10 Banks with Lower Earnings On Tap

NEW YORK ( TheStreet) -- TheStreet has identified 10 profitable bank holding companies expected to see a decline in earnings during 2011.

For some of these banks, including Bank of the Ozarks ( OZRK), analysts' reduced earnings expectations for 2011 reflect elevated 2010 earnings from gains on bargain purchases of failed banks from the Federal Deposit Insurance Corporation.

For others, including TCF Financial ( TCB), fee income declined during the second half of 2010 as new rules were implemented in August requiring that banks only provide overdraft protection for ATM and debit card transactions to depositors who opt-in for the service. Reduced earnings expectations for TCF reflect a full year of the new opt-in rules, along with more declines in fee revenue expected when the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act - signed into law by President Obama in July 2011 - is implemented, which will lower interchange fees on debit card purchases.

SNL Financial analyst Tyler Hall told TheStreet that the Durbin Amendment in its current form would "have anywhere from a 75% to 85% impact on debit card interchange revenues, which have historically been a profit center for many banks."

Two of the holding companies we identified are facing extraordinary expenses tied to regulatory agreements with the Office of Thrift Supervision, including TFS Financial ( TFSL), which has already entered into a memorandum of understanding (MOU) with the regulator, and Hudson City Bancorp ( HCBK), which recently warned that its main subsidiary Hudson City Savings Bank is likely to be required to restructure its balance sheet, leading to "a material charge to earnings."

To come up with our list, we isolated the 10 bank and thrift holding companies with average daily trading volume of at least 50 thousand shares, that were profitable in 2010 and were expected by analysts polled by Thomson Reuters to have the largest percentage decline in earnings for 2011. All data was supplied by SNL Financial.

10. International Bancshares

International Bancshares ( IBOC) of Laredo, Texas, has seen its stock decline 15% over the past year to close at $18.11 Monday.

The company owes $216 million in government bailout funds received through the Troubled Assets Relief Program, or TARP.

The bank was among the 10 identified by TheStreet last August as being among the most heavily reliant among actively traded banks on service charges on deposit accounts, including ATM and debit card overdraft fees.

For 2010, International Bancshares reported net income available to common shareholders of $116.9 million, or $1.72 a share, declining from $129.8 million, or $1.90 a share in 2009. The 2010 results included noncash impairment charges of $8.4 million and $21.8 million in litigation expenses. The return on average assets (ROA) for 2010 was 1.15%, down from 1.23% in 2009. In comparison, the aggregate return on assets for all U.S. banks and thrifts for 2010 was 0.66%, compared to a negative 0.08% in 2009, according to the FDIC.

The company's services charges on deposit accounts held up despite the overdraft opt-in rule, totaling $99.6 million for 2010, unchanged from 2009.

Brett Rabatin of Sterne Agee is the only sell-side analyst covering International Bancshares and has a neutral rating on the company, expecting earnings of $1.62 a share for 2010 and $1.91 in 2012, "assuming IBOC repays TARP without a capital raise."

After the company announced its fourth-quarter results, Rabatin said the shares had "limited downside given the relative valuation to Texas peers and increased M&A speculation in the region."

9. Capital One Financial

Shares of Capital One Financial ( COF) of McLean, Va. closed at $48.30 Monday, returning 28% over the previous year.

The company warned on March 1 in its annual 10-K filing with the Securities and Exchange Commission that it could face another $1.1 billion in losses related to mortgage securitizations, as a result of lawsuits by subsidiaries of U.S. Bancorp ( USB) and Duetsche Bank ( DB).

The company reported net income of $2.7 billion for 2010, or $6.01 a share, increasing from $320 million, or 74 cents a share, in 2009. The main factor in the earnings increase was the transfer of $42 billion assets held in off-balance-sheet conduits onto the balance sheet as required by new accounting rules, during the first quarter.

Capital One's ROA for 2010 was 1.52%.

