June's Five Top-Performing Big Bank Stocks

NEW YORK (TheStreet) -- While nearly all large bank stocks have been in the doldrums of late, there were a couple of bright spots in June. Here are the five best stock performers for the month from among the 50 largest (by total assets) public U.S. bank holding companies.

Shares of Capital One Financial ( COF) of McLean, Va. closed at $40.30 Wednesday, down 2% in June but returning 7% year-to-date. It finished last week at $39.43.

Earnings: Capital One had a good first quarter, reporting net income of $636 million or $1.40 a share, improving from earnings of 83 cents a share in the fourth quarter and a net loss of 44 cents a share in the first quarter of 2009. The ROA return on assets for the first quarter was a respectable 1.39% and the ROE return on equity was 12.15%, with the improvement in earnings driven by a release of $566 million in reserves, as the company's loan quality improved.

Capital: Capital One paid off its tab with the Troubled Assets Relief Program, or TARP, in June 2009. The company's Tier 1 leverage ratio was 6.04% and its total risk-based capital ratio was 16.90% as of March 31, exceeding the 5% and 10% ratios most banks need to maintain to be considered well capitalized.

Tier 1 capital dropped considerably during the first quarter as the company moved off-balance-sheet conduits onto its balance sheet as required by new accounting rules, which increased total assets by 18% to $201 billion as of March 31. The company was included in TheStreet's 5 Banks That Might Get Burned By Reform, since shareholders face the possibility of a dilutive common offering or conversion, assuming the financial reform bill is passed by Congress, as its ratio of qualifying trust-preferred equity to Tier 1 capital was 31.6% as of March 31.

Asset Quality: Looking at overall credit quality, nonperforming assets - including nonaccrual loans and securities and loans past due 90 days or more (less government-guaranteed balances) plus repossessed real estate -- comprised 2.43% of total assets as of March 31. This compared to the national aggregate ratio of "noncurrent assets plus repossessed real estate" of 3.43% reported by the Federal Deposit Insurance Corp. Capital One's net charge-off ratio for the first quarter was 8.21%, reflecting the company's primary focus on credit card lending.

Like other major card lenders, Capital One reports credit card loss and delinquency rates monthly. According to SNL, Capital One's annualized net loss rate on credit cards for May was 8.89%, which was down from a peak of 9.77% in January, but up slightly from 8.84% in May 2009. Bank of America ( BAC) had the highest credit card loss rate among the "big six" credit card lenders in May, at 13.33%, followed by Citigroup ( C) at 11.16%. American Express ( AXP) had the lowest card loss rate among the group for May, at 6.10% and also showed the best year-over-year improvement by far, with the loss rate down significantly from 10.42% a year earlier.

Capital One's 30+ days delinquency rate for cards was 5.29% in May, improving from a peak of 6.56% in November and 5.41% in May 2009. All of the big six card lenders showed year-over-year improvements in delinquency rates except for Citigroup, which reported a May delinquency rate of 5.59%, a shade higher than 5.58% a year earlier.

Prospects: Capital One's credit quality is on the rebound and earnings are bound to improve in line with the overall economy and additional releases of loan loss reserves. Investors need to be wary, however, of the financial reform legislation, since we don't know how the Collins Amendment's trust-preferred equity restrictions will be phased in. The faster they are phased-in, the more likely it is that common shareholders will have their stakes diluted.

With a pending deal to be acquired by the U.S. subsidiary of Toronto-Dominion Bank ( TD), shares of The South Financial Group ( TSFG) of Greenville, S.C. were flat for June but down 57% year-to-date, closing at 27 cents Wednesday.

The South Financial Group announced on May 17 a merger agreement, under which Toronto-Dominion would acquire the company for 28 cents a share or about $61 million. This was a groundbreaking deal, because the Treasury agreed to sell the $347 million in preferred shares it held in the target company to Toronto-Dominion for a heavily-discounted consideration of $130.6 million.

