NEW YORK (
) -- Among the ten most actively traded bank stocks trading below book value, there are many stocks that should be avoided, but also several good plays on the coming recovery and one screaming buy.
During "normal times" (remember those?) if you were considering a group of bank stocks, bargains would include profitable banks with decent asset quality trading below two times tangible book value, while bank holding companies with strong earnings growth, a low-risk business model or an attractive dividend payout might trade much higher. Looking back to the bottom of the market in March 2009, it was very easy to find decent names among bank stocks selling below book value. The story has changed now, but there are still a few left.
A bank holding company's tangible book value is its total common equity capital less goodwill, mortgage servicing rights, deferred tax assets, and other intangible assets. As one might expect at this point in the industry recovery, trading far below book is usually a sign of serious problems and danger for investors -- including potential dilution of common shares -- but some of the following names are in a sweet spot right now.
South Financial Group Inc.
of Greenville, S.C. would have made the list since the shares closed at 27 cents or 0.17 times tangible book value on Thursday, but the holding company agreed on May 17 to be acquired by
Here are the most actively-traded bank stocks selling below book value as of Thursday's close according to
, with the cheapest listed first. Hang in there, the more attractive names are toward the end of the list:
of San Juan, Puerto Rico was trading for just 0.2 times tangible book value on Thursday, when shares closed at $1.06, down 54% year-to-date.
The company owes $400 million in TARP money and has missed three dividend payments on government-held preferred shares since August.
FirstBancorp was ordered on June 4 by the Federal Reserve to submit a plan within 30 days to raise sufficient capital to maintain Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 8%, 10% and 12%, respectively. These ratios normally need to be at least 5%, 6% and 10% for most banks to be considered
While FirstBancorp's capital ratios as of March 31 exceeded those required by the Federal Reserves's order, the order states that if the ratios slip below the required amounts, the company will be required to submit a plan for "the sale, merger, or liquidation of the bank" within 45 days, unless additional capital becomes available.
The company announced on June 4 that it was in "advanced discussions" with Treasury officials to convert the $400 million in TARP preferred shares to common shares, and was also planning to raise $500 in common equity.
In late April, the company reported a net loss of $107 million, or $1.22 a share, for the first quarter after losing a total of $275 million, or $3.48 a share, in 2009, as charge-offs (loan losses) mainly in FirstBancorp's construction and consumer loan portfolios took their toll.
Nonperforming assets -- including nonaccrual loans and repossessed real estate loans, less any government-guaranteed balances -- comprised 10.28% of total assets as of March 31 according to
. The annualized ratio of net charge-offs to average loans for the first quarter was 3.65%. Loan loss reserves covered 4.09% of total loans as of March 31, staying "ahead of the pace" of charge-offs.
The massive dilution on the table from the company's plans to convert the TARP preferred to common and raise additional common equity are reflected in the low valuation. Investors should steer clear until and if First Bancorp's capital initiatives are completed.
Citizens Republic Bancorp
of Flint, Mich. closed at 90 cents Thursday, or 0.6 times tangible book value. Even at that low valuation, shares are up 30% year-to-date.
The company owes $300 million in TARP money and missed its February dividend payment on preferred shares held by the government.
Despite continued losses, Citizens Republic was still well capitalized as of March 31, with a Tier 1 leverage ratio of 8.47% and a total risk-based capital ratio of 13.49%. During the company's first-quarter conference call, CFO Charles Christy said the company was confident it had "plenty of capital to get us through the rest of the cycle and remain well capitalized," according to a transcript published by
Citizens Republic reported a first-quarter net loss to common shareholders of $90 million, or 23 cents a share, following a total 2009 loss of $534 million or $2.75 a share. The first-quarter loss reflected $77 million in credit write-downs in anticipation of a sale of nonperforming mortgages during the second quarter.
The nonperforming assets ratio was 4.51%, declining slightly from the previous quarter, as the company reported improvements in several asset quality benchmarks. The net charge-off ratio for the first quarter was quite high at 6.01% but reflected the $77 million write-down on the nonperforming mortgages being sold in the second quarter. Loan loss reserves covered 4.2% of total loans, which appeared adequate.
