10 Regional Banks Swimming In Foreclosures

NEW YORK ( TheStreet) -- TheStreet has identified the 10 regional U.S. banks with highest balances of residential loans in some stage of foreclosure, as most large players sped-up the process of working through their mortgage mess.

Most of the recent media coverage has focused on lingering scrutiny of foreclosure processes at the "big four" U.S. Banks, all of which saw increases in the mortgages in foreclosure during the second half of the year, although the pace slowed in the second and third quarters as the media, state attorneys general and the public caught onto some sloppy practices by mortgage servicers seeking to seize collateral.

The bank with the highest total unpaid principal balance of loans secured by one-to-four family properties in some stage of foreclosure as of December 31 - according to data from Securities and Exchange Commission filings supplied by SNL Financial - was JPMorgan Chase ( JPM), with $23.1 billion. This was an increase of 16% during the fourth quarter and 23% from a year earlier. In its annual 10-K filed with the SEC on February 28, JPMorgan said it expected to "incur additional costs and expenses in connection with its efforts to correct and enhance its mortgage foreclosure procedures," as well as "significant legal costs in responding to governmental investigations and additional litigation." The company also estimated that "reasonably possible losses" in excess of legal reserves already established could range as high as $4.5 billion.

The bank holding company with the second highest principal balance of residential mortgage loans secured by properties in foreclosure was Bank of America ( BAC), with $20.6 billion, which was a 20% increase from a year earlier. Although CEO Brian Moynihan was upbeat at an investor presentation on Tuesday, saying the company's "normalized" earnings could range as high as $40 billion a year before taxes, several analysts expressed concerns over the company's lingering mortgage put-back risk, as several investor groups press the company to buy back mortgage-backed securities originally issued by Countrywide (which Bank of America acquired in July 2008), or pay compensation.

Next is Wells Fargo ( WFC), which had $17.9 billion in residential mortgage loans secured by properties in foreclosure as of December 31, increasing 18% from a year earlier. In its 10-K filing, the company said "it is likely that one or more of the government agencies will initiate some type of enforcement action against Wells Fargo, which may include civil money penalties," stemming from investigation's of foreclosure practices. Wells Fargo also said that seven class action suits and "several individual borrower actions" were filed late in 2010 and early this year, over its role as a mortgage servicer.

Citigroup ( C) had a far lower $7 billion in residential mortgages with collateral in foreclosure as of December 31, although this was an increase of 11% in the fourth quarter and 34% from a year earlier. The Wall Street Journal reported on March 3 that Citi was among the large mortgage servicers that were sent a proposal drafted by the U.S. Justice Department, other unnamed federal agencies and state attorneys general, outlining changes to loan servicing practices that were meant to stem foreclosures.

Moving beyond the big four, here are the 10 regional bank holding companies with the highest unpaid principal balances of one-to-four family residential loans secured by homes in foreclosure, as of December 31:

10. New York Community Bancorp

Shares of New York Community Bancorp ( NYB) of Westbury, N.Y. closed at $17.70 Tuesday, returning 19% over the previous year. Based on a quarterly payout of 25 cents, the shares have a dividend yield of 5.65%.

New York Community had $289.1 million in one-to-four family mortgages collateralized by homes in the process of foreclosure as of December 31, that vast majority of which were covered by loss-sharing agreements with the Federal Deposit Insurance Corp..

Repossessed real estate totaled $90.5 million at the end of 2010, and the company said that $62.4 million of that total was related to the company's acquisition of the failed Desert Hills Bank of Phoenix in March 2010, and was covered by FDIC loss sharing agreements.

While the company acquired a mortgage lending business when it purchased some of the deposits and assets of the failed AmTrust Bank of Cleveland from the FDIC in December 2009, the one-to-four family loans being originated are immediately sold to government-sponsored enterprises.

The company's lending is focused on multifamily loans, "with an emphasis on non-luxury apartment buildings that feature below-market rents," which totaled $16.8 billion or 70.9% of "noncovered" portfolio loans as of December 31. Covered loans are those covered by loss-sharing agreements with the FDIC, where the agency essentially covers 80% of losses on loans acquired as a result of a bank failure.

New York Community's 2010 ratio of net charge-offs - loan losses less recoveries - was 0.20% according to SNL, which was an extremely low loss rate when compared to the aggregate net charge-off ratio for all U.S. banks and thrifts, which was 2.54%, according to the FDIC.

New York Community's forward price to earnings ratio is 12, based on Tuesday's closing price and the consensus 2012 earnings estimate of $1.48 a share among analysts polled by Thomson Reuters.

