1. Bank Mutual (BKMU) of Milwaukee tops the list with the lowest price relative to tangible book value. Shares closed at $6.44 Tuesday, down 8.5% in May and 5% year to date. The price-to-book ratio was 0.85, and with a quarterly dividend payout of 7 cents, shares were yielding 4.35%.
The thrift holding company had total assets of $3.41 billion as of March 31 and was strongly capitalized with a total risk-based capital ratio of 21.99%, greatly exceeding the 10% required for most banks and thrifts to be considered well capitalized. Such a high level of capital makes the dividend appear safe, although one of the reasons investors may have shied away from the stock is that it has paid dividends exceeding its earnings for several years.
Net income for the first quarter was $2.3 million, for a return on average assets (ROA) of just 0.26%. Contributing to the weak earnings was a narrow net interest margin -- the difference between a bank's average rate earned on loans and investments and its average cost of funds -- of just 1.76%, declining from 2.35% a year earlier. In comparison, the banking industry's net interest margin expanded to a seven-year high of 3.83% during the first quarter, as reported in the Federal Deposit Insurance Corporation's Quarterly Banking Profile .Bank Mutual explained in its first quarterly earnings release that it was repositioning its balance sheet for "what we believe will be higher interest rates in the future," by investing cash inflows from loan repayments into short and medium-term securities and overnight investments. Sterne Agee analyst Mike Shafir said in a report maintaining his firm's neutral rating on the shares that Sterne agreed that Bank Mutual's "healthy capital position will allow it to navigate through this credit cycle" but that "a higher rate environment is necessary" for the bank to grow its earnings significantly. Despite the neutral rating, Bank Mutual looks good as a long-term play and is certainly worth considering, with the shares selling below book value. Even with a narrow net interest margin, the company is profitable, and with the U.S. economy coming out of recession, interest rates will begin to rise. -- Written by Philip van Doorn in Jupiter, Fla.
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