10 Bank Stocks Turning the Credit Corner

NEW YORK ( TheStreet) -- TheStreet has identified 10 large banks with stubbornly high problem assets, some of which could provide outsized gains for investors over the next year.

Beginning with a list of 93 publicly traded bank and thrift holding companies -- excluding any traded on the Pink Sheets -- with total assets exceeding $5 billion as of June 30, we have isolated the 10 companies with the highest percentage of nonperforming assets as of June 30. SNL Financial supplied the data, and we used the nonperforming assets ratios derived by from Securities and Exchange Commission filings.

SNL defines nonperforming assets (NPA) as nonperforming loans (as reported by the holding companies) plus renegotiated loans and leases, plus repossessed real estate.

Of course, the NPA ratio only factors-in problem assets that are on the banks' balance sheets. For several of the largest mortgage lenders, most of the credit risk is off the balance sheet.

Bank of America ( BAC), for example, had $ $384.8 billion in one-to-four family residential mortgage loans serviced for others (excluding home equity lines) as of June 30. Out of this total $148.8 billion, or 39%, were past due 90 days or more, according to the company's regulatory filing with the Federal Reserve. Another $22.6 billion, or 6%, of the loans serviced for others, were past due 30 to 89 days.

Bank of America also reported that $131 billion, or 34%, of the one-to-four family mortgage loans (again excluding home equity lines) serviced for others, were in some phase of the foreclosure process, as of June 30.

So the nation's largest bank holding company doesn't even know how much risk it is facing from institutional investors' mortgage putback demands.

The following 10 bank and thrift holding companies aren't facing the existential threat of unknown risk from ever-mounting mortgage repurchase demands, but their earnings have suffered as their on-balance-sheet nonperforming assets have remained stubbornly high.

That being said, there's plenty of upside for the shares as indicated by consensus price targets, and only two of the names have any analysts recommending selling the shares. Half of the names have five or more analysts rating the shares a buy.

Here are the 10 bank and thrift holding companies with the highest NPA ratios per SNL Financial, as of June 30, counting up to the one with the weakest asset quality:

10. TCF Financial Corp.

Shares of TCF Financial ( TCB) of Wayzata, Minn., closed at $9.43 Wednesday, down 36% year-to-date. Based on a quarterly payout of five cents, the shares have a dividend yield of 2.12%.

The company had $18.8 billion in total assets as of June 30, with a nonperforming assets ratio of 4.35%, which was the same as the NPA ratio at the end of the first quarter, but up from 4.09% in June 2010, according to SNL Financial.

Second-quarter net income was $29.8 million, or 19 cents a share, compared to $29.7 million, or 20 cents a share, the previous quarter, and $45 million, or 32 cents a share, in the second quarter of 2010. CEO William Cooper said that the company had "continued to evaluate potential strategies to mitigate the lost debit card interchange revenue," and that "TCF expects to be implementing its new product and fee structures in the fourth quarter."

TCF's second-quarter operating return on average assets (ROA) was 0.67% according to SNL Financial.

The second-quarter provision for loan losses was $44 million, declining from $45.3 million in the first quarter and $49 million in the second quarter of 2010.

Following the second-quarter earnings announcement, Credit Suisse analyst Craig Siegenthaler reiterated his neutral rating for TCF, while reducing his target price for the shares to $16 from $17, saying that with clarity from the Federal Reserve's final ruling on the Durbin Amendment, the effect on TCF's earnings would be "$50-60M annually, slightly below our prior estimate of $64M."

The shares trade for nine times the consensus 2012 EPS estimate of $1.01, among analysts polled by FactSet, and 0.9 times their June 30 tangible book value of $10.04, according to SNL.

Out of 16 analysts covering TCF Financial, six rate the shares a buy, eight have neutral ratings and two recommend selling the shares.

9. Western Alliance Bancorporation

Shares of Western Alliance Bancorporation ( WAL) of Phoenix closed at $5.17 Wednesday, down 30% year-to-date.

The company had $6.5 billion in total assets as of June 30, with a nonperforming assets ratio of 4.38%, declining from 4.63% the previous quarter and 5.16% in June 2010, according to SNL Financial.

Western Alliance announced on Wednesday that the company had received $141 million through the Treasury Department's Small Business Lending Fund (SBLF), exchanging the preferred shares held by the government for a previous investment made through the Troubled Assets Relief Program, or TARP, for new preferred shares.

Western Alliance president Ken Vecchione said the company's participation in the small business lending fund would "aid in promoting lending to this vital part of our economy and we look forward to using it to assist small businesses in our Arizona, California and Nevada markets."

