and specialty finance for Robert W. Baird & Co. (2007-2009). Mr. James graduated from the University of Tennessee in 1999 with a B.S. in economics and finance.

TWST: What do you tell investors to do at this point?

Mr. James: At this point, with the sector having rallied as much as it has, and I did not call for "get on the beta trade," I'd be leaning towards fading a little bit of that beta trade; and if you're long, be in defensive names, more defensive names, higher-quality names than the high-beta names. That's from a short-term perspective.

Then from a full-year or longer-term perspective, I think you've got to gravitate towards the names like I talked about earlier that can legitimately generate growth and earnings per share increase that are not driven exclusively by provision expense. 2011 proved - as kind of lackluster year and as volatile as it was with the stocks - that if you latch on to a good story, that you can still make a lot of money. I guess 2011 proved to me that stock picking still works no matter what. It was an extremely challenging year with very highly correlated action between stocks in the sector, between the sector and interest rates.

It's not very many names, and we didn't by any means get all of them, or even most of them probably, but if you got on board with an Ozark (OZRK), a Signature (SBNY), a Lakeland Financial (LKFN), and I don't have the list right in front of me but I know there is more, not only did you outperform on a relative basis, you made real money, lots of it.

TWST: That's what we are here to do.

Mr. James: It can be done. I think it needs to be stated to investors, investment community, that making money on banks is something that can be done. It's hard right now, but I feel like a lot of people, at least in the second half of last year, more or less kind of hung it up for the year or left the sector for dead another year - another not good year for banks, and the top-down kind of macro outlook for this sector is anything but rosy. It's tough, it's got a lot of challenges, but you find a good name and do some good work on it, and you can still do well.

TWST: What good names would you point investors toward at this time?

Mr. James: On my list I have - last year two of my favorite ideas were Old National (ONB) and Lakeland. Old National I think was down a couple percent for the year, but it's still a pretty good outperformer, and I got into it a little later in the year before they did their FDIC deal for Integra. I still like that company. I think it's got what I like in the sense that it's, what I would call, the more defensive buy or a defensive long in the sense that it's got very clean credit, an Indiana footprint that's not boom or bust, excess capital, the potential to be the acquirer of choice for small banks in Indiana, and while it doesn't have a lot of organic growth, which people want, it does have potential for growth via M&A and they also have a lot of costs that can still be cut out of that company.

It has been said investors won't pay for cost cutting, but my retort is a basis point of ROE for NIM or for lower expenses looks the same, and banking is more of a business about the bottom line, returns on capital, growing - retaining capital, growing tangible book than it is, well, every quarter the revenue has to be up and beat expectations or I'm going to take the stock down. Banks aren't tech stocks, so if you can increase your ROE by cutting costs, I think that's absolutely fine and will be rewarded. So I like a name like Old National for a number of reasons, M&A and cost cutting being the two most specific.

Lakeland Financial was probably my top pick last year. It's still in my view undervalued relative to other small community banks, given the level of profitability, growth potential and the growth they actually put up with the profitability. I mean, it's a 2% plus preprovision pretax ROA bank. That's like 1.15% ROA, and it's valued like companies that do significantly less than that and don't grow. So while it was up a last year, I still like Lakeland long-term - it's a perfect long-term buy and hold, and if anybody is still investing based on that strategy, it's perfect for that.

On a newer end, just at the turn of the calendar of the year, I upgraded SCBT Financial (SCBT) after the deal they did in December because I had kind of an epiphany on the stock that said they already have some good things going on under the surface - if they can continue to do deals, both FDIC and traditional like the ones that they have done, that's going to be a pretty good growth engine all by itself, potentially a very strong growth engine. Underneath that, it's a bank in a state - South Carolina - that doesn't have a dominant hometown player. Bank of America (BAC) and Wells Fargo (WFC) are number one and number two in every meaningful market in South Carolina, and SCBT is number six, seven or eight. They've grown loans at an organic pace of 8%-plus annualized for six quarters because they are taking customers from $50-billion-plus asset banks. They've got both market share movement and M&A going on for them I think. So that's my top growth pick for this year.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Southeast and Midwestern Banks Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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