NEW YORK ( TheStreet) -- The rally in U.S. bank stocks has made the industry riskier for investors who only consider the best-known names. Does anyone have the guts to buy Bank of America ( BAC) shares now that the price-to-earnings ratio has shot up to 67.6? Or Fifth Third ( FITB) at, gulp, 118.9? Even BB&T ( BBT) stands at 24.5. The banking sector as a whole is selling for a bit more than 21, which is more than the benchmark S&P 500 Index of U.S companies. Smart investors should look farther afield for bargains. Here are three -- out of more than 1,000 publicly traded U.S. bank and thrift holding companies -- that came out as winners: Comerica ( CMA) of Dallas, United Financial Bancorp ( UBNK) of West Springfield, Mass., and Westfield Financial ( WFD) of Westfield, Mass. Here are the criteria, using data provided by SNL Financial: Price-to-tangible-book-value ratio below 1 as of Oct. 16; three-month average trading volume greater than 50,000 shares; nonperforming assets below 2.5% of total assets; net interest margin greater than 2.5%; positive return on average assets for 2008; and positive return on average assets for the first half of 2009. We used information mainly from second-quarter filings, since most U.S. holding companies haven't yet announced third-quarter results. Returns on average assets (ROA) are based on net income before dividends paid on preferred stock issued to the Treasury for capital infusions via the Troubled Asset Relief Program (TARP).
Although the company made our list by posting a positive return on assets stretching back to the start of last year, Comerica suffered a third-quarter net loss of $15 million, or 10 cents a share, after factoring in preferred stock dividends paid to the Treasury. Still, the bank beat analysts' estimates of a loss of 53 cents, based on a survey by Thomson Reuters. Comerica recorded $239 million in net loan charge-offs during the third quarter, a decline from $248 million in the second quarter, and said it expected another small drop this quarter because it reduced its residential real-estate exposure. The company's net interest margin (the difference between the average rate earned on loans and investments, and the average cost of funding) declined to 2.68% from 2.73% in the previous quarter, which Comerica attributed to "excess liquidity, which more than offset improved loan spreads and lower core deposit rates." During Comerica's third-quarter conference call, Chief Financial Officer Beth Acton said: "The fourth-quarter net interest margin will increase as a result of maturities of higher-cost CDs and wholesale funding and a reduction in excess liquidity. In addition, we expect the margin will continue to benefit from improved loan pricing." Comerica had a high level of capital as of Sept. 30, with a tier 1 leverage ratio of 12.45% and a total risk-based capital ratio of 16.75%. With the bank so well-capitalized and earnings significantly affected by dividends being paid on $2.25 billion in TARP money received in November, Comerica Chief Executive Officer Ralph Babb said during the call that "we would like to pay it back as soon as feasible."
In a report affirming its "market perform" rating for Comerica, equivalent to "hold," BMO Capital Markets analyst Peter Winter projected the company would repay TARP in mid-2010. He raised his guidance for 2010 to a loss of 55 cents a share (from a loss of $1.40) and net income of $2.60 in 2011. Comerica shares are near a 52-week high, but they're selling below book value. The stock, which has risen 55% this year, has a low risk of dilution for common shareholders, especially since loan quality is improving. Based on the BMA Capital Markets earnings estimate for 2011 and Friday's closing price of $30.79, the price-to-earnings ratio would be about 12. Before the crisis began, the shares closed at $58.68 at the end of 2006, or 11 times the $5.49 per share earned that year. After Comerica released earnings results last Tuesday, Goldman Sachs ( GS) analyst Brian Foran summed up the result as "nice credit, weak earnings," saying that the company's credit quality was "the best of the bunch reporting today," which included Regions Financial ( RF), Marshall & Ilsley ( MI) and Zions Bancorp ( ZION). Goldman has a neutral rating on Comerica. Comerica stands out from many other regional banks because of its early improvement in credit quality. With the repayment of TARP and normalization of earnings over the next several years, there is tremendous upside potential.
Neither company applied to participate in TARP.
United Financial has the best net interest margin of the three companies we selected: 3.38% for the third quarter. Supporting the stock is a buyback of 5% of the company's shares, which began in February, with 633,000 shares repurchased through Oct. 16. There were 208,000 shares left to be repurchased. United Financial's shares are attractively priced, selling for below book value and considerably less than their 52-week high of $15.48. The company's stock has fallen 15% this year. United Financial's strong capital, buyback, excellent loan quality, good net interest margin and coming expansion make it a compelling play.
Chief Credit Officer Louis Gorman said the institution had been focused on building its commercial portfolio for many years, having "assembled a team of very experienced C&I lenders with solid skills and reputations." He said Westfield shied away from riskier loans, wasn't focusing on any particular industry, and that its largest credit was to a local college. Westfield makes for another compelling investment, also selling for below book value and much less than its 52-week high of $10.55. It has by far the highest level of capital among our three picks, giving the company many options, including continued share buybacks, dividend increases and expansion through acquisitions. The stock has dropped 21% this year. -- Written by Philip van Doorn in Jupiter, Fla.