Keefe Bruyette & Woods analyst Eileen Rooney has a "Market Perform" or neutral rating on the shares, with a 12-month price target of $1. While Christy said Citizens Republic didn't plan on repaying TARP until the bank was "through the cycle and safely on the road to economic recovery," dilution of the common shares is a clear possibility. The improved asset quality trend and continued risk of dilution support Rooney's rating.
Pacific Capital Bancorp
of Santa Barbara, Calif. was trading for 0.6 times tangible book value at Thursday's closing price of $1.35. Shares were up 41% year-to-date, however, the stock has been quite volatile, peaking at $5.11 on April 23.
The company owes $180.6 million in TARP money and has missed four dividend payments on preferred shares held by the Treasury.
As of March 31, Pacific Capital's Tier 1 leverage ratio was 4.29% and its total risk-based capital ratio was 9.64%, putting it below the thresholds required for most banks to be considered well capitalized.
On April 29, the company announced an agreement with a subsidiary of Ford Financial Fund LP for a $500 million investment, with Pacific Capital selling Ford's SB Acquisition Company $45 million in common shares for 20 cents apiece and issuing preferred shares for the rest.
As part of its agreement with the investment group led by Gerald J. Ford, Pacific Capital offered to redeem $67 million in trust-preferred securities at a generous 18 cents on the dollar. It also offered to tender $121 million in subordinated debt for 27 cents on the dollar. This is a perfect illustration of how painful it can be for investors to have their company "saved."
When the Ford investment is closed, Pacific Capital will begin a rights offering, giving shareholders of record the previous day an opportunity to buy common shares at the 20 cent price.
Pacific Capital reported a net loss to common shareholders of $80 million or $1.71 a share, following a loss of $431 million or $9.24 a share during 2009. Most of the losses reflected elevated provisions for loan loss reserves.
The nonperforming assets ratio was 6.00% as of March 31. The net charge-off ratio for the first quarter was 6.62% and loan loss reserves covered 5.77% of total loans.
The Ford investment is probably sufficient to save the company, but will leave current shareholders with a very small stake. This company provides a case-study in the steep price that must be paid by various classes of investors to save a bank that's on the brink. Then again, as far as the debt holders and trust-preferred investors are concerned, the Ford deal certainly beats a total loss.
The volatility of the shares leading up to the Ford deal should be enough to scare investors away.
of Fort Lauderdale, Fla. closed at $1.45 Thursday or 0.7 times book value. Shares were up 12% year-to-date.
The company is not participating.
BankAtlantic Bancorp is a thrift holding company, which doesn't report the same exact capital ratios as the bank holding companies previously mentioned. The company's main subsidiary, BankAtlantic, was well capitalized as of March 31, with a Tier 1 leverage ratio of 7.51% and a total risk-based capital ratio of 12.86%.
The holding company has priced a $25 million rights offering, giving shareholders of record as of June 14 the right to purchase common shares at a price of $1.50. The offering expires after the market close on July 20.
BankAtlantic Bancorp most recently increased its offer to redeem privately-held trust-preferred securities totaling $230 million, to 60 cents on the dollar from 20 cents, and extended the deadline to June 21. This was a major improvement for investors and trustees who were holding out since the original offer was made in January.
Before raising the offer, BankAtlantic was fighting one trustee,
Bank of New York Mellon
, which refused to accept the original 20 cents on the dollar offer, even though more than two thirds of the shareholders of one of the trust-preferred tranches had voted to accept it. While BankAtlantic said the trust-preferred debenture required only a two-thirds vote, Bank of New York was requiring 100% shareholder approval.
Despite tripling the offer, if BankAtlantic succeeds in redeeming the entire $230 trust-preferred pool for $138 million, the company will be able to book a gain of $92 million. Not bad.
The holding company reported a first-quarter net loss of $20.5 million, or 42 cents a share, following a total 2009 loss of $185.8 million, or $7.87 a share, with most of the losses coming from the commercial real estate lending portfolio.
Nonperforming assets comprised 10.83% of total assets as of March 31, according to
, which is the highest nonperforming assets ratio among the ten holding companies being discussed here. The ratio of net charge-offs to average loans for the first quarter was 4.25% and loan loss reserves covered 3.04% of total loans as of March 31.