The consensus earnings estimate for 2011 is $5.18 a share. After Capital One reported its interim credit delinquencies for January, Henry Coffey of Sterne Agee reiterated his neutral rating on the shares, saying that net loan charge-offs "and delinquencies fall across the board, but in the largest unit, US Card, portfolio size continues to fall."

Out of 22 analysts covering Capital One, eight rate the shares a buy, 12 have neutral ratings and two analysts recommend selling the shares.

8. Southwest Bancorp

Shares of Southwest Bancorp ( OKSB) of Stillwater, Okla. closed at $13.60 Monday, returning 73% over the previous year.

The company owes $70 million in TARP money and raised $57.5 million in common equity last April. With a strong tangible common equity ratio of 10.67%, Southwest Bancorp seems well-positioned to repay TARP.

Southwest reported net income available to common shareholders of $12.8 million, or 71 cents a share, improving from $8.8 million, or 60 cents a share, in 2009. The main factor in the earnings improvement was an increase in net interest income to $107.3 million in 2010 from $98.7 million the previous year, as Southwest Bancorp improved its net interest margin - essentially the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings -- to 3.67% from 3.38%.

The ROA for 2010 was 0.57%.

The consensus earnings estimate for 2011 is 61 cents a share.

Two of the three analysts covering Southwest Bancorp rate the shares a buy, with a consensus price target of $20, which would represent a 47% gain from Monday's close. The third analyst recommends investors hold the shares.

In January, Matt Olney of Stephens, Inc. told TheStreet that although he didn't Southwest Bancorp was pursuing a sale, the company was "in an attractive area so they would get offers." Olney said "$16.25 a share is a fair target at the lower end and I could see something close to $18 in valuation if" the company were sold.

7. TCF Financial

Shares of TCF Financial ( TCB) of Wayzata, Minn. closed at $15.86 Monday, rising 9% over the previous year.

The company on Wednesday commenced a $200 million common stock offering.

In the third quarter of 2010 -- before banks were required to implement new rules requiring them only to provide overdraft protection on ATM withdrawals and debit card purchases to customers opting-in for the service -- TCF led U.S. bank holding companies with at least $10 billion in total assets with over 25% of its second-quarter operating revenue coming from service charges on deposit accounts. These charges totaled $79 million during the second quarter, and with the new rules effective for only half of the third quarter, TCF's service charges on deposit accounts declined by 11% to $69.9 million. During the fourth quarter, the service charges totaled $62.6 million.

Seeking to head-off another decline in fee revenue, TCF sued the Federal Reserve in October, saying that the interchange fees it would be allowed to charge under the new rules would be between 5% and 20% of the current rates. The company amended its complaint in January, to add as a defendant John Walsh, the acting Comptroller of the Currency, since the OCC would enforce the "confiscatory rate or fee."

The Independent Community Bankers of America -- an industry trade group of nearly 5,000 banks--in February lent its support to TCF, calling the Federal Reserve's planned curbs on interchange fees "government price fixing."

According to SNL, TCF's motion for a preliminary injunction will be heard in federal court in Sioux Falls on April 4.

TCF reported net income of $146.6 million, or $1.05 a share, for 2010, improving from net income available to common shareholders of $68.7 million, or 54 cents a share, in 2009, which included $18.4 million in preferred dividends and non-cash charges deemed dividends in connection with the $361 million in TARP money that was repaid in April of that year. The ROA for 2010 was $0.82%.

Service charges on deposit accounts for all of 2010 totaled $178.2 million, declining from $293 million in 2009, and the overdraft opt-in rules were in effect for less than half of the year, being implemented on August 15.

The consensus earnings estimate for 2011 is 90 cents a share.

Out of 19 analysts covering TCF Financial, six rate the shares a buy, while 11 have neutral ratings and two analysts recommend selling the shares.

6. Bank of the Ozarks

Shares of Bank of the Ozarks of Little Rock, Ark. Closed at $43.24 Monday, returning 32% over the previous year.

