10 Bank Stocks Trading Below Book With Up To 85% Upside (Update 2)

Updated with additional comment on Citigroup and with market close information and total return information.

NEW YORK ( TheStreet) -- TheStreet has identified a select list of bank stocks still trading below tangible book value, despite the sector's strong year-to-date rally.

Despite the banking sector's strong year-to-date returns, scores of bank stocks still trade below tangible book value, and analysts see a hefty payday down the line for patient investors.

When considering the young year's amazing bank stock rally, it pays to consider an investor's timing. Yes, shares of Bank of America ( BAC) were up 44% year-to-date through Friday's close at $8.02, but the one-year total return is negative 45%.

Using data provided by HighlineFI, we narrowed down the list of banks trading below tangible book value by only including actively traded names, with average daily trading volume of over 50,000 shares, and names for which the Dec. 30 tangible book value was available. Then we isolated the 10 with the highest implied one-year upside potential, based on mean price targets among analysts polled by Thomson Reuters.

The list includes all four four Puerto Rico bank holding companies, with the low valuations reflecting the island territory's severe and prolonged recession, while the analysts' (mostly) positive views reflect increasing market share for two of the names, healthier forward profit estimates for the group, and the long-term recapture of deferred tax assets to earnings and capital.

B. Riley analyst Joe Gladue says that "Puerto Rico has been in a recession for at least five years now," but it now "looks like the local economy is not shrinking anymore." The analyst also says that despite the consolidation of banks headquartered on the island territory -- from seven to four over the past two years -- "there is still considerable speculation that there can be additional consolidation in the market, and quite a few people think that would be beneficial for the remaining banks and the economy."

A logical combination, according to Gladue, would be First Bancorp ( FBP) and Doral Financial ( DRL), since First Bancorp has completed a recapitalization, but "one thing they don't have is a big mortgage origination platform, which Doral has."

"Doral has said they would be interested in the consolidation as either a buyer or a seller," according to Gladue, who also says that a combined First Bancorp and Doral "could probably see $100 million in cost savings from a combination, which would improve the earnings of the combined company significantly."

Two of the group of 10 active names trading under book with the most upside potential are members of the "big four" group of U.S. banks.

Then again, the two big four members trading above book, appear cheaply priced to forward earnings estimates.

Shares of JPMorgan Chase ( JPM) trade for 1.2 times tangible book value, according to HighlineFI, but for an attractive 8.2 times the consensus 2012 earnings estimate of $4.67, among analysts polled by Thomson Reuters.

That's the lowest forward price-to-earnings ratio among the big four. JPMorgan Chase's shares were up 15% year-to-date through Wednesday's close at $38.46. Analyst sentiment is very strong, with 29 out of 32 analysts rating the shares a buy, while the remaining three analysts are on the fence.

Shares of Wells Fargo ( WFC) closed at $30.59 wednesday, rising 13% year-to-date, and trading for 1.8 times tangible book value. Wells Fargo was also the most expensive of the big four to forward earnings, with the shares trading for 9.7 times the consensus 2012 EPS estimate of $3.20.

Then again, you get what you pay for. Wells Fargo has been the gold standard among the big four recently, with a return on average assets (ROