NEW YORK (

TheStreet

) -- An analysis of the largest five banks still owing bailout money to the Treasury highlights two bank stocks for investors to consider right now, while it's probably best to wait on the other three.

(The

Treasury Department announced Friday

that it had lowered its projected cost for the the Troubled Assets Relief Program, or TARP, by $11.4 billion to $105.4 billion, because of earlier-than-expected repayment of bailout funds by some recipients, and because of the significant appreciation of common shares granted to the government by some TARP recipients, including

Citigroup

(C) - Get Report

.)

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Based on total assets as of March 31, the largest five bank holding companies with preferred shares held by the Treasury for assistance received through TARP, are

SunTrust

(STI) - Get Report

,

Regions Financial

(RF) - Get Report

,

Fifth Third Bancorp

(FITB) - Get Report

,

KeyCorp

(KEY) - Get Report

and

M&T Bank Corp

(MTB) - Get Report

.

Here's a quick snapshot of some key numbers for the five banks, based on first quarter SEC filings:

All five banks are holding much higher levels of capital than they would have thought reasonable before the credit crisis hit. Of the three with nonperforming assets exceeding 4%, only Regions Financial has a Tier 1 leverage ratio below 9%, although its total risk-based capital ratio of 15.76% far exceeds the 10% required for most banks to be considered

well capitalized

.

When Will America Face Its Fiscal Crisis? (Forbes)

In the following discussions, all earnings figures are before dividend payments to preferred shareholders.

SunTrust

SunTrust shares closed at $27.54 on Wednesday, with shares up 36% year-to-date. The company's credit trends are improving, as early-stage loan delinquencies have slowed over the past year and the quarterly provision for loan loss reserves declined to $862 million in the first quarter from $974 million in the fourth quarter and $994 million a year earlier.

Shares were trading for 1.4 times tangible book value Wednesday, which would normally indicate a cheap price for a bank stock, but reflect the extended period that SunTrust will spend working through its problem loans, as well as the risk of dilution to common shareholders when the company prepares to repay $4.85 billion in TARP money. The company raised a total of $1.9 billion through common equity offerings in 2009 and has yet to sell any stock in 2010.

SunTrust's net loss narrowed during the first quarter to $158 million, quite an improvement from losses of $245 million for the fourth quarter and $812 million in the first quarter of 2009. Most analysts expect loan losses to continue be a drag on earnings for the next two years. The current consensus estimates are for a loss of $1.21 per share in 2010 following by earnings of 92 cents a share in 2011 and a profit of $2.42 per share for 2012.

In a bullish report supporting his firm's buy ratiing for SunTrust, Deutsche Bank analyst Matt O'Connor said that normalized annual earnings exceeding $3 per share won't be "that difficult to achieve," once the company resolves its credit concerns. Based on his normalized annual earnings projection of $3.17 a share, SunTrust would trade for a low 8.7 times earnings.

With a couple of years of credit pain ahead, along with the uncertainty associated with TARP, SunTrust should only be considered by investors with strong stomachs who can wait until the company is positioned to ride the next wave of growth in the Southeast.

Regions Financial

Shares of Regions Financial were up 48% year-to-date as of Wednesday's market close. The company owes $3.5 billion in TARP money and raised $1.8 billion in a common stock offering in May 2009.

Regions reported a first-quarter net loss of $196 million, improving from a fourth-quarter loss of $543 million, and a profit of $77 million in the first quarter of 2009. Regions continued building loan loss reserves, although the pace slowed, as it set aside $394 million for reserves during the first quarter, compared to $770 million in the fourth quarter and $425 million in the first quarter of 2001.

The company's first-quarter net interest margin -- the difference between the average yield on loans and investments and the average cost of funds -- was 2.74%, the lowest by far out of the group of five. In comparison, the industry aggregate margin for the first quarter was 3.83%. Management expects the margin to improve to 3.00% by the end of the year.

In addition to the low interest rate environment, the margin improvement has been driven by the bank's remarkable increase in non-interest bearing transaction account deposits. These deposit balances -- a stable source of free funding that also generates fee income -- increased 17% over the past year to $23.4 billion as of March 31.

Regions has said it expects problem assets and loan losses to crest during the second quarter, and that it is looking to repay TARP as soon as regulators allow.

Analyst opinion on Regions is mixed. Collins Stewart analyst Todd Hagerman has a buy rating on the stock, citing operating improvements across the board, with a 12-month price target of $10. Barclays Capital analyst Jason Goldberg has an underweight rating and $8 price target on the stock, citing ongoing credit costs and regulatory and litigation risk at Regions subsidiary Morgan Keegan.

