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10 Midwest Bank Stocks: Update

NEW YORK (TheStreet) -- As we continue to track 10 Midwest Bank Stocks selected earlier this year, it's clear that "long-term" remains the overriding theme.

Since we last looked at the group on Aug. 2, half of the names have seen further declines, although that's not a bad short-term track record, considering that the KBW Bank Index (I:BKX) declined 6% during the same period, to close Friday at 41.82, despite rising 7.5% last week.

Now that most large U.S. bank and thrift holding companies have reported their third-quarter results, it's clear that the industry will be facing serious revenue pressures for some time, with narrowing net interest margins as short-term interest rates remain near zero, while long-term rates continue to decline, and with the Oct. 1 implementation of the Federal Reserve's new rules to limit the interchange fees charged by banks to merchants to process debit card purchases, as required by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last July.

Large banks' earnings are also pressured by declining releases of loan loss reserves. The 'big four" U.S. banks all saw declining reserve releases during the third quarter.

Growth of commercial and industrial loans was among the positive themes for the third quarter, although loan demand in most categories remained weak. For the fourth quarter and over the next year, expect expense reductions to be a major industry theme.

We originally selected the following 10 Midwest bank stocks in late March, by isolating the 10 regional names trading at the lowest multiples to consensus earnings estimates for 2012. Initially, the forward price-to-earnings ratios for the group ranged from 6.6 to 13.4. In the meantime, nine of the 10 names have seen their consensus 2012 estimates lowered, in the face of Durbin, the narrowing margins and slower-than-expected loan demand.

The Midwest group's forward P/E ratios now range from 7.6 to 14, showing that most of the group is still more highly valued than the "big four" U.S. banks, which face continued headline risk, including a large mortgage settlement with states' attorneys general on the table, coming capital rules from the Federal Reserve, and a regulatory target on the back, in general.

Bank of America's (BAC) forward price-to-earnings ratio was 7.1, based on Friday's closing price of $7.35 and a consensus 2012 earnings estimate of $1.03, among analysts polled by FactSet. This is the same forward P/E for Bank of America when we originally identified the 10 Midwest bank stock picks based on March 25 market information, however, Bank of America's shares and the consensus 2012 earnings estimate have both declined 45% since then.

For JPMorgan Chase (JPM), the forward P/E was 7.5, based on Friday's close at $36.69 and the consensus 2012 EPS estimate of $4.92. The shares have declined 20% and the forward EPS estimate has declined 12% since March 25.

Citigroup (C) had a forward P/E of 7.7, based on a closing price of $34.16 Friday and a 2012 consensus earnings estimate of $4.42. Factoring-in the 1-for-10 reverse split on May 6, Citi's shares have pulled back 23% since March 25, while the forward EPS estimate has declined 17%.

Wells Fargo's (WFC) forward P/E was 8.4, based on Friday's closing price of $27.08 and consensus 2012 EPS estimate of $3.21. The shares are down 15% since March 25, while the consensus 2012 earnings estimate has been lowered by 10%.

Here are updated looks at the 10 Midwest picks, again in descending order by forward price-to-earnings ratio:

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