67 WALL STREET, New York - February 7, 2012 - The Wall Street Transcript has just published its Southeast & Midwestern Banks Report offering a timely review of the sector to serious investors and industry executives. This Southeast and Midwestern Banks 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); Ozarks (OZRK); 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: Are there still growth names in the bank area?
Mr. James: I do believe so, yes. They're a little different than traditionally, and I guess maybe simplistically I would refer to growth as - I've got a pretty loose definition of growth, anything that would give you internally or externally, whether it be revenue or expense, growth in preprovision, pretax income per share. So not credit-driven earnings, because we've seen that releasing reserves or credit leverage does not exactly do wonders for stocks. So there are two different ways you can get what I'm talking about. One is to grow the top line, obviously grow loans organically, improve your net interest margin if you should be so lucky and grow preprovision, pretax income that way.
An example would be a company like Lakeland Financial (LKFN). It's a small-cap company in Indiana which operates a very simple, straightforward kind of C&I-focused business model that's predicated on taking market share from larger banks. They've maintained positive loan growth through the cycle, had growth in preprovision, pretax income per share. It's a legitimate growth story. Growth has slowed there, as it has everywhere, but that was one of the best performing small-cap stocks last year.
The other side of that coin would be something I would think like an Old National (ONB), where they don't have a lot of organic loan growth or organic top-line revenue growth, but they have been on a cost-cutting strategy for over 18 months that has more than offset the pressure on revenue and aided them in growing preprovision, pretax income. Then on top of that there is a third leg, if you can throw accretive M&A on top of that, you grow preprovision, pretax income per share that way as well. It's pretty clear - you can do a pretty clear sort on 3Q 2011, year-over-year growth in preprovision, pretax income per share and look at the year-over-year change in stock price.
I don't think you'll find many where it's positive, and the stocks are down a lot and it's where most of the big winners are going to be. So a name like Bank of the Ozarks (OZRK), a monster stock last year, that was a situation that held true for them due to acquisitions and organic growth. Signature Bank (SBNY), which is not a Southeast or a Midwest bank but an organic growth story, they have preprovision, pretax income per share growth driven by organic balance sheet growth. That one was up 40% or more last year. That's about the only way you're going to get big positive absolute returns right now. The situations I'm talking about are obviously pretty rare.
TWST: Have bank managements adjusted?
Mr. James: I think some have and some haven't. I think there are a lot of bankers out there that have sat on their heels and played defense through this cycle, being internally focused, defensive - focused internally on cleaning up credit, cutting costs, etc., and waiting for times to get better, just assuming, "Hey, eventually one day we're going to get interest rates better and loan growth's going to be better, and we're just kind of playing defense waiting for those days to come along." But I think there are other management teams out there that are on the offensive - if you will, to grow.
With growth being one of the most important drivers of a stock in any industry, you probably want to be aligned with a management team that has a proactive growth strategy. Right now, for most banks that means M&A, because there are only a couple of ways you can actually get the growth, and one is to buy it - on price or structure - and the other is if you happen to be fortunate enough to be located in markets which are strong and you've got a market share position and you're small enough where the large numbers work in your favor, then you can be something like a Lakeland where you can take market share, you can feed off of a JPMorgan Chase (JPM) at the lower end of middle-market C&I and CRE and still grow; however, for most banks material growth probably means M&A.
TWST: Do the banks have the balance sheets or the valuations to go ahead and do M&A at this point?
Mr. James: I think that's the big question facing this sector, particularly on the currency side or the pricing side, I should say. When you talk about the banking industry, I'm going to make a pretty clear delineation between large-cap banks and even upper-mid to large-cap regional banks, and then what I would refer to as almost like a miniregional or a smid-cap bank, anywhere from $3 billion to $30 billion in assets, that piece of the sector. I think they have a whole different kind of set of opportunities ahead of them relative to larger or smaller banks. So when I'm talking positively about growth prospects, smid-cap banks are better positioned than any other slice of the banking pie as far as asset size.
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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