5 Cheapest Bank Stocks Under $5

NEW YORK ( TheStreet) -- Following a year that saw many bank stocks on the road to recovery there are some that continue to trade under $5, which look like a steal when priced to forward earnings estimates.

Investors remained skittish after a very painful 2008, but there was plenty of money to be made on bank stocks trading below $5. Huntington Bancshares ( HBAN), for example, closed at $4.33 on January 11, 2010, rising 66% to close at $7.12 Tuesday. Two of the companies discussed below also had very strong double-digit returns over the same period, were still priced below $5 on Tuesday and have further upside based on consensus price targets.

Using data provided by SNL Financial, we started with 288 publicly traded banks and thrifts trading below $5 - excluding those traded on the Pink Sheets - we narrowed down the list to 36 with three-month average daily trading volume exceeding 50,000 shares. We then pared the list further to the five names trading at the lowest multiple to the consensus 2011 earnings estimates among analysts polled by Thomson Reuters, making sure each company was covered by at least three analysts.

Here they are, ranked by descending forward P/E based on the 2011 earnings estimates:

Terms

For each of the 10 banks discussed on the following pages, we'll be looking at capital strength, earnings quality and asset quality. For an explanation of those terms you can click on the box below.

5. West Coast Bancorp

Company Profile

Shares of West Coast Bancorp ( WCBO) closed at $3.20 Tuesday, returning 15% over the previous year.

Income Statement

The company returned to profitability in the third quarter, reporting net income of $6 million, or 6 cents a share, compared to a net loss of $12.4 million, or 79 cents a share, in the third quarter of 2009. With loan quality improving, West Coast Bancorp was able to lower its third-quarter provision for loan losses to $1.6 million from $20.3 million a year earlier.

The return on average assets (ROA) for the third quarter was 0.97% and the net interest margin was 3.71%, increasing from 3.14% a year earlier.

Balance Sheet

Total assets were $2.5 billion as of September 30 and the nonperforming assets (NPA) ratio was 4.12%, which was a high level but a major improvement from 7.80% a year earlier. The third-quarter net charge-off ratio was 0.83% and reserves covered 2.65% of total loans as of September 30.

West Coast Bancorp is strongly capitalized with a Tier 1 leverage ratio was 12.84% and its total risk-based capital ratio was 18.23% as of September 30. The tangible common equity ratio was 10.18% according to SNL Financial.

Stock Ratios

The shares trade for 20 times the 2011 consensus earnings estimate of 16 cents a share. The forward price-to-earnings ratio declines to 13, based on the 2012 consensus earnings estimate of 25 cents a share.

Analyst Ratings

Out of four analysts covering West Coast Bancorp, only Matthew Clark of Keefe, Bruyette & Woods rates the shares a buy, reiterating his "outperform" rating after the company announced its third-quarter results. Clark's price target is $3.50 and he estimates the company will earn 22 cents a share in 2011 and 25 cents a share in 2012.

The other three analysts all rate West Coast Bancorp a hold.

4. First Busey Corp.

Company Profile

Shares of First Busey ( BUSE) of Champaign, Ill. closed at $4.77 Tuesday, for a total return of 38% over the previous year. Based on a quarterly payout of 4 cents, the shares have a dividend yield of 3.35%.

On December 31, the company raised $85.9 million in new capital, selling $54 million in common shares and $31.9 million in convertible preferred shares to institutional and private investors.

Brian Martin of FIG Partners was enthusiastic about the participation of insiders and local investors in the offering, saying in a report on January 3 that the "strong sponsorship reflects management's ability to successfully execute on its plan and investors' confidence that financial and credit performance will continue to improve allowing them to emerge as a key regional consolidator."

Income Statement

Third-quarter net income to common shareholders was $12.1 million, or 18 cents a share, compared to a third-quarter 2009 loss of $298.6 million, or $8.34 a share, which included a goodwill impairment charge of $208.2 million and a $197.5 million provision for loan loss reserves. The third-quarter 2010 provision for loan losses declined to $31.7 million.

