First California: Strong Buy

Strong earnings momentum on the back of impressive second quarter results, including a 25% earnings surprise, helped First California Financial Group, Inc. (FCAL) achieve a Zacks #1 Rank (Strong Buy) on September 8. Moreover, this regional bank has surpassed the Zacks Consensus Estimate in six of the last ten quarters while matching it in one quarter. The average surprise for the period was 148.7%.

With a solid year-to-date return of 100.9% and a history of beating the quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second-quarter earnings, loan growth as well as fundamental strength – including strong credit quality and capital ratios – are the primary rank drivers for this stock.

First California reported its second-quarter results on July 26 with earnings per share of 10 cents, beating the Zacks Consensus Estimate of 8 cents by 25.0% and year-ago earnings of 7 cents by 42.9%. Strong results for the quarter were primarily aided by higher non-interest and interest income. However, a hike in non-interest expenses was the downside.

Net interest income increased 11.2% to $17.2 billion from $15.5 million in the year-ago quarter. The improvement was primarily due to a surge in average earning assets and increase in the net interest margin (NIM). Non-interest income increased 5.6% year over year to $3.4 million.

Non-interest expense increased 5.5% from the year-ago period to $14.8 million. Provision for loan losses remained unchanged compared with the year-ago quarter at $0.5 million.

Credit quality continued to improve. As of June 30, 2012, allowance for loan losses was 1.76% of total loans, down 23 basis points from 1.99% as of June 30, 2011. Net charge-offs for the quarter were $0.3 million compared with $0.9 million in the year-ago quarter.

As of June 30, 2012, North Valley's total risk-based capital ratio was 16.93% and Tier 1 leverage ratio was 9.99%. Tangible book value per share came in at $4.51 versus $4.11 in the year-ago quarter.

Earnings Estimate Revisions

For 2012, the Zacks Consensus Estimate advanced 16.7% to 42 cents per share in the past 60 days. This implies a year-over-year growth of about 797.2%. For 2013, the Zacks Consensus Estimate jumped 12.8% over the same period. This represents an increase of 27.5% compared with the prior year.

Valuation

First California currently trades at a forward P/E of 16.6x, a 10.7% premium to the peer group average of 15.0x. However, on a price-to-book basis, the shares are trading at 0.99x, a discount of 18.9% to the peer group average of 1.22x.

First California has a trailing 12-month ROE of 5.0% compared with the peer group average of 9.3%.

About the Company

Headquartered in Westlake Village, California, First California Financial is a bank holding company operating 19 commercial banking offices through its subsidiary – First California Bank. It offers a wide range of consumer and business banking deposit products and services to individuals and small and middle sized businesses. Founded in 1979, the company has a market capitalization of roughly $202.5 million.

Other Zacks #1 Rank bank stocks include BofI Holding Inc. (BOFI - Snapshot Report) and Premierwest Bancorp (PRWT).