Out of 19 analysts covering the company, 11 rate the shares a buy, while seven have neutral ratings and one analyst recommends selling the shares. The mean price target is $19.57, implying 11% upside for investors, while they collect the dividends.

9. Popular, Inc.

Shares of Popular, Inc. ( BPOP) of Hato Rey, Puerto Rico, closed at $3.17 Tuesday, returning 42% over the previous year.

The company had $328 million in one-to-four family mortgages secured by properties in foreclosure as of December 31. According to the company's 10-K report, $551 million out of its $3.6 billion in mortgage loans were adversely classified as of December 31. This excludes "covered loans" acquired from the failed Westernbank in May. The loans acquired from Westernbank are covered under an 80% loss-sharing agreement with the FDIC.

Popular reported a net loss applicable to common stockholders of $227.5 million, or 22 cents a share, and a net loss of $54.6 million, or 6 cents a share, for all of 2010. The 2010 provision for loan losses was $1 billion and the company's net charge-off ratio was 5.83%.

The company owes $935 million in government bailout funds received through the Troubled Assets Relief Program, or TARP.

Following the company's 10-K report, Adam Barkstrom of Sterne Agee reiterated his buy rating for Popular, as the company's efforts to dispose problem assets "help clear the way for a return to more material and sustainable earnings." The company reclassified $1 billion in portfolio loans as held-for-sale during the fourth quarter, mainly nonperforming construction, commercial real estate and land loans.

Barkstrom's $5 target for the shares is based on a normalized earnings estimate of 55 cents a share.

Five of the six analysts covering Popular rate the shares a buy, while the remaining analyst has a neutral rating. The forward P/E is 8, based on the 2012 consensus earnings estimate of 38 cents a share.

8. Fifth Third Bancorp

Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $13.70 Tuesday, rising 9% over the previous year.

Fifth Third saw its stock slide on March 1, after the company disclosed that the SEC had issued a third subpoena for information on its commercial loans, although SNL reported that investors attending the bank's earnings presentation weren't overly concerned.

The big news for Fifth Third is, of course, its repayment of $3.4 billion in TARP money, following a $1.7 billion common equity raise in January. This set the company apart from other large regional players, including SunTrust ( STI), Regions Financial ( RF ) and KeyCorp ( KEY), that are awaiting the results of the latest round of Federal Reserve stress tests , before repaying government bailout funds.

The company had $527.7 million in one-to-four family mortgages secured by properties in foreclosure as of December 31.

Fifth Third reported 2010 net income available to common shareholders of $503 million, or 63 cents a share, compared to $511 million, or 73 cents a share in 2009, when the company booked a $1.8 billion gain on the sale of 51% of its merchant and financial institutions processing business. The 2010 provision for loan losses declined to $1.5 billion from $3.5 billion the previous year.

The 2010 net charge-off ratio was 2.95%.

Fifth Third's forward P/E is 9.5, based on the consensus 2012 earnings estimate of $1.44 a share. Out of 24 analysts covering the company, eight rate the shares a buy, 14 have neutral ratings and two recommend selling the shares.

7. BankUnited

Shares of BankUnited ( BKU) of Miami Lakes, Fla. closed at $28.59, up 2% from their initial offering price of $27 on January 27.

The "new" BankUnited was resurrected from the old BankUnited, which failed in May 2009 and was purchased from the FDIC by an investor group led by John Kanas.

BankUnited's entire loan portfolio acquired from its failed predecessor is covered by an 80% loss-sharing agreement with the FDIC.

The new BankUnited earned $156.9 million during the first three quarters of 2010, or $1.69 a share, according to its prospectus, for a return on average assets of 1.86%. The company's ratio of nonperforming assets (excluding loans and repossessed assets covered by the FDIC) to total assets was 1.99% , and the annualized net charge-off ratio for the first three quarters of 2010 was a low 0.31%.

It's too early to consider analyst ratings or P/E multiples for the company, but the company is expected to deploy its capital war chest by making strategic acquisitions. John Kanas told TheStreet's Maria Woehr after the IPO that BankUnited planned to be "an important part of the consolidation story" for the banking industry, with an initial focus on expanding its footprint in the Southeast.

6. BB&T Corp.

Shares of BB&T ( BBT) of Winston-Salem, N.C. closed at $26.98 Tuesday, down 4% from a year earlier.

The company had $598 million in one to four family mortgages with collateral in some stage of foreclosure as of December 31.