The net interest margin for the third quarter was 3.64%, increasing from 3.05% a year earlier, and the ROA for the third quarter was a decent 0.67%.

Balance Sheet

Total assets were $3.5 billion as of September 30 and the nonperforming assets ratio was 2.50%, improving from 4.71% a year earlier. The third-quarter net charge-off ratio was 2.87% and loan loss reserves covered 3.30% of total loans as of September 30. The company owes the government $100 million in bailout funds received through the Troubled Assets Relief Program, or TARP.

Martin estimated the company's pro forma tangible common equity ratio after the December capital raise would be 7.8% as of December 31 and that the capital raise was "for purely offensive purposes."

Stock Ratios

The shares trade for 18 times the 2011 consensus earnings estimate of 27 cents a share. The forward P/E declines to 12, based on the 2012 consensus earnings estimate of 41 cents a share.

Analyst Ratings

All four analysts covering First Busey rate the shares a hold.

3. Popular, Inc.

Company Profile

Shares of Popular, Inc. ( BPOP) of Hato Rey, Puerto Rico, closed at $3.20 Tuesday, up 42% over the previous year. In addition to having the best total return among the banks listed here over the past year, Popular has the highest upside of 43%, based on the mean target price of $4.57 among analysts polled by Thomson Reuters.

Popular's purchase of the failed Westernbank Puerto Rico from the Federal Deposit Insurance Corp., put the company in a leading position among Puerto Rico banks, with a 38% deposit market share in the commonwealth as of June 30.

Income Statement

For the third quarter, Popular reported net income to common shareholders of $494.5 million, or 48 cents a share, compared to net income to common shareholders of $595.6 million, or $1.40 a share, during the third quarter of 2009.

The third-quarter 2010 results included an after-tax gain of $531 million on the completed sale of 51% of the company's Evertec subsidiary. Interest income was also boosted by a $78.5 million discount accretion on FDIC-covered loans acquired from Westernbank.

During the third quarter of 2009, Popular converted the $935 million in preferred shares held by the U.S. Treasury for TARP assistance to trust-preferred shares. Although the company is still paying the government 5% on the TARP money, the conversion was a huge gain for the company, lowering Popular's accumulated deficit by $485 million because of an assumed discount rate of 16%, taking into account the much greater dividend rate the company would have paid if it had offered trust-preferred shares in the open market.

Balance Sheet

Total assets were $40.8 billion as of September 30, with an NPA ratio of 6.94%, increasing from 6.47% a year earlier. Nonperformers peaked at 7.43% of total assets in March 2010.

The net charge-off ratio for the third quarter was 3.81% and reserves covered 4.74% of total loans as of September 30.

Popular's Tier 1 leverage ratio was 9.99% and its total risk-based capital ratio was 16.16% as of September 30, and the tangible common equity ratio was a strong 8.31%.

Stock Ratios

The shares trade for 16 times the consensus 2011 earnings estimate of 20 cents a share. The forward P/E drops to an attractive level of 8, based on the 2012 consensus earnings estimate of 40 cents a share.

Analyst Ratings

Sentiment for Popular is very strong, with five out of six analysts rating the shares a buy. The remaining analyst recommends investors hold the shares.

After the company's third-quarter results were announced, KBW's Brian Slack reiterated his buy rating for Popular with a $6 price target.

2. Tennessee Commerce Bancorp

Company Profile

Shares of Tennessee Commerce Bancorp ( TNCC) closed at $4.97 Tuesday, returning 15% over the previous year.

The company is the only one of the five listed here to report a net loss for the third quarter.

Income Statement

Tennessee Commerce reported a third-quarter net loss to common shareholders of $1.5 million, or 16 cents a share, compared to net income to common shareholders of $1.2 million, or 25 cents a share, a year earlier. The main factors in the third-quarter loss were a $2 million in repossession expenses and a $7.2 million provision for loan losses, increasing from $5.3 million a year earlier.

