NEW YORK (
has identified a select list of
headquartered in Midwest states, with the lowest forward price-to-earnings ratios based on consensus earnings estimates.
Baseball season is coming, along with the joy of spring and continued economic recovery. This is a great time for bullish investors to pick winners for a regional rally.
Many of the names featured here appear fully valued against the 2011 earnings estimates among analysts polled by Thomson Reuters, however, when you go out another year and consider expectations based on a "closer-to-normal" 2012, two of the best-known Midwest banking names look cheap, with shares trading below 10 times forward earnings.
Then again, the "big four" U.S. banks look even cheaper on that basis.
Bank of America's
forward price-to-earnings ratio was 7.1, based on Friday's closing price of $13.34 and the consensus 2012 earnings estimate of $1.87 a share, among analysts polled by Thomson Reuters. The company seems to have a target on its back, with the
objection to its initial plan to begin returning capital to investors following the completion of the
, other regulatory concerns including the latest "bright idea" of asking large mortgage servicers to pay delinquent mortgage borrowers as much as $21,000 apiece to hand over the keys, ongoing coverage of its legal expenses and potential losses from being forced to buy back securities originally packaged by Countrywide.
For investors who can commit for several years, this could be the moment of "maximum fear" for the stock as economic recovery unfolds, and it could be a historic buying opportunity.
, the forward P/E was 8.2, based on Friday's close at $45.86 and the consensus 2012 EPS estimate of $5.58.
had a forward P/E of 8.4, based on a closing price of $4.46 Friday and a 2012 consensus earnings estimate of 53 cents a share.
forward P/E was 8.9, based on Friday's closing price of $31.94 and projected EPS of $3.58 for 2012
For long-term investors, the regional story may be more compelling, at least for now, and the market seems to be pricing-in the group's growth potential in the expected economic recovery.
To come up with our list, we isolated the 10 bank and thrift holding companies in 12 Midwest states with the lowest forward price-to-earnings ratios based on consensus 2012 earnings estimates among analysts polled by Thomson Reuters. We limited our selections to stocks with average daily trading volume of more than 50 thousand shares and with at least two buy recommendations from analysts.
This approach excludes four banks that would have made the cut, but don't have enough buy ratings from analysts.
First Merchants Corp.
of Muncie, Ind.;
Old National Bancorp
of Champaign, Ill.; and
First Busey Corp.
of Champaign, Ill., each have one buy rating, while all four analysts covering
of Troy, Mich., are neutral.
Let's move on to our Midwest list. All data was provided by SNL Financial as of Friday's market close.
10. Associated Banc-Corp.
of Green Bay, Wis. closed at $14.74 Friday, returning 2% over the previous year. The forward price-to-earnings ratio is 13.4, based on the consensus 2012 earnings estimate of $1.10 a share.
The company reported a net loss to common shareholders of $30.4 million, or 18 cents a share, in 2010, following a loss of $161.2 million, or $1.26 a share in 2009. During each of the past two years, Associated Banc-Corp paid over $29 million in dividends on preferred shares issued to the government for $525 million bailout funds received through the Troubled Assets Relief Program, or TARP.
The good news for Associated is that the company completed on Monday completed a $300 million offering of 5.125% senior notes due in 2016, and plans to use most of the money to repay the government $262.5 million - half of the TARP money -- on April 6.
Out of 13 analysts covering Associated Banc-Corp, two rate the shares a buy, eight have neutral ratings and three analysts recommend selling the shares. The TARP overhand is a major drag on the shares, and this is the only Midwest bank stock meeting our list criteria with sell ratings outweighing buy ratings.
After the debt offering was launched on March 21, Jeff Davis of Guggenheim Securities reiterated his sell rating on Associated, as main subsidiary
is barred by regulators from upstreaming dividends to the parent company. Davis also said that despite the Associated Banc-Corp having "stout capital ratios," his firm assumes "the Federal Reserve will require a modest raise" of common equity, before the company completes its exit from TARP.
9. TCF Financial
of Wayzata, Minn. closed at $15.24 Friday, down 5% over the previous year. The forward P/E is 12.6, based on the consensus 2012 EPS estimate of $1.21.