BB&T earned $816 million, or $1.16 a share during 2010, increasing from net income available to common shareholders in 2009 of $729 million, or $1.15 a share. The company's return on average assets for 2010 was 0.54%, as a $2.6 billion provision for loan losses continued to place a drag on earnings. The provision declined from $2.8 billion in 2009.

The company's ratio of net charge-offs to average loans for 2010 was 2.41%, increasing from 1.74% the previous year.

BB&T's forward P/E is 10.5 based on the 2012 consensus earnings estimate of $2.57 a share. Adam Barkstrom of Sterne Agee said in a report on March 3 after meeting with the company's management that BB&T's could achieve normalized annual earnings of $3.39 a share, and set a price target of $34, based on that estimate, which he said "compares to less profitable peers currently trading in the 10x-12x range."

Sterne Agee dropped its coverage of BB&T on March 8. Eight of the remaining 33 analysts covering the company rate the shares a buy, while 21 have neutral ratings and four analysts recommend selling the shares.

5. Regions Financial

Shares of Regions Financial of Birmingham, Ala. closed at $7.64 Tuesday, up 9% over the previous year.

The company had $723.7 million in one to four family mortgages with collateral in foreclosure as of December 31, which was an increase of 43% from the previous quarter. The company's nonperforming assets ratio - including loans past due 90 days, nonaccrual loans and repossessed real estate - was 3.38% at the end of 2010, compared to 3.57% a year earlier. The 2010 net charge-off ratio was 3.17%, increasing from 2.34% in 2009.

The company reported that in the fourth quarter, its inflow of nonperforming loans declined 29% from the third quarter.

Regions returned to profitability during the fourth quarter, reporting net income available to common shareholders of $36 million, or 3 cents a share. For all of 2010, the company reported a net loss to common shareholders of $763 million, or 62 cents a share, following a 2009 loss of $1.3 billion, or $1.27 a share.

The company owes $3.5 billion in TARP money.

Regions has been the subject of persistent rumors of a possible sale, and Richard Bove of Rochdale Securities lowered his rating on the company to a sell from a neutral rating on February 16, saying "speculation is high" that the company will be acquired, fed by a "belief that Regions has failed the most recent stress test and that the bank will be required to sell."

While Bove said he viewed a sale was not likely at current prices, but said the shares were over-valued because he assumed that a takeout "would occur at $5 to $6 per share." The analyst also said he thought it would be more likely that Regions would raise capital instead of selling.

Regions Financial's forward P/E is 13, based on the consensus 2012 earnings estimate of 58 cents a share. None of the 21 analysts covering the company recommend buying the shares. Eight analysts have neutral ratings and three recommend selling.

4. Hudson City Bancorp

Shares of Hudson City Bancorp ( HCBK) of Paramus, N.J. closed at $10.02 Tuesday, down 21% over the previous year. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 5.99%.

Hudson City reported $743.4 million in one to four family mortgages with the underlying homes in foreclosure as of December 31, however, credit quality at main subsidiary Hudson City Savings Bank has held up quite well through the credit crisis. The thrift's nonperforming assets ratio was 1.41% as of December 31 and the 2010 net charge-off ratio was a low 0.31%.

Of greater concern to investors is the company's recent disclosure that it expects the thrift subsidiary to be required by the Office of Thrift Supervision to reduce its interest rate risk by restructuring its balance sheet to lower its wholesale borrowings, which would result in material charges to earnings.

Hudson City's net interest margin - its average yield on earning assets less the company's average cost for deposits and borrowings -- narrowed to 1.70% in the fourth quarter from 2.27% a year earlier. While the company typically runs on normally thin net interest margins while maintaining good operating earnings through very high efficiency, the prolonged low-rate environment paired with weak loan demand will probably lead to a change in strategy, causing uncertainty for investors.

Hudson City earned $537.2 million, or $1.09 a share in 2010, increasing from $527.2 million, or $1.07 share in 2009.

Following Hudson City's 10-K filing, David Darst of Guggenheim Securities provided several estimates of possible restructuring scenarios. Under an aggressive restructuring, with the company reducing wholesale borrowings by $7.5 billion and restructuring another $7.5 billion in funding, Darst estimated the net interest margin would expand to 2.25%, with $1.3 billion in charges.

Out of 16 analysts covering Hudson City, 13 have neutral ratings, while three analysts recommend selling the shares. The shares are trading for 12 times the 2012 consensus earnings estimate of 86 cents a share.