While BankAtlantic has been able to make many moves to boost capital and survive the credit crisis as it works through its problem loans, it's not easy to see how investors can make money on the stock. Another confusing element for investors is the company's unusual structure, where another company called BFC Financial, which is thinly-traded and controlled by BankAtlantic CEO Alan Levan, controls 66% of the voting power among BankAtlantic's common shareholders, despite holding less than 36% of the common shares as of Dec. 31.
With the company losing so much money for investors over the past several years, investors considering the stock should be aware of the fact that senior management effectively reports to nobody.
of Medford, Ore. is the smallest among the ten most actively-traded bank and thrift holding companies selling for less than tangible book value as of Thursday's close, with total assets of $1.5 billion as of March 31. Shares closed at 46 cents Thursday, or 0.8 times tangible book, and were down 67% during 2010.
PremierWest owes $41.4 million in TARP money and has missed two quarterly dividend payments on government-held preferred shares.
The holding company completed a $33.3 million common stock offering in April. Proceeds of the offering received through March 31 brought the company's Tier 1 leverage ratio to 8.21% and its total risk-based capital ratio to 11%. Terms of an April 6 Cease and Desist order from the FDIC require main subsidiary PremierWest Bank to achieve and maintain a Tier 1 leverage ratio of 10% within 180 days. Since the bank subsidiary's Tier 1 leverage ratio was also 8.21% as of March 31, it appears another capital raise will be needed.
PremierWest Bancorp reported a net loss to common shareholders of $3.3 million, or 10 cents a share, for the first quarter, after losing $148.6 million or $6.01 a share during 2009. The two main factors in the 2009 loss were $88 million in provisions for loan loss reserves and a fourth-quarter non-cash goodwill impairment charge of $74.9 million.
The nonperforming assets ratio was 8.31% as of March 31, down slightly from the previous quarter. PremierWest's net charge-off ratio for the first quarter was 1.93%, which was its lowest level in a year. Loan loss reserves covered 4.16% as of March 31.
There were some bright signs for asset quality, but "adversely classified loans" were still increasing. These include nonperforming loans, as well as performing loans with "a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt." For commercial real estate borrowers whose loans are maturing, there may not be sufficient collateral to support a loan renewal, or a new loan from a different lender. Adversely classified loans comprised 26% of total loans as of March 31.
PremierWest completed a significant capital raise in April, however, the company will probably need to raise capital again to comply with the FDIC order. Investors considering the shares should wait until third-quarter numbers are available. At that point, the company's asset quality picture may have improved, and hopefully it will have achieved the capital ratios mandated by regulators.
of Chevy Chase, Md. closed at $4.35 Thursday or 0.8 times tangible book value. Shares were up 6% year-to-date.
CapitalSource's main subsidiary is CapitalSource Bank of Los Angeles, Calif.
The company is not a TARP pariticpant.
CapitalSource is a specialty finance company, and doesn't report capital ratios in the same manner as most other bank holding companies. Main subsidiary CapitalSource Bank was well-capitalized as of March 31, with a Tier 1 leverage ratio of 11.78% and a total risk-based capital ratio of 17.35%. The holding company's tangible common equity ratio was 15.61% as of March 31, which was the highest by far for the companies being discussed here.
Capital Source reported a first-quarter net loss of $211.7 million or 67 cents a share, after losing $869 million or $2.84 a share during 2009. As would be expected, elevated provisions for loan losses were the main factor in the losses.
For the main bank subsidiary, the nonperforming assets ratio was 5.59% as of March 31. The net charge-off ratio was 2.05%, and reserves covered 6.45% of total loans. Loan loss reserves appeared adequate, even though the ratio of nonperforming loans to total loans was 9.24%.
The decline in shares from a 2010 closing high of $6.23 on April 23 would appear to be a good buying opportunity for investors considering CapitalSource for a long-term play on the economic recovery. The stock is rated "Outperform" or the equivalent of a buy by Keefe Bruyette & Woods analyst Sameer Gokhale, who said the "sell-off appears excessive." KBW projects the company will return to profitability in the first quarter of 2011. While this is a risky play over the next year, the company's strong level of capital mitigates dilution risk and it will be well-positioned when interest rates rise, since nearly all of its loans feature adjustable rates.
of Columbus, Ga. closed at $2.66 Thursday, or 0.8 times tangible book value. Shares were up 30% for 2010, even after pulling back from a closing high of $3.82 on April 20.
