10 Bank Stocks Turning the Earnings Corner

NEW YORK ( TheStreet) -- With the earnings outlook for banks turning bleaker, there may be some diamonds in the rough among smaller banks.

The recovery in smaller regional banks has taken a long time to play out. Unlike larger banks that have been able to rely on income from capital market activities to bolster their profits, regional banks that mostly do "plain vanilla" lending have been more exposed to credit losses since the crisis.

Many of them are significantly exposed to residential and commercial real estate and construction lending. In the last two years, the banks have worked on recapitalizing their balance sheets and have tried to shift focus from construction lending and towards commercial loans.

In more recent quarters they begun to see the benefits of improvement in asset quality and many of them are beginning to stage a turn around.

TheStreet identified banks that have seen a loss in recent quarters that are expected to move back into the black in the next 12 to 18 months. Not included in our shortlist is Bank of America ( BAC), which took a loss in the second quarter as mortgage-related claims against the bank soared. Analysts are not quite sure just when Bank of America would turn the corner.

The others in the list are banks that have either seen a recent return to profitability or are likely to by the end of 2012. Analysts are counting on banks' ability to set off the significant losses racked up in recent years against future profits, which would reduce tax liabilities and boost profits.

However, their recovery is tenuous, as the threat of another recession looms. The pace of improvement in credit quality could moderate, while revenue growth remains elusive.

Still, consensus estimates do show significant earnings upside for these banks.

Here are 10 banks that look set to turn the corner.

10. Flagstar Bancorp

Shares of Michigan-based Flagstar Bancorp ( FBC) are down 70% year-to-date and is now trading at about 51 cents, which puts it in danger of being de-listed from the New York Stock Exchange.

The bank has taken severe losses in the last 12 quarters, thanks to its legacy residential mortgages portfolio. Flagstar reported a second-quarter loss of $70.16 million or 14 cents per share. In the year ago quarter, the bank reported a loss of 63 cents per share.

Flagstar is expected to post a loss of 3 cents per share in the third quarter and expected to finish the year with a loss of 22 cents per share, according to consensus estimates from Factset. Consensus still expects it to break even in 2012, with the bank forecast to report an earnings per share of 2 cents.

Flagstar has been selling unprofitable branches to shore up its finances and is trying to improve its focus on Michigan and New England regions. It recently sold 27 branches in Atlanta to PNC Financial ( PNC) for $42 million and 22 branches in Indiana to First Financial Bancorp ( FFBC) at a profit of $23 million.

FBR Capital downgraded the stock to market perform following the second quarter report, arguing that the legacy residential portfolio continues to be a drag on profitability and that absent mortgage origination volume, it will not be able to generate enough earnings to offset credit costs.

The bank also faces the risk of being forced to repurchase mortgages sold to Fannie Mae and Freddie Mac.

All four analysts covering the stock rate it a hold.

9. Citizens Republic Bancorp

Shares of Citizen Republic ( CRBC) are actually up nearly 20% for 2011, making it a rare outperformer among bank stocks.

Citizens Republic reported second-quarter net income of $18.5 million, or 46 cents a share, which was its first quarterly profit in three years. The profit mainly resulted from a $17.8 million release of loan loss reserves and a $10 million income tax benefit.

The second-quarter numbers compared to a net loss of $74.3 million, or $1.89 a share, the previous quarter and a loss of $44.7 million, or $1.27 a share, a year earlier.

The shares underwent a 1-for-10 reverse split on July 5.

The company also owes $300 million in TARP money, and has deferred its last six quarterly dividend payment to the government.

KBW analyst John Barber on July 11 raised his rating for Citizens Republic to "Outperform" with a price target of $13, saying the company had "significantly improved its credit quality and differentiated itself from peers."

8. Boston Private Financial

Shares of Boston Private Financial ( BPFH) have been trading in a narrow range in the last two years and are down about 10% in 2011.

After four straight quarters of losses, the bank reported a profit in the second quarter, posting an earnings per share of 17 cents. Provision for loan losses for the second quarter was a credit of $2.2 million, a decrease of $15.6 million from $13.4 million on a linked quarter basis, and down $17.2 million compared to the same period in 2010 from $15.0 million.