The company reported second-quarter net income to common shareholders of $3.7 million, or five cents a share, increasing from a loss to common shareholders of $1.2 million, or two cents a share, in the second quarter of 2010. The main factor in the earnings improvement was a reduction in the provision for loan losses to $11.9 million in the second quarter, from $23.1 million a year earlier.

KBW analyst Brian Klock on Wednesday reiterated his "market perform" rating for Western Alliance with a $7.50 price target, saying "with the swap of the TARP with SBLF, we are lowering 3Q11 EPS by $0.09 to reflect the non-cash accelerated TARP discount amortization, but raising our '12 EPS estimate $0.05 to reflect lower SBLF funding cost (assuming 4% coupon)."

Klock now expects the company to earn 50 cents a share in 2012.

The shares trade for nine times the consensus 2012 EPS estimate of 59 cents, among analysts polled by FactSet, and just under their June 30 tangible book value of $5.43, according to SNL.

Out of 15 analysts covering Western Alliance, eight rate the shares a buy, while the remaining analysts all have neutral ratings.

8. PrivateBancorp

Shares of PrivateBancorp ( PVTB) of Chicago closed at $7.78 Wednesday, down 46% year-to-date.

The company had $12.1 billion in total assets as of June 30, with a nonperforming assets ratio of 4.79%, increasing from 4.46% the previous quarter and 3.51% in June 2010, according to SNL Financial.

The company owes $243.8 billion in TARP money.

Second-quarter net income available to common shareholders was $5.5 million, or eight cents a share, compared to a net loss of $818 thousand, or a penny a share, during the second quarter of 2010. The second-quarter provision for loan losses declined to $31.1 million from $45.4 million a year earlier. The second-quarter return ROA was 0.29%, reflecting the continued drag on earnings from credit expenses.

KBW analyst Christopher McGratty on Sept. 15 reiterated his "Outperform" rating for PrivateBancorp, with a $16 price target, saying after meeting with the company's senior management that "management's tone reaffirmed that credit trends are likely to continue to move in the right direction, albeit gradually."

The shares trade for 11 times the consensus 2012 EPS estimate of 70 cents, among analysts polled by FactSet, and 0.6 times their June 30 tangible book value of $12.67, according to SNL.

Out of 14 analysts covering PrivateBancorp, three rate the shares a buy, while the remaining analysts all have neutral ratings.

7. Washington Federal

Shares of Washington Federal ( WFSL) of Seattle closed at $13.23 Wednesday, down 21% year-to-date. Based on a quarterly payout of six cents, the shares have a dividend yield of 1.81%.

The company had $13.3 billion in total assets as of June 30, with a nonperforming assets ratio of 5.19%, increasing from 5.12% the previous quarter and 5.09% in June 2010, according to SNL Financial.

Washington Federal was included among TheStreet's 10 Big Banks with Solid Revenue because the company's pre-provision net revenue for its fiscal third-quarter ended June 30 increased 68% year-over-year to $68.1 million.

Fiscal third-quarter net income was $30.1 million, or 27 cents a share, increasing from $12.7 million, or 11 cents a share, a year earlier. While the provision for loan losses increased slightly year-over-year, to $21 million, losses on foreclosed real estate declined 74% to $8.2 million.

Net interest income increased 7% year-over-year to $106.1 million. The net interest margin was 3.44%, increasing from 3.14% a year earlier. The fiscal third quarter ROA was 0.90%, according to SNL.

After Washington Federal reported its fiscal third-quarter results in August, Sterne Agee analyst Brett Rabatin reiterated his "Buy" rating for the shares, with a $19 price target, saying "investors should become more focused on names like WFSL in the current environment of pervasively low interest rates."

The shares trade for 10 times the consensus 2012 EPS estimate of $1.34, among analysts polled by FactSet, and 0.9 times their June 30 tangible book value of $14.53, according to SNL.

Out of 13 analysts covering Washington Federal, six rate the shares a buy, while the remaining analysts all have neutral ratings.

6. Sterling Financial

Shares of Sterling Financial ( STSA) of Spokane, Wash., closed at $12.32 Wednesday, down 35% year-to-date.

The company had $9.2 billion in total assets as of June 30, with a nonperforming assets ratio of 5.38%, declining from 6.72% the previous quarter and 10.47% in June 2010, according to SNL Financial.

The company received $303 million in TARP money in December 2008. The Treasury's preferred shares in Sterling Financial were all converted to common shares in August of last year.

Second-quarter net income was $7.6 million, or 12 cents a share, compared to a loss to common shareholders of $58.2 million, or $73.91 a share, in the second quarter of 2010, when the company took a $70.8 million provision for loan losses, while selling a significant portion of its nonperforming loans. The second-quarter 2010 EPS figure reflects a 66-for1 reverse stock split that took place in November.