3. SunTrust

Shares of SunTrust of Atlanta closed at $29.93 Tuesday, returning 17% over the previous year.

SunTrust owes $4.85 billion in TARP money, which is the most among banks that haven't yet repaid the government, and quite a bit - including a potentially large capital raise - is riding on Federal Reserve stress tests that will be completed this month.

The company had $2.4 billion in one to four family mortgages secured by homes in foreclosure as of December 31, which was a decline of 6% from a year earlier. SunTrust's nonperforming assets ratio was 2.88% as of December 31, declining from 3.65% a year earlier, and the company's 2010 net charge-off ratio was 2.45%.

SunTrust returned to profitability in the third quarter, with net income to common shareholders of $84 million, or 17 cents a share, followed by $114 million in the fourth quarter, or 23 cents a share. For all of 2010, the company posted a net loss to common shareholders of $87 million, or 18 cents a share, following a 2009 loss of $1.7 billion, or $3.98 a share.

The company said in a March 9 SEC filing that it expected its loan charge-offs to continue to decline during the first quarter, and the company's president COO William Rogers said at the Citigroup Financial Services Conference that SunTrust was seeing "significant opportunities for product penetration and growth," among 100,000 commercial companies operating in its Southeast footprint.

SunTrust's forward P/E is 13, based on a consensus 2012 earnings estimate of $2.26 a share. Among 29 analysts covering the company, seven rate the shares a buy, 17 have neutral ratings and five analysts recommend investors part with the shares.

2. U.S. Bancorp

Shares of U.S. Bancorp ( USB) of Minneapolis closed at $27.75 Tuesday, increasing 12% over the previous year.

The company had $2.7 billion in one to four family mortgages with collateral property in foreclosure as of December 31, a 15% increase from a year earlier. U.S. Bancorp's nonperforming assets ratio was 1.87% as of December 31, declining from 2.48% a year earlier. The company's 2010 net charge-off ratio was 2.14%.

U.S. Bancorp has been a rock among large U.S. bank holding companies through the credit crisis, as its lowest return on average assets over the past five years was 0.83% in 2009, when the industry's ROA was -0.08%, according to the FDIC.

Net income for 2010 was $3.3 billion, or $1.73 a share, increasing from $1.8 billion, or 97 cents in 2009. The provision for credit losses was $4.4 billion in 2010, declining from $5.6 billion the previous year.

CEO Richard Davis said at the Citigroup conference that his team was "sitting by the phone," awaiting word from the Federal Reserve when the stress tests are completed, on whether the company can raise its dividend from the current quarterly payout of 5 cents a share.

When asked about M&A possibilities, Davis said his company would "not miss an opportunity if it comes to us," but added that "the likelihood of that is much lower" than a couple of years ago."

U.S. Bancorp's shares are trading for 11 times the consensus 2012 earnings estimate of $2.57 a share. That multiple makes the shares of this steady earnings performer appear quite cheap, as they traded at much higher trailing P/E at the end of each of each of the past five years. Analyst sentiment is strong, with 17 out of 26 analysts rating the shares a buy, while seven analysts have neutral ratings and two recommend selling the shares.

1. PNC Financial Services

Shares of PNC Financial Services ( PNC) of Pittsburgh closed at $63.37, returning 15% over the previous year.

The company had $2.8 billion in one to four family mortgages with collateral in foreclosure as of December 31. PNC's nonperforming assets ratio was 2.95% as of December 31, improving from 3.60% a year earlier. The 2010 net charge-off ratio was 1.87%.

PNC reported net income attributable to common shareholders of $3 billion, or $5.74 a share, increasing from $2 billion, or $4.26 a share, in 2009. The 2010 provision for credit losses was $2.5 billion, declining from $3.9 billion the previous year.

PNC's return on average assets for 2010 was 1.14%.

SNL reported that at an investor presentation Wednesday, CFO Richard Johnson said that his firm had requested "greater capital flexibility" from regulators, and that PNC's board of directors "board of directors views increasing the dividend as a key priority." The company is currently paying a quarterly dividend of 10 cents a share.

Johnson also said that PNC expected a decline in net interest income and margin in 2011, from "a decrease in purchase accounting accretion," but that this would be offset by "an expected decline of at least $800 million in credit loss provisioning."

PNC's shares trade for 10 times the 2012 consensus earnings estimate of $6.35 a share. On January 24, William Wallace of How Barnes Hoefer & Arnett reiterated his buy rating for the shares with a $75 price target, saying that PNC's "excess capital creates too many opportunities to ignore."

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

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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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