Following two years of heavy losses in its construction and commercial loan portfolios, South Financial was under pressure to raise capital as main subsidiary Carolina First Bank was no longer considered well capitalized and was ordered by state regulators and the FDIC to significantly increase its capital ratios. A common stock offering might not have succeeded. The Treasury's decision to take a $216 million haircut on The South Financial Group's TARP debt was obviously seen as a better alternative than a total loss on the TARP money if the bank failed, not to mention the hit taken by the FDIC's deposit insurance fund.

Earnings: The first quarter net loss was $80.6 million, following annual losses of $676 million in 2009 and $547 million in 2008.

Capital: The holding company reported a Tier 1 leverage ratio of 7.41% and a total risk-based capital ratio of 10.83% as of March 31. While these would normally be sufficient for a bank to be well-capitalized, South Financial's main unit was required by the FDIC to raise additional capital, which led to management's decision to find a buyer.

Asset Quality: The nonperforming assets ratio was 4.19% as of March 31. The ratio of net charge-offs to average loans for the first quarter was 4.25%.

Prospects: South Financial's management expects the merger deal with Toronto-Dominion to be completed during the third quarter. Since shares closed at 67 cents the trading session before the company announced it was being sold for 28 cents a share, investors might be tempted to reject the deal when it comes to a vote.

On June 22, the Greenville News reported that five shareholders had sued South Financial, saying that the 28 cents-a-share sale price was unfair, since the company's book value was $2.72 a share as of March 31. Of course, numbers can get a little funny when lawyers are involved: That book value figure includes the TARP money. Excluding the government's preferred stake in the company, the tangible book value was $1.64 a share, according to SNL.

So the bank is a risk-arbitrage play at this point. It's quite possible that management will negotiate with the Treasury and with TD to get a better combination of price and TARP forgiveness for the company, which would cause shares to pop. After all, the cost of this deal is chicken feed for Toronto-Dominion.

South Financial has not yet released a voting proxy or announced when it will hold a shareholder vote on the deal, so it's anyone's guess what will result from a delayed vote, the shareholder lawsuit, TD's enthusiasm for the deal and the possibility of more discussions with the Treasury.

Shares of Bank of Hawaii Corp. ( BOH) closed at $48.35 Wednesday, returning 1% during June and 6% for the first half of 2010. The stock finished this past Friday at $46.63.

Earnings: The company has been a good earnings performer through the crisis, even as it increased loan loss reserves to cover moderate loan losses. Bank of Hawaii earned $52.7 million during the first quarter, or $1.09 a share, up from 75 cents a share in the first quarter of 2009. The ROA for the first quarter was 1.70% and the return on average equity was 22.23% -- strong numbers for most banks in any climate, but outstanding in the later stages of a national banking crisis. ROA and ROE for 2009 were 1.22% and 16.43%, respectively. Earnings comfortably support the company's quarterly dividend of 45 cents a share.

Capital: Bank of Hawaii is not a TARP participant. The company's Tier 1 leverage ratio was 6.97% and its total risk-based capital ratio was 17.20% as of March 31. The high risk-based capital ratio reflects what regulators consider to be a low risk profile for the company's loan and securities portfolios.

Asset Quality: The nonperforming assets ratio was just 0.46% as of March 31. Loan losses compared slightly less favorably to the national aggregate, with a ratio of net charge-offs to average loans of 1.17% for the first quarter, compared to the industry charge-off ratio of 2.84%.

Prospects: At a time when many stocks of well-known bank holding companies are selling below book value, Bank of Hawaii's shares aren't cheap, at 2.6 times tangible book value and 15 times the projected 2010 earnings among analysts polled by Thomson Reuters.

However, this is a high quality franchise that has re-focused itself over the past ten years on making quality loans in its home market, and shares traded at much higher valuations before the crisis. At the end of 2007, shares went for nearly 3.5 times tangible book value. The company's price to projected earnings also becomes more attractive as we move out further. Shares were trading for 12.1 times projected earnings for 2012. The company's decent dividend yield of 3.72% completes the case for Bank of Hawaii as a lower-risk long term play for investors.