The company completed a $230 million common equity raise on March 9.
TCF earned $146.6 million, or $1.05 a share in 2010, improving from earnings to common shareholders of $68.7 million, or 54 cents a share in 2009, when the company recorded a non-cash deemed dividend on $12 million on the redemption of cumulative preferred stock, and also paid $6.4 million in dividends on TARP preferred shares, which were redeemed in April 2009.
The company's net interest margin - the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings - improved to 4.14% in 2010 from 3.87% in 2009.
In 2011, TCF Financial will have its first full year of reduced deposit service charges under regulations that became effective on August 15, requiring banks only to provide fee-based overdraft protection on ATM and debit card transactions for customers who "opt-in" for the service only. The Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act - signed into law by President Obama in July - will lower interchange fees charged by banks to merchants accepting payments via debit cards. The company said in its annual report that the "reduction in TCF's average interchange rate after July 21, 2011 could approach 85%," if the Federal Reserve's proposed rule to implement the Durbin amendment becomes permanent.
This is why TCF's earnings are
, with a consensus earnings estimate o 88 cents a share.
The company sued the Federal Reserve in October to keep the regulator from implementing its proposed rules capping interchange fees. Reuters reported that several industry groups have filed "friend of the court" briefs lending their support to TCF.
Still, seven out of 19 analysts covering TCF rate the shares a buy, while 10 analysts are neutral and two recommend selling the shares. Stifel Nicolaus analyst Tony Davis on March 22 upgraded the shares to a buy with a price target of $18, citing the "groundswell of opposition to the Durbin Amendment."
8. FirstMerit Corp.
of Akron, Ohio, closed at $16.50 Friday, down 19% over the previous year. Based on a quarterly payout of 16 cents, the shares have a dividend yield of 3.88%.
FirstMerit's forward P/E is 12.2, based on the 2012 consensus EPS estimate of $1.35.
The company earned $102.9 million, or $1.02 a share in 2010, improving from $82.2 million, or 90 cents a share in 2009.
Stifel Nicolaus analyst Tony Davis on March 7 upgraded FirstMerit to a buy rating with a $21 price target, saying a sell-off in the shares had "created an attractive trading opportunity given the prevailing valuation, the company's top flight management, superior financial profile and impressive longer term growth opportunities in metro-Chicago."
Oppenheimer analyst on Terry McEvoy on Tuesday upgraded FirstMerit to "outperform" or buy, from "perform," saying that "acquisition opportunities across the Chicago marketplace, principally FDIC-assisted deals over the near-to-mid term, have the potential to drive earnings estimates meaningfully higher."
The key to FirstMerit's Chicago area expansion has been its acquisitions of failed institutions from the
Federal Deposit Insurance Corp.
. These have included
of Orland Park, Ill. in February 2010 and
of Elmwood Park, Ill. last May.
Five out of 13 analysts covering FirstMerit rate the shares a buy, while the remaining analysts all have neutral ratings.
7. First Financial Bancorp
First Financial Bancorp
of Cincinnati closed at $16.19 Friday, down 12% from a year earlier. Based on a quarterly payout of 12 cents, the shares have a dividend yield of 2.96%. The forward P/E is 12.1 based on the consensus 2012 earnings estimate of $1.34 a share.
The company fully redeemed its TARP preferred shares on Feb. 23, repaying the government $80 million, and also increased its quarterly dividend payout to 12 cents, from 10 cents a share.
In 2010, First Financial reported net income to common shareholders of $57.4 million, or 99 cents a share, compared to $217.8 million, or $4.78 a share during 2009, when the company booked a $343 million bargain purchase gain on the company's acquisition of the failed Irwin Union Bank, FSB, from the FDIC in September 2009.
The company's return on average assets (ROA) for 2010 was 0.91%, which among this group of ten Midwest banks was only bested by
, with an ROA of 1.14%.
Two of the nine analysts covering First Financial rate the shares a buy, while the remaining analysts all have neutral ratings. Saying the company was "flush with capital," KBW analyst Christopher McGratty on March 11 reiterated his neutral rating on First Financial, although he raised his price target to $18.00.