Net interest margin for the second quarter was 3.29%, an increase of 11 basis points from 3.18% on a linked quarter basis, and flat compared to the same period in 2010.

Analysts expect the bank to report an earnings per share of 9 cents a share according to consensus estimates from Factset.

The stock trades at 11.7 times its 2012 consensus earnings estimate as polled by Factset.

7.United Community Banks

Shares of Georgia-based United Community Banks ( UCBI) have shed 15% year-to-date.

After 11 straight quarterly losses, the bank reported an earnings per share of 8 cents, mainly on account of a reduction in provision for loan losses to $11 million from $190 million in the year-ago-quarter, as the bank aggressively got rid of non-performing assets.

Analysts expect the bank to report an earnings per share of 10 cents in the third quarter and 11 cents in the fourth quarter, though that is not sufficient to reverse the losses incurred in the earlier quarters. Earnings estimates for 2012 and 2013 are at 60 cents per share and 91 cents per share respectively.

The bank still owes about $180 million in TARP money.

Sandler O'Neill has a buy rating on the stock with a price target of $9.50, citing continued improvement in credit metrics following its aggressive disposal of non- performing assets, strong capital cushion following its first quarter 2011 capital raise and flexibility in managing net interest margins (through re-pricing of high-cost deposits).

The stock trades at 15 times its 2012 expected earnings or at about 80% of its tangible book value.

6. Bancorp South

Shares of Bancorp South ( BXS) have declined more than 40% in 2011.

The bank beat expectations in the second quarter , reporting a net income came in at $12.8 million or 15 cents per share compared with a net loss of $12.6 million or 15 cents per share in the year-ago quarter.

Analysts were expecting 4 cents per share on revenues of $178.25 million.

Provision for credit losses for the second quarter of 2011 halved to $32.2 million from $62.4 million for the second quarter of 2010. Nonperforming loans fell from the first quarter of 2011 by $45.2 million to $379.8 million.

One of the biggest concern with the bank has been its elevated level of non-performing assets. The bank has said that the pace of charge-offs is improving and newly identified non-accrual loans is on the decline.

However, Bancorp South has cut its quarterly dividend twice in 2011. In the first quarter it halved its dividend payout to 11 cents a share from 22 cents. In the second quarter, it knocked off another 10 cents from its dividend, paying out just a penny a share.

The bank said the cuts were done to preserve its capital. Tier I risk-based capital as on June 30 stood at 10.82%.

5. Sterling Financial

Shares of Spokane, Washington-based Sterling Financial ( STSA) have lost 33% in 2011.

The bank, which suffered massive losses in 2009, received a $730 million capital boost from private investors including Warburg Pincus and Thomas H. Lee Partners, who took a combined 45% stake in the company, in 2010.

The Treasury Department also converted $300 million worth of preferred stock to common shares.

The bank is well capitalized with a Tier 1 Risk-based capital ratio of 16.90%.

After several quarters of losses, the bank turned the corner in 2011, reporting an earnings per share of 9 cents in the first quarter and 12 cents in the second quarter. Provision for loan losses dropped more than 80% to $12.5 million from the year-ago quarter, while net interest margins also improved to 3.3% from 2.8%.

Consensus expects the bank to report an earnings per share of 11 cents in the third quarter and finish the year with an EPS of 43 cents.

4. MB Financial

Shares of Chicago, Illinois- based MB Financial ( MBFI) are down 17% year-to-date.

The bank's quarterly performance since the crisis has been mixed, alternating between profits and losses.

The bank reported a second-quarter net loss to common stockholders of $10 million, or 18 cents a share, mainly reflecting a $61.3 million provision for credit losses, as it sold loans with a carrying value of $281.6 million (prior to their transfer to held-for-sale), including $156.3 million in nonperforming loans. The company received $194.6 million for the loans sold, net of expenses, recognizing $87 million in charge-offs from the sale.

MB Financial still owes $196 million in TARP money.

