Sector Watch: Lender stocks

The mortgage industry meltdown has distracted investor attention from high quality lenders, such as SCBT Financial Corp. (Nasdaq:SCBT) and Southside Bancshares (Nasdaq:SBSI), which continue to perform well. Both companies have conservative loan portfolios and double-digit earnings growth.

SCBT Financial has been providing commercial banking services in the Carolinas for over 73 years. The company owns South Carolina Bank and Trust, South Carolina Bank and Trust of the Piedmont, and The Scottish Bank. It operates through 50 financial centers across the Carolinas.  

Location influences regional bank growth rates and SCBT is well-located in a fast-growing region of the Mid-Atlantic. A recent study ranked Raleigh-Cary and Wilmington in North Carolina and Charleston, S.C., among the top 10 cities nationwide for employment growth.

Mortgage loan defaults have not been an issue for SCBT since the company never participated in subprime lending. In the 2008 second quarter, non-performers represented only 0.33% of its total loans. Because of its high asset quality, SCBT is able to capitalize on current growth opportunities that are contributing to record net income.

SCBT’s earnings rose 12.3% in the first six months of 2008, to $12.1 million from $10.8 million in the same period one year ago. Per-share earnings rose modestly to $1.18 versus $1.17 one year earlier, limited by dilution from The Scottish Bank acquisition. Earning assets expanded 20.8% year over year to $2.51 billion from $2.08 billion, and deposits (a source of future loan growth) increased 16.1% year over year to $2.0 billion from $1.7 billion. Analysts think SCBT will produce 12% growth next year and 11% annual growth over the next five years. My $42 target price for SCBT is 12% above Tuesday’s closing price of $37.60.

Southside Bancshares serves markets in eastern Texas that include Fort Worth, the state’s fifth-largest city. It operates through Southside Bank (headquartered in Tyler, Texas) and Fort Worth National Bank (headquartered in Fort Worth, Texas), and has 44 branch locations.

SBSI’s markets have not experienced the housing slowdown affecting other areas of the country. Home prices are up 3.6% so far this year in Texas and 2008 state employment growth is forecast at 2%, fueled by growth in the region’s energy sector.        

Conservative lending, a major acquisition and related synergies helped SBSI post record earnings for the first six months of 2008. Net income soared 68.6% year over year to $14.1 million from $8.4 million one year earlier and per-share earnings climbed 67.8% year over year to $0.99 from $0.59. Loans grew 27.3% year over year to $978.3 million from $768.7 million, and deposits rose 23.1% year over year to $1.5 billion from $1.2 billion. SBSI’s non-performing assets represented less than 0.33% of total assets.

SBSI has produced large upside earnings surprises in the last three quarters and is forecast by analysts to generate 60% growth this year and 6% annual longer-term growth. Management signals its confidence with a $0.03 special dividend that will be paid with the regular $0.13 September quarter dividend. My $29 price target is a 15% premium to Tuesday’s closing price of $25.20.

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