The third quarter net interest margin was 3.77%, increasing from 3.61% a year earlier.

Balance Sheet

Total assets were $1.4 billion as of September 30 and the NPA ratio was 3.78%, increasing from 2.35% a year earlier. The third-quarter net charge-off ratio was 2.07% and reserves covered 1.75% of total loans as of September 30. The company said in its third-quarter earnings release that its increase in nonperformers during the quarter was "was mainly attributed to one relationship that totaled $17.3 million."

The Tier 1 leverage ratio was 10.34% and the total risk-based capital ratio was 12.42% as of September 30. The tangible common equity ratio of , and the tangible common equity ratio was 6.63% according to SNL Financial.

Stock Ratios

The shares trade for 12 times the 2012 consensus earnings estimate of 40 cents a share, but the forward P/E drops to a much more attractive 7 times the 2012 consensus earnings estimate of 74 cents a share.

Analyst Ratings

Three out of four analysts covering Tennessee Commerce rate the shares a buy. The remaining analyst recommends holding the shares.

While Jeff Davis of Guggenheim securities lowered his 2011 earnings estimate to 48 cents a share from 50 cents a share after third-quarter results were announced, he reiterated his buy rating with a $6 target on November 1, saying the shares offered "good appreciation potential."

1. Citigroup

Company Profile

Shares of Citigroup ( C) closed at $4.94 Tuesday, returning 36% over the previous year.

While we're still in an environment of major headline risk for the largest U.S. banks, Citigroup has less mortgage exposure than the remaining "big four" U.S. bank holding companies:

According to Consolidated Financial Statements for Holding Companies filed with the Federal Reserve, Citigroup had the lowest total exposure to first-lien one-to-four family mortgages as of September 30, and 5.17% of these loans were in the process of foreclosure, compared to 6.92% for Bank of America ( BAC), 7.05% for Wells Fargo ( WFC) and a whopping 13.68% of first-lien one-to-fours in foreclosure for JPMorgan Chase ( JPM).

Income Statement

For the third quarter, Citigroup reported net income available to common shareholders of $2.1 billion, or seven cents a share, compared to a net loss to common shareholders of $3.2 billion, or 27 cents a share, during the third quarter of 2009.

The provision for credit losses was reduced to $5.9 billion during the third quarter from $12.1 billion a year earlier, with the company reporting a "a net release of reserves for loan losses and unfunded lending commitments of $2.0 billion," accounting for most of the third-quarter profit.

Balance Sheet

Citigroup had $1.98 trillion in total assets as of September 30, with a nonperforming assets ratio of 1.67%, improving from 2.17% a year earlier. The third-quarter net charge-off ratio was 4.24%, declining from 4.78% a year earlier.

Citi's Tier 1 leverage ratio was 6.57% and its total risk-based capital ratio was 16.14% as of September 30. The tangible common equity ratio was 6.76% according to SNL Financial.

Stock Ratios

Citi's shares are trading for 11 times the 2011 consensus earnings estimate of 46 cents a share and 9 times the 2012 consensus estimate of 55 cents a share.

Analyst Ratings

Out of 20 analysts covering Citigroup, 10 rate the shares a buy, eight have hold ratings and two analysts recommend investors sell the shares.

Richard Staite of Atlantic Equities rates the shares "overweight" or buy, with a $6 price target and said in October following Citi's earnings announcement that "upside could be much more if investors start to place a greater value on its strong capital position and significant emerging market presence. "

RELATED STORIES:



-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

To submit a news tip, send an email to: tips@thestreet.com.

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.

More from Opinion

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

It's Dumb to Think There Aren't Already Monopolies in Big Tech

It's Dumb to Think There Aren't Already Monopolies in Big Tech

Google's EU Battles Are Hardly a Reason to Panic

Google's EU Battles Are Hardly a Reason to Panic