There's no question that Regions face short to medium-term risk of dilution as the company works through loan losses and gets closer to repaying TARP. The light at the end of the tunnel will be increased lending in the company's market area, mainly in the Southeast, hopefully funded with continued growth of checking deposits. Meanwhile, investors considering the company face a rocky road over the next couple of years.

Fifth Third Bancorp

Fifth Third has seen its shares rise 37% year-to-date through Wednesday. The company owes $3.4 billion in TARP money, which comes to 3% of its total assets -- the highest among the group of five. Fifth Third also has the highest capital ratios among the five.

First-quarter credit metrics indicated Fifth Third was turning the corner, as nonperforming assets were flat and the net charge-off ratio declined to 2.91% from 3.54% in the fourth quarter, although it exceeded 2.28% a year earlier. The lower charge-offs enabled the company to reduce its provision for loan losses to $590 million from $776 million in the fourth quarter and $773 million in the first quarter of 2009.

Fifth Third reported a small net loss to common shareholders of $10 million for the first quarter, narrower than its $98 million loss in the fourth quarter but still well off its profit of $98 million in the same period a year earlier.

The current consensus estimates (before dividend payments on preferred shares) are for earnings of two cents a share in the second quarter and 11 cents a share for 2009.

The remarkable run of Fifth Third's shares this year, along with the pressure over the past week show just how risky the stock can be over the short term. Many analysts consider the stock to be fairly-valued at this point, although if we take consensus earnings estimates out to 2012, shares trade at a low 9.2 times earnings. Like SunTrust and Regions, Fifth Third is best considered by investors confident of the company's prospects several years down the line. The company has said it expects to repay TARP in the second half of 2010.

KeyCorp

KeyCorp's shares have risen 41% this year through Wednesday. The company owes $2.5 billion in TARP money and has said it would like to repay the Treasury as soon as regulators allow.

Based on price relative to book value, KeyCorp is the cheapest stock among the group of five by far, with shares closing at $7.79, just below the company's tangible book value of $7.94 according to

SNL Financial

.

For KeyCorp, a major sign of a credit turnaround was that its provision for loan loss reserves during the first quarter was less than the amount it charged off, thus "releasing" $109 million in reserves during the quarter. This qualifies it as the only one of the group of five to allow reserves to decline. This effect should accelerate as the economy continues to improve, but the current level of loan loss provisions is still high enough to cause net losses.

Like many banks in the low interest rate environment, KeyCorp has improved its net interest margin. Its mark of 3.17% in the first quarter compares favorably to 2.77% in the same period a year earlier. The company is also in the midst of a long-term push to reduce expenses.

A market price below book value mitigates the short-term risk of a secondary offering as the company looks to repay TARP, especially with analysts' earnings projections likely to continue rising as KeyCorp releases additional reserves.

Based on the market's lack of enthusiasm for the shares and their relatively low valuation, this looks like a great time for investors to consider KeyCorp.

M&T Bank Corp.

M&T's shares have risen 26% year-to-date through Wednesday, and the company's largest shareholder is

Allied Irish Banks PLC

(AIB)

, which has announced plans to raise capital by selling its reported 22.5% stake in M&T during 2010.

There have also been recent reports of negotiations between M&T and

Banco Santander SA

( STD), with M&T considering a combination with Banco Santander's U.S. thrift subsidiary

Sovereign Bank

of Wyomissing, Penn. According to the

Financial Times

, negotiations were suspended over Banco Santander's desire for control over the combined U.S. entity. The talks could be restarted, however. M&T was unwilling to provide any comment on the matter to

TheStreet

.

M&T clearly is the standout among the five largest remaining TARP banks as the only one to remain profitable through the credit crisis. This was mainly because its loan portfolio is concentrated in upstate New York and in Pennsylvania, which escaped the worst effects of the real estate crisis. The bank's TARP burden is also the smallest among the group at $600 million, or less than 1% of its total assets.

The only thing that keeps M&T from being a screaming buy right now is the year-to-date run-up in shares, although they had pulled back 8% from a year-to-date closing high of $90.69 on May 12, closing at $83.39 Wednesday. Shares were selling for 2.8 times tangible book value at that time, which is a bit expensive in the current environment. Maxim Group analyst Christopher Nolan has maintained a "hold" rating on the shares, noting the "premium to peers."

Still, M&T appears to be a pretty low-risk pick. Renewed talks with Banco Santander could lead to a quick premium for shareholders, and M&T's earnings comfortably support a quarterly dividend payout of 70 cents, translating to a decent yield of 3.36%.

More on Regional Banks Tarp Holdouts with Dilution Risk

--

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.