TCF Financial ( TCB) of Wayzata, Minn. closed at $16.61 Wednesday, returning 3% during June and 24% for the first half. The stock finished Friday at $15.48.

Earnings: Net income for the first quarter was $34.2 million or 26 cents a share, up from 15 cents in the fourth quarter and 17 cents a share for the first quarter of 2009. The company has remained profitable through the crisis. First-quarter earnings improved because the company was able to reduce its quarterly provision for loan losses. The ROA for the first quarter was 0.76% and the ROE was 10.78%. The company was included in TheStreet's Five Bank Stocks Vulnerable to Fee Changes from new overdraft fee rules beginning July 1.

Capital: TCF repaid TARP in April 2009. The company's Tier 1 leverage ratio was 7.67% and its total risk-based capital ratio was 12.49% as of March 31.

Asset Quality: The nonperforming assets ratio was 2.59% as of March 31, only slightly worse than the previous quarter. The net charge-off ratio for the first quarter was 1.22%, improving from 1.35% in the fourth quarter but a little ahead of 1.03% in the first quarter of 2009. Loan loss reserves covered 1.70% of total loans as of March 31.

Prospects: FBR Capital Markets analyst David Rochester raised his firm's rating on TCF's shares to "market perform" from "underperform" in early June, with a 12-month price target of $16. He said FBR expected "uncertainty surrounding the ultimate impact of regulatory reform on fee income expectations to continue to weigh on the stock near term," but also said that the company could achieve annual normalized earnings ranging from $1.60 to $1.80.

Over the short haul, shares appear expensive, priced at 16.7 times the $1.04 consensus earnings estimate for 2010. For long term investors, TCF appears to be another decent play on an economic recovery, trading for 9.5 times the $1.83 consensus earnings estimate for 2012.

Shares of M&T Bank Corp. ( MTB) of Buffalo, N.Y. returned 7% during June to close at $84.95 -- the best stock performance among the largest 50 U.S. banks for the month. Shares returned 31% for the first half of 2010. It finished Friday at $84.89.

M&T is in play because, according to Bloomberg, the company continues to negotiate a possible merger with the U.S. banking operations of Banco Santander SA ( STD), which holds Sovereign Bank of Wyomissing, Pa.

Meanwhile, according to the Sunday Times of London, after earlier announcing plans to sell its 22.5% stake in M&T's shares during 2010, Allied Irish Banks ( AIB) is now considering selling its stake at "a single-digit discount" to the market price to a group of investors, none of whom would end up with more than 2% of the shares offered.

Earnings: First-quarter net income was $151 million or $1.15 a share, increasing from $1.04 a share in the fourth quarter and 49 cents a year earlier. The earnings improvement resulted from a decline in loan losses and lowering of loan loss reserve provisions.

Capital: M&T owes $600 million in TARP money, which is a relatively small amount for a company with $68 billion in total assets; however, the company was also included in TheStreet's Five Banks That Might Get Burned By Reform, since 20% of its Tier 1 capital was comprised of trust-preferred securities as of March 31. The Tier 1 leverage ratio was 8.59% and the total risk-based capital ratio was 12.62% as of March 31.

Asset Quality: M&T's nonperforming assets ratio was 2.07% as of March 31, increasing slightly from the previous quarter. The net charge-off ratio for the first quarter was a moderate 0.73%, and reserves covered 1.73% of total loans as of March 31.

Prospects: M&T is a risky short-term play, because of the fly in the ointment represented by the probable (and possibly discounted) sale of the large stake held by Allied Irish Banks, which is under regulatory orders to raise a significant amount of capital. The prospect of a combination with Banco Santander also raises uncertainty, but could help the company avoid a dilutive common equity offering to repay TARP and handle the effects of the Collins Amendment.

Guggenheim Partners analyst Marty Mosby has a neutral rating on the shares, with a 12-month price target of $72.50, which would be a 15% discount to Wednesday's close. But the market clearly expects good results from all the action surrounding M&T.

-- 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.

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