The company announced on June 1 that it had completed the consolidation of 28 of its 30 bank charters operating in the Southeast U.S. into one Georgia charter. Synovus's two remaining Tennessee charters are to be consolidated by June 30. While the local branches will still operate under their own brand names, this move will make it easier for the holding company to manage its capital and cash more easily and greatly simplify its relationship with regulators.
Synovus owes $968 million in bailout money, and has not missed any dividend payments on preferred shares held by the Treasury.
The holding company's Tier 1 leverage ratio was 7.68% as of March 31, and its total risk-based capital ratio was 13.03%. June capital ratios will be significantly higher, since Synovus raised $769 million through a common stock offering in May, along with another $334 million from an offering of "tangible equity units" that feature a $25 par value and consist of prepaid common stock purchase contracts and subordinated amortizing notes.
Synovus posted a first-quarter net loss to common shareholders of $230 million, or 47 cents a share, following a 2009 net loss of $1.49 billion or $3.99 a share during 2009, as the company worked through its nonperforming loans.
The nonperforming assets ratio was 6.49% as of March 31, and while this was up from 6.23% the previous quarter, the company also reduced its provision for loan loss reserves as it expects credit losses to continue declining, because the inflow of problem assets had fallen for four straight quarters.
Several analysts are neutral on the shares, saying they are fairly valued after the recent equity raise. Guggenheim Partners analyst Jeff Davis projects the company will return to profitability during the second half of 2011, while Adam Barkstrom of Sterne Agee expects the company to continue losing money through 2011.
Tom Brown of Second Curve Capital, who also writes commentary on
, remains bullish on the company but also believes the capital raise, while reducing the company's risk, has taken away "some of the potential upside" of the shares. Second Curve Capital held 13.4 million or 1.71/% of the outstanding shares in the company as of March 31, according to an SEC filing.
Brown believes that at "7 times normalized earnings, the stock trades as if Synovus is still on life support." (The consensus earnings estimate among analysts polled by
for the company's earnings in 2012 is 34 cents a share). He also thinks the stock could double over the next two to three years.
While the reported financials and the capital raise make a pretty clear case that Synovus is in pretty decent shape and heading toward profitability, there is a potential risk of dilution if the company decides to raise even more capital. Then again, shares are trading at a big enough discount to address some of that risk. For investors who can commit to the shares for three years and avoid reacting to the short-term swings of the market, Synovus looks like a nice recovery play.
Marshall & Ilsley
of Milwaukee closed at $7.78 Thursday or 0.9 times tangible book value. The stock was up 43% year-to-date.
The company owes $1.7 billion in TARP money, and has been making its dividend payments on government-held preferred shares.
Marshall & Ilsley's Tier 1 leverage ratio was 9.36% and its total risk-based capital ratio was 14.47% as of March 31. Guggenheim analyst Marty Mosby, in his report initiating his firm's coverage of M&I with a "Buy" rating, says the company "does not have
the regulatory capital cushion to repay the TARP funds," and he expects the company to issue $1 billion in trust-preferred securities and another $1 billion in debt to repay TARP. This would be a big advantage to common shareholders, who would avoid having their positions diluted.
As we discussed in our look at
, Sen. Susan Collins's amendment to the bank reform legislation would bar banks from including trust-preferred equity in Tier 1 capital. If the amendment were enacted in its current form, the capital-raising plan discussed by Mosby would be untenable. Then again, the senator said last week that the exclusion of trust-preferred equity form Tier 1 capital would have to be phased-in.
The first-quarter net loss to common shareholders was $140.5 million or 27 cents a share, following a 2009 loss of $859 million or $2.46 a share, as the company made elevated provisions for loan losses.
Nonperforming assets comprised 5.55% of total assets as of March 31 according to
, down from 5.71% the previous quarter. The first-quarter net charge-off ratio was 3.89%, and reserves covered 3.55% of total loans. During the first quarter, net loan charge-offs totaled $423 million, which was the lowest level of loan losses over the past four quarters. While the company still reserved more than it lost -- adding $458 million to reserves during the quarter -- There were many signs that loan-quality problems had crested, since early-stage delinquencies had declined for four quarters and the inflow of nonperforming loans had declined to its lowest since the third quarter of 2008. .