The company has purchased five failed banks from the FDIC over the past year, including Unity National Bank of Cartersville, Ga. in March 2009; Woodlands Bank of Bluffton, S.C. in July; Horizon Bank of Bradenton, Fla. in September; Chestatee State Bank of Dawsonville, Ga. in December; and Oglethorpe Bank of Brunswick, Ga. in January.

Net income for 2010 was $64 million, or $3.75 a share, increasing from $36.8 million, or $2.18 a share, in 2009, when the company paid $6.3 million in preferred dividends accrual on $75 million in TARP money that was repaid in November of that year. The 2010 results included $35 million in gains on FDIC-assisted purchases. The ROA for 2010 was 2.13%, which would be very hard to beat in 2011 with significant additional bargain purchases from the FDIC.

On February 15, the American Banker reported that Bank of the Ozarks was still on the prowl, having already bid on more than 30 failed banks according to CEO George Gleason. The CEO said he would like the bank's 2011 acquisition activity to match that of last year, with a clear preference for FDIC-assisted deals.

The consensus 2011 earnings estimate for Bank of the Ozarks is $2.96 a share.

Five of the 10 analysts covering Bank of the Ozarks rate the shares a buy, while four have neutral ratings and one analyst recommends selling the shares.

5. Bank of Hawaii

Shares of Bank of Hawaii ( BOH) of Honolulu closed at $47.31 Monday, returning 14% over the previous year. Based on a quarterly payout of 45 cents, the shares have a dividend yield of 3.73%.

The company was featured in January as one of 10 Western Bank Stocks for the Long Term, and has been one of the strongest and most consistent earnings performers among large U.S. banks, with annual ROA averaging 1.52%. The company has continued to perform well right through the credit crisis, with its lowest ROA being 1.22% in 2009.

2010 net income was $183.9 million, or $3.80 a share, increasing from $144 million, or $3.00 a share in 2009. The 2010 ROA was 1.45%.

One alarming disclosure in Bank of Hawaii's 2010 10-K report was the company's estimate that the Federal Reserve's proposed regulations based on the Durbin Amendment, "which are likely to be effective in July 2011, could potentially reduce our debit card interchange fees by approximately 82% or $18.8 million on an annualized basis."

The consensus earnings estimate for 2011 is $2.96 a share, with analysts concerned about the net interest margin, which narrowed to 3.16% in the fourth quarter from 3.67% a year earlier, according to SNL.

Brett Rabatin of Sterne Agee said in January that he expected Bank of Hawaii's net interest margin to "be close to bottoming out."

Out of 12 analysts covering Bank of Hawaii, two rate the shares a buy, nine recommend holding the shares and one analyst recommends selling.

4. Renasant Corp.

Shares of Renasant Corp. ( RNST) of Tupelo, Miss. closed at $15.66 Monday, returning 1% over the previous year. Based on a quarterly payout of 17 cents, the shares have a dividend yield of 4.25%.

During 2010, Renasant earned $31.7 million, or $1.38 a share, improving from $18.5 million, or 87 cents a share, in 2009. The 2010 results included $42.2 million in gains on the FDIC-assisted acquisition of the failed Crescent Bank & Trust of Jasper, Ga. in July.

The company made a smaller acquisition on February 4, buying the failed American Trust Bank of Roswell, Ga. from the FDIC.

Renasant's 2010 ROA was 0.80%, but credit quality was placing a drag on core earnings, as the company's provision for loan losses totaled $30.7 million, increasing from $26.9 million in 2009. On a brighter note, Mark Muth of Howe Barnes Hoefer & Arnett pointed out after the fourth-quarter results were announced that Renasant's "continued funding mix shift into low cost, core deposits and out of higher cost CDs and borrowings was a key factor in the NIM improvement." According to SNL, the fourth-quarter net interest margin was 3.54%, improving from 3.29% a year earlier.

The consensus earnings estimate for 2011 is 98 cents a share.

Two of the 11 analysts covering Renasant rate the shares a buy, while the remaining analysts all recommend holding the shares.