The provision for loan losses was $10 million during the second quarter, which was the same as in the first quarter.

Sterling's second-quarter annualized ratio of net charge-offs to average loans was 2.23% and reserves covered 3.66% of total loans as of June 30, "staying ahead of the pace" of loan losses. The company's regulatory total risk-based capital ratio of 18.20% as of June 30 was the highest among this group of bank and thrift holding companies.

The shares trade for 12.5 times the consensus 2012 EPS estimate of $1.09, among analysts polled by FactSet, and 0.9 times their June 30 tangible book value of $12.80, according to SNL.

Two of the three analysts covering Sterling Financial rate the shares a buy. The remaining analyst has a neutral rating.

5. Synovus Financial

Shares of Synovus Financial ( SNV) of Columbus, Ga., closed at $1.09 Wednesday, down 58% year-to-date. Based on a one-cent quarterly payout, the shares have a dividend yield of 3.67%.

The company had $28.3 billion in total assets as of June 30, with a nonperforming assets ratio of 6.25%, declining from 6.35% the previous quarter, but increasing from 5.94% in June 2010, according to SNL Financial.

The company owes $967.9 million in TARP money.

Synovus reported a second-quarter net loss attributable to common shareholders of $53.5 million, or seven cents a share, compared to a loss of $93.7 million, or 12 cents a share, in the second quarter of 2010.

The company is still working through a high level of problem assets, although its provision for loan losses declined to $120.2 million in the second quarter, from $298.9 million a year earlier. Expenses on foreclosed real estate totaled $39.9 million in the second quarter, although this was a decline from $46.4 million a year earlier.

Sterne Agee analyst Todd Hagerman on Sept. 12 reiterated his neutral rating for Synovus, saying "market speculation surrounding a potential distressed purchase of SNV... keep us cautious, but Neutral for now."

The shares trade for 10 times the consensus 2012 EPS estimate of 11 cents, among analysts polled by FactSet, and less than half their June 30 tangible book value of $2.39, according to SNL.

Out of 21 analysts covering Synovus, five rate the shares a buy, 14 have neutral ratings, and two analysts recommend selling the shares.

4. Popular, Inc.

Shares of Popular, Inc. ( BPOP) of Hato Rey, Puerto Rico, closed at $1.46 Wednesday, down 54% year-to-date.

The company had $39 billion in total assets as of June 30, with a nonperforming assets ratio of 6.50%, declining from 6.52% the previous quarter and 6.62% in June 2010, according to SNL Financial.

Popular was included among TheStreet's 10 Banks on Solid Financial Footing, because the company's Tier 1 common equity ratio was a strong 11.53% as of June 30, according to SNL.

The company owes $935 million in TARP money.

Second-quarter net income applicable to common stock was $109.8 million, or 11 cents a share, compared to $9.2 million, or a penny a share, in the first quarter, and a net loss of $236.2 million, or 28 cents a share, for the second quarter of 2010. The Second-quarter return on average assets was 1.14%, according to SNL, for, by far, the strongest earnings performance among this group of 10 banks and thrifts. .

The results for the second quarter of 2010 reflected a capital raise that was initially a preferred issue, later converted to common shares after shareholder approval to increase the common share count. Upon conversion, the company recorded one-time $192 million dividend on preferred shares during the second quarter.

Second-quarter 2011 results were boosted by "a tax benefit of $59.6 million related to the timing of loan charge-offs for tax purposes." Popular had agreed with Puerto Rico's Department of the Treasury to defer tax deductions related to loan charge-offs that occurred in 2009 and 2010 to 2013 through 2016. The company said that "as a result of the agreement, the Corporation made a payment of $89.4 million to the P.R. Treasury and recorded a tax benefit on its financial statements of $143 million, or $53.6 net of the payment made" to the Puerto Rico Treasury."

Popular's second-quarter net interest income totaled $374.5 million, increasing by $31.2 million from the previous quarter, reflecting improved yields on loans acquired when the company purchased the failed Westernbank Puerto Rico from the FDIC.

Popular's quarterly financial reports tend to contain many adjustments, as the company continues to work through April 2010 acquisition of the failed Westernbank, and handles Federal Deposit Insurance Corp. loss-share accounting and tax issues.

The shares trade for less than five times the consensus 2012 earnings estimate of 33 cents a share, among analysts polled by FactSet. The stock trades for less than half the company's June 30 tangible book value of $3.14, according to SNL.

Following "another messy quarter due to a tax benefit and loss share accounting noise," Derek Hewitt of KBW in July reiterated his "Outperform" rating for Popular, with a $4.50 price target, saying that the company's "higher accretable yield, lower funding costs and some opportunistic portfolio purchases drove higher spread revenue," and that its capital continued to grow.

The shares trade for four times the consensus 2012 EPS estimate of 33 cents, among analysts polled by FactSet, and less than half their June 30 tangible book value of $3.14, according to SNL.

Four out of five analysts covering Popular rate the shares a buy, while the remaining analyst has a neutral rating.

3. CapitalSource

Shares of CapitalSource ( CSE) of Chevy Chase, Md., closed at $6.25 Wednesday, down 12% year-to-date.

The company had $9.3 billion in total assets as of June 30, with a nonperforming assets ratio of 7.36%, declining from 9.04% the previous quarter. Nonperforming assets information was not available for Capital Source for June 2010.

CapitalSource earned $16.6 million during the second quarter, or five cents a share, declining from $18.3 million, or six cents a share, in the second quarter of 2010, when the company booked a $21.7 million gain on the sale of all of its direct real estate investments, including sold 103 long-term care facilities to Omega Healthcare Investors.

CapitalSource remains focused on lending to the healthcare industry, as well as on equipment finance, technology, multifamily lending, and a professional practice lending group, which finances the acquisition of dental and veterinary practices.

The second-quarter provision for loan loss reserves was $1.5 million, declining from $25.3 million a year earlier.

On Sept. 15, after the company gained the consent of investors holding senior notes due in 2014, to increase its share repurchase authorization to $385 million from $200 million, and Jeff Davis of Guggenheim Securities reiterated his neutral rating on the shares, with a price target of $6.75.

The shares trade for 15 times the consensus 2012 EPS estimate of 42 cents, among analysts polled by FactSet, and just above their June 30 tangible book value of $5.99, according to SNL.

Out of 10 analysts covering CapitalSource, seven rate the shares a buy, while the remaining analysts all have neutral ratings.

2. Flagstar Bancorp

Shares of Flagstar Bancorp ( FBC) of Troy, Mich., closed at $0.49 Wednesday, down 70% year-to-date.

The company had $12.7 billion in total assets as of June 30, with a nonperforming assets ratio of 8.47%, declining from 8.71% the previous quarter and 12.08% in June 2010, according to SNL Financial.

Flagstar owes $266.7 million in TARP money.

The company reported a second-quarter net loss applicable to common stock of $74.9 million, or 14 cents a share, compared to a loss of $97 million, or 63 cents a share, in the second quarter of 2010. The second-quarter provision for loan losses was $48.4 million, declining from $64.3 million a year earlier. Aside from the continued outsized credit costs, the most recent quarterly results included $15.6 million in net securities impairment losses and $15.9 million "other fees and charges."

During the second quarter, the company entered into an agreement with PNC Financial Services ( PNC) to sell or lease its entire Georgia franchise of 27 branches.

The company's main thrift subsidiary Flagstar bank was strongly capitalized as of June 30, with a regulatory total risk-based capital ratio of 19.73%.

The consensus among analysts polled by FactSet is for Flagstar to earn two cents a share during 2012.

All four analysts covering Flagstar Bancorp have neutral ratings on the shares.

1. Doral Financial

Shares of Doral Financial ( DRL) of San Juan closed at $1.11 Wednesday, declining 20% year-to-date.

The company had $8 billion in total assets as of June 30, with a nonperforming assets ratio of 17.92%, increasing from 17.18% the previous quarter and 14.89% in June 2010, according to SNL Financial.

SNL reported earlier this month that several analysts said that a sale was the best option for Doral, although private equity investors -- who hold 70% of the company's shares -- might be waiting to try and maximize the value they get for the company.

Doral announced in July that it had amended agreements with Thomas H. Lee Partners, Oaktree Capital Management and other investors to increase the size of a proposed private placement to $525 million, which along with a proposed rights offering of $37.3 million would have the company raising a total of $562.3 million in common equity. Doral hasn't yet announced a record date for either offering.

The company announced second-quarter earnings attributable to common shareholders of $2.1 million, or two cents a share, compared to a loss of $235.8 million, or $3.50 a share, in the second quarter of 2010, when Doral sold $378 million in non-agency collateralized mortgage obligations for a loss of $137 million and also took a $13 million charge on the reclassification of construction loans held for investment, as held-for-sale.

The second-quarter provision for loan losses was $13.3 million declining from $44.6 million a year earlier.

The shares trade for three times the consensus 2012 EPS estimate of 36 cents, among analysts polled by FactSet, and for less than one third their June 30 tangible book value of $3.99, according to SNL.

Among the four analysts covering Doral, one rates the shares a buy, while the remaining analysts all have neutral ratings.

>>To see these stocks in action, visit the 10 Bank Stocks Turning the Credit Corner portfolio on Stockpickr.

-- 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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