6. MB Financial
of Chicago closed at $19.28 Friday, down 18% over the previous year. The forward P/E is 11.3, based on the 2012 consensus earnings estimate of $1.70 a share.
The company owes $196 million in TARP money. In late January after MB Financial announced its fourth-quarter results, CEO Mitchell Feiger said the company would wait to repay TARP, "hopefully without any common stock issuance."
MB Financial reported net income to common shareholders of $10.1 million, or 19 cents a share, improving from a net loss to common shareholders of $36.4 million, or $36.4 million, in 2009. The earnings improvement reflected a tax-adjusted net interest margin of 3.83% for 2010, increasing from 2.97% in 2009.
The company's provision for loan losses in 2010 was $246.2 million, rising from $231.8 million a year earlier, as MB Financial continued to work through a prolonged credit slump in Chicago. Nonperforming assets - including loans past due 90 days or more, nonaccrual loans (less government-guaranteed balances) and repossessed assets - made up 5.60% of total assets as of December 31, increasing from 3.75% at the end of 2009. There were signs of an improvement in credit conditions during the fourth quarter, as "potential problem loans" declined to $291.7 million as of December 31, from $311.3 million in September.
Seven out of 13 analysts covering MB Financial rate the shares a buy, while five have neutral ratings and one analyst recommends selling.
of Cleveland closed at $8.72 Friday, returning 11% over the previous year. The forward P/E is 11, based on the 2012 consensus earnings estimate of 79 cents a share.
KeyCorp owes $2.5 billion in TARP money, and is expected to fully repay the government soon, having completed a $625 million common stock offering following the completion of Federal Reserve
The company reported net income attributable to common shareholders of $390 million, or 44 cents a share during 2010, following a loss of $1.6 billion, or $2.34 a share, in 2009. The main factor in the earnings improvement was a reduction in the provision for loan and leases to $638 million in 2010 from $3.2 billion a year earlier. During the fourth quarter, KeyCorp set itself apart from other large lenders by transferring $97 million from loan loss reserves.
In a March 9 report discussing the transfer from reserves, CLSA analyst Mike Mayo said that Key was "the first large bank to take the action despite higher-quality banks not having done so."
Out of 22 analysts covering the company, three rate KeyCorp's shares a buy, while 17 have neutral ratings and two analysts recommend selling. Guggenheim's Jeff Davis on March 18 reiterated his buy rating and $11 price target for the shares, saying speculation that KeyCorp could sell was "likely tabled."
4. U.S. Bancorp
Shares of U.S. Bancorp of Minneapolis closed at $26.92 Friday, returning 4% over the previous year. The forward P/E is 10.5, based on the 2012 consensus earnings estimate of $2.57 a share.
Following the completion of the Federal Reserve's stress tests, U.S. Bancorp increased its quarterly dividend to 12.5 cents a share and a new authorization to buy back up to 50 million shares.
The company reported net income applicable to common shareholders of $3.3 billion, or $1.74 a share for 2010, improving from $1.8 billion, or 97 cents a share in 2009. The 2010 provision for credit losses was $4.4 billion, declining from $5.6 billion.
Even with the large provision for credit losses, U.S. Bancorp's 2010 return on assets of 1.14% was the best among this group of 10 Midwest bank holding companies. Looking back, the company achieved ROA close to or exceeding 2.00% during the three years ending in 2007. With coming releases of loan loss reserves expected as the overall economy improves, long-term investors are could be looking at a golden opportunity.
Analyst sentiment is strong, with sixteen out of 25 analysts rating U.S. Bancorp a buy, while seven have neutral ratings and two analysts recommend selling the shares.
3. Huntington Bancshares
of Columbus, Ohio has had the best return over the past year of any stock in this group of 10, with shares returning 21% to close at $6.59 Friday. The forward P/E is 9.6, based on the 2012 consensus earnings estimate of 69 cents a share.
First quarter earnings are likely to reflect the U.S. bankruptcy court ruling against the company, requiring Huntington to pay $73 million to a trustee representing lenders that were victimized by Cyberco and Teleservices Group. Cyberco was raided by the FBI in November 2004. SNL Financial reported that among the allegations of the lawsuit were that the bank continued to extend credit to the companies despite being aware of irregularities.
For 2010, Huntington reported net income applicable to common shareholders of $140.3 million, or 19 cents a share, compared to a net loss to common shareholders of $3.3 billion, or $6.14 a share, during 2009, when the company booked a noncash goodwill impairment charge of $2.6 billion and securities impairment charges of $183 million.
The 2010 provision for credit losses was $635 million, declining from $2.1 billion a year earlier. Earnings were boosted by an increase in the net interest margin to 3.44% in 2010 from 3.11% in 2009
The 2010 ROA was 0.59%. The consensus earnings estimate for 2011 is 52 cents a share, more than tripling the 2010 earnings performance.
Out of 19 analysts covering Huntington Bancshares, nine rate the shares a buy, nine have neutral ratings and one analyst recommends investors sell the shares.
2. Fifth Third Bancorp
of Cincinnati closed at $13.85 Friday, returning 4% over the previous year. The forward P/E is 9.5, based on the 2012 consensus earnings estimate of $1.46 a share.
Following the completion of the Federal Reserve's stress tests, the company increased its quarterly dividend to 6 cents a share, from a penny a share. The company had already repaid $3.4 billion in TARP money to exit the program in January, following a $1.7 billion common equity raise.
Fifth Third reported 2010 net income available to common shareholders of $503 million, or 63 cents a share, compared to $511 million, or 73 cents a share in 2009, when the company booked a $1.8 billion gain on the sale of 51% of its merchant and financial institutions processing business. The 2010 provision for loan losses declined to $1.5 billion from $3.5 billion the previous year.
The consensus among analysts is for the company to earn $1.18 a share in 2011.
Out of 23 analysts covering Fifth Third Bancorp, nine rate the shares a buy, 13 have neutral ratings and one analyst recommends selling. On March 18, KBW analyst David Konrad upgraded Fifth Third to "outperform," saying the shares were trading at a "14% discount to peers," based on his firm's earnings estimates.
1. Citizens Republic Bancorp
Citizens Republic Bancorp
( CRBC) of Flint, Mich. closed at 86 cents Friday, down 9% from a year earlier. The forward P/E is a low 6.6, based on the 2012 consensus earnings estimate of 13 cents a share.
Not only is Citizens Republic the lowest-price stock among this group of 10 Midwest holding companies and the cheapest relative to forward earnings, it is a speculative play, as the company is operating under a July agreement with the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation, requiring it to submit plans to improve its capital strength, asset quality and risk management and assess the quality of its management. Citizens Republic reported in its annual report that it is in full compliance with the agreement.
The company is seeking shareholder approval for a reverse stock split, with a proposed range of 1-for-2 to 1-for 10, to take place before the end of this year. Shareholders will vote at Citizens Republic's annual meeting on May 18.
The company also owes $300 million in TARP money, and has deferred its last five quarterly dividend payment to the government.
Citizens Republic reported a net loss to common shareholders of $314.6 million, or 79 cents a share for 2010, improving from a loss of $534 million, or $2.71 a share in 2009. The provision for loan losses was $392.9 million in 2010, increasing from $323.8 million in 2009.
Nonperforming assets made up 2.58% of total assets as of December 31, declining from 4.73% a year earlier. During the fourth quarter, Citizens Republic began its planned acceleration of its efforts to workout problem assets, which CEO Cathleen Nash said would be "substantially complete" during the first quarter of 2011. The company resolved $466.2 million in problem assets during the fourth quarter, "through a combination of bulk sales and loan workouts," leading to $159.3 in net charge-offs.
On February 4, FBR Capital Markets analyst Brett Scheiner upgraded Citizens Republic to "outperform," with a price target of $1.30, saying "the company's aggressive problem loan workout strategy and sufficient regulatory capital ratios should drive positive net income at the bank in 3Q11."
The four analysts covering Citizens Republic Bancorp are evenly split between buy and hold ratings.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.