3. Hudson City Bancorp

Shares of Hudson City Bancorp of Paramus, N.J. closed at $9.84 Monday, declining 23% over the previous year. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 5.99%.

The shares declined sharply after the company announced in its 10-K filing on March 1 that its Hudson City Savings Bank unit was likely to enter into a memorandum of understanding (MOU) with the Office of Thrift Supervision, requiring it to reduce its interest rate risk by restructuring its balance sheet to reduce its reliance on wholesale borrowings, which would result in material charges to earnings.

Hudson City's net interest margin narrowed to 1.70% in the fourth quarter from 2.27% a year earlier. While the company traditionally operates with a narrow net interest margin, maintaining good operating earnings through industry-leading efficiency, the prolonged low-rate environment paired with weak loan demand will probably cause regulators to force a change in strategy.

Hudson City's net income for 2010 was $537.2 million, or $1.09 a share, increasing from $527.2 million, or $1.07 share in 2009. The consensus 2011 earnings estimate is 76 cents a share.

Following Hudson City's 10-K filing, David Darst of Guggenheim Securities presented several scenarios related to the company's expected MOU. Under a scenario where Hudson City would deleverage by $7.5 billion and restructure another $7.5 billion in funding, Darst estimated the net interest margin would improve to 2.25%, while the company would take $1.3 billion in restructuring charges.

Out of 16 analysts covering Hudson City, 13 have neutral ratings, while three analysts recommend selling the shares.

2. Heritage Financial

Shares of Heritage Financial ( HFWA) of Olympia, Wash. closed at $14.33 Monday, declining 3% over the previous year.

The company reported net income to common shareholders of $11.7 million, or $1.04 a share during 2010, improving from a loss of $739 thousand, or 10 cents a share in 2009. The 2010 results included $1.7 million in dividends and accrued discounts on $24 million in TARP money that was repaid in December. 2010 results also included $11.8 million in gains on the acquisitions of the failed Cowlitz Bank of Longview, Wash. in July and Pierce Commercial Bank of Tacoma in November.

The 2010 ROA was 1.16%.

The consensus earnings estimate for 2011 is 63 cents a share. After Heritage reported its fourth-quarter results, Don Worthington of Howe Barnes Hoefer & Arnett reiterated his buy rating with a $17 target, estimating 70 cents a share in earnings for 2011, saying the company's level of capital was "robust" and that his firm expected "profitability metrics to improve steadily over the next two years due to revenue growth and declining credit costs."

Five of the six analysts covering Heritage Financial rate the shares a buy, with one analyst recommending holding the shares.

1. TFS Financial

Shares of TFS Financial of Cleveland closed at $10.71 Monday, declining 17% from a year earlier.

TFS Financial's fiscal year ends on September 30. For fiscal 2010, the company reported net income of $11.3 million, or four cents a share, declining from $14.4 million, or 5 cents a share, in fiscal 2009. The ROA for fiscal 2010 was 0.10%.

Main subsidiary Third Federal Savings and Loan Association entered into a memorandum of understanding with the OTS in August, requiring it to assess its home equity loan portfolio and reduce its concentration in that loan type and make other changes that the holding company said in its annual report could be material to earnings.

For the first quarter of fiscal 2011 ended December 31, TFS Financial reported a net loss of $7.3 million, resulting mainly from a provision for loan losses totaling $34.5 million, increasing from 16 million a year earlier. The company also said that the OTS had approved its planned reduction of "$1 billion in home equity loan commitments, including a $300 million reduction in outstanding balances." The company and its subsidiaries entered into new MOUs, requiring compliance with monitoring policies set through the original MOU, which TFS said "carry unanticipated costs to complete which will continue to increase the Company's non-interest expense in amounts that are not expected to, but may, be material to its results of operations."

The consensus earnings estimate for fiscal 2011 among the two analysts covering TFS Financial, both of whom rate the shares a buy, is a loss of a penny a share.

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

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

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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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