With the political and regulatory bias against
equity, it seems likely that Marshall & Ilsley will at least consider a common equity raise. Some of that risk is baked into the current discounted price of the stock, which was trading for 9 times the consensus estimate for earnings in 2012. Marshall & Ilsley appears to be a decent play on the recovery for long-term investors. Mosby's 12-month target for the shares is $10, which represented a 29% gain from Thursday's close.
Who Owns Marshall & Ilsley?
shares closed at $3.90 Thursday or 0.95 times tangible book value. Shares were up 18% year-to-date.
Citigroup received a total of $45 billion in bailout money and redeemed about $20 billion in preferred shares held by the government in December. The Treasury had previously converted $25 billion of Citi preferred stock to common shares in February 2009, and is in the midst of selling its stake in the company.
Citigroup's Tier 1 leverage ratio was 6.16% and the company's total risk-based capital ratio was 14.88% as of March 31. With the consensus earnings projections of profits for every quarter during 2010, it would seem the risk of further dilution to common shareholders is off the table for now. Continued
would also boost the company's capital ratios.
Citi reported a surprise $4.46 billion
for the first quarter, or 15 cents a share, in April after posting a total loss to common shareholders of $1.61 billion, or 80 cents a share, in 2009. First-quarter earnings improved as the company's trading revenue improved and credit costs subsided.
Nonperforming assets declined to 2.65% of total assets as of March 31 from 2.71% the previous quarter. The net charge-off ratio during the first quarter also declined slightly to 4.57% from 4.60% in December. Loan loss reserves covered 6.49% of total loans as of March 31, and because of its aggressive provisioning during previous quarters, Citigroup was able to reserve $18 million less than it charged-off during the quarter, which boosted earnings. This "run-off" of loan loss reserves can be expected to accelerate greatly if credit quality continues to improve the way analysts expect, which will further boost earnings and capital.
Citigroup has paid-off TARP and become profitable, removing the risk of further dilution to common shareholders, at least for now. Analyst Richard Bove recently said investors should
and showered CEO Vikram Pandit with compliments.
It indeed seems that Pandit was the right person to install as CEO after Chuck Prince stepped down in November 2007. Pandit's patient approach kept the company from conducting a panic fire sale as many in the media were demanding and would have led to even greater losses. It's also pretty clear that the government's bailout of the company was a winner for all parties.
As a very large, profitable company with better expense controls, improving credit trends and coming "reserve release," Citi is a screaming buy right here.
of Hato Rey, Puerto Rico closed at $2.77 Thursday or 0.99 times tangible book value. Shares were up 23% year-to-date.
The $935 million in TARP money owed by Popular was converted to common shares last August.
Popular's Tier 1 leverage ratio was 7.34% and its total risk-based capital ratio was 10.97% as of March 31. These ratios don't reflect the company's April 30 acquisition of $9.4 billion in assets from the failed Westernbank Puerto Rico, and a preferred equity raise of $1.1 billion that was subsequently converted to common shares. Capital ratios should be further boosted when the company sells its Evertec subsidiary, which Popular expects to net a gain of at least $700 million.
The company reported a first-quarter net loss of $85 million, or 13 cents a share. For 2009, despite losses from operations and preferred stock dividends and accretion of $618 million, gains booked on the conversion of preferred shares to common stock and trust-preferred shares led to a profit of $97 million, or 24 cents a share. While the consensus analyst projection for 2010 is a net loss of 15 cents a share, the projection for 2011 is for profits in every quarter and full-year earnings of 22 cents a share.
The nonperforming assets ratio was 7.98%, increasing from 7.53% the previous quarter. The ratio of net charge-offs to average loans for the first quarter was 3.84% and loan losses covered 5.51% of total loans.
Popular isn't out of the woods yet as far as credit quality is concerned, and Puerto Rico's official unemployment rate currently exceeds 16%. Depending on how the
to the banking reform legislation is enacted, another common equity raise could be needed.
Still, many analysts are bullish on the shares, including Adam Barkstrom, who reiterated his "Buy" rating on the shares on June 3, with a 12-month target of $5. With the increase in Popular's market share as it took on most of Westernbank's assets and the expectation of a relatively quick return to profitability, patient investors who can tolerate the Popular's risks from coming banking reform and credit losses in Puerto Rico could be handsomely rewarded.
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Written by Philip van Doorn in Jupiter, Fla.
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.