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10 Most Profitable Banks Trading Below Book Value

10. Bank Mutual

Shares of Bank Mutual (BKMU) of Milwaukee closed at $5.13 Thursday, returning 19% during January, following a 37% return during 2012. The shares traded for 0.9 times tangible book value, and for 19 times the consensus 2014 earnings estimate of 27 cents. The consensus 2013 EPS estimate is 23 cents.

Based on a 2-cent quarterly payout, the shares have a dividend yield of 1.56%.

During 2012, the company's ROA was 0.27%. The company had $2.4 million in total assets as of Dec. 31.

The company reported fourth-quarter earnings of $2.3 million, or 5 cents a share, increasing from $2.0 million, or 4 cents a share the previous quarter, and $1.4 million, or three cents a share, a year earlier. The sequential improvement mainly reflected a $944 million loss on mortgage servicing rights and a $982 million negative amortization of mortgage servicing rights, both in the third quarter. The year-over-year earnings improvement reflected an increase in gains on loan sales to $3.3 million in the fourth quarter from $2.6 million in the fourth quarter of 2011.

Sterne Agee analyst Kenneth James has a "neutral" rating on Bank Mutual, and said in a report on Jan. 22 that positive developments for the company included improvements in credit quality, net interest margin and "recent loan growth."

The net interest margin (NIM) is the spread between the average yield on loans and investments and the average cost for deposits and borrowings. With the Federal Reserve keeping its target short-term federal funds rate in a range of zero to 0.25% since late 2008, most banks have already seen most of the benefit of lower funding costs, while asset yields continue to reprice lower. Meanwhile, the Federal Reserve continues its rapid balance sheet expansion in an attempt to hold long-term rates at low levels.

Bank Mutual's net interest margin widened to 2.86% in the fourth quarter from 2.66% a year earlier, in part because "$100 million in high-cost borrowings from the Federal Home Loan Bank of Chicago" matured during the third quarter.

"The company remains a ways off from generating normal returns," James said, "but the combination of positive credit quality and revenue trends may draw the shares closer towards [tangible book value]," of $5.87 a share. Considering that the shares rose 7% from Jan. 18 through Thursday's close, it would seem that investors believe in the company's revenue trends.

BKMU Chart BKMU data by YCharts

Interested in more on Bank Mutual? See TheStreet Ratings' report card for this stock.
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