The bank is, however, expected to report an earnings per share of 35 cents in the third quarter and finish 2011 with a positive earnings per share of 59 cents, according to consensus estimates from Factset. Earnings estimates for 2012 and 2013 are at $1.66 and $2.06 respectively.

MBFI has also been identified by analysts as a potential M&A target. The bank has itself been active on the acquisition front, having participated in six FDIC-assisted deals.

After the company announced its second-quarter results, FIG Partners analyst Brian Martin reiterated his "Outperform" rating with a price target of $24, saying that the second-quarter loan sale was "a clear positive as it put a good chunk of MBFI's credit problems in the rear view mirror," which " paved the way for an acceleration in the repayment of TARP and or the ability to become more aggressive on the M&A front."

3. Synovus Financial

Shares of Synovus Financial ( SNV) have plunged 58% year-to-date. At the current market price, it trades below even March 2009 levels , when the banking sector hit its low.

The bank reported a $53.5 million loss during the second quarter, compared to a $242.6 million loss in the year-ago quarter. That marked the twelfth straight quarter of losses from the bank, as it bore the brunt of the housing meltdown in the south east.

Analysts expect the bank to post another loss in the third quarter at 3 cents per share on revenues of $300.48 million, according to estimates at Thomson Reuters.

Synovus says that credit metrics are improving for the bank. New non- performing loan inflows slowed to $231.1 million in the second quarter, the lowest level in 11 quarters.

The bank is targeting $75 million in expense savings in 2011 and $100 million in savings in 2012. It plans to lay-off 850 employees in total by the year end.

Sandler O'Neill analyst Kevin Fitzsimmons rates the stock a hold. He expects the stock to continue trading at a sizeable discount to tangible book value until investors see more significant disposition activity, signs of life on core revenue growth front, a more sizable capital cushion and a return to profitability.

Seven analysts rate the stock a buy or outperform, 19 analysts have a hold rating on the stock , while two analysts have an underperform or sell rating on the stock.

2. Zions Bancorp

Shares of Zions Bancorp ( ZION) have shed nearly 40% in 2011.

After more than two years of losses, Zions turned around in 2011, posting a profit of 8 cents a share in the first quarter and 16 cents a share in the second quarter.

Net loans and leases grew $278 million compared to a decline of $202 million during the first quarter. Provision for loan losses declined to $1.3 million from $60 million in the first quarter.

The bank has been improving its focus on business loans , with commercial business loans and commercial real estate accounting for 79% of its revenues. The bank reported $8.8 billion in commercial and industrial loans as of June 30, increasing 3% from the previous quarter and also 3% from the second quarter of 2010.

When the company announced its second-quarter results, CEO Harris Simmons said that Zions said that "commercial and consumer loan growth was more than offsetting a modest decline in commercial real estate loans," and that the bank's "relatively strong capital and funding ratios position us to take advantage of lending opportunities as they arise."

Scott Seifers at Sandler O'Neill has a hold rating on the stock. While the bank remains among the best positioned to profit from a recovery, its "plain vanilla" earnings stream exposes it more to the tough environment of limited loan growth and low interest rates, the analysts said.

1. Hudson City Bancorp

Shares of New Jersey-based Hudson City Bancorp ( HCBK) have plunged 54% in 2011.

The thrift holding company reported earnings of $96 million, or 19 cents a share during the second quarter, declining from $142.6 million, or 29 cents a share, during the second quarter of 2010. In the first quarter the bank reported a negative EPS of $1.13.

Earlier in the year, the bank was forced by the Office of Thrift Supervision to restructure its balance sheet after its strategy of borrowing from the Federal Home Loan Bank of New York and investing the proceeds in securities backfired in a low interest rate environment.

Hudson also had to cut its quarterly dividend to 8 cents a share from 15 cents per share.

The stock trades at a dividend yield of nearly 6% at current levels. But that has not made the analyst community bullish on the stock's prospects.

Only one analyst has a buy rating on the stock, while 18 analysts have a hold rating and 2 analysts have a sell or underperform rating on the stock.

Analysts expect the bank to report an earnings per share of 18 cents in the third quarter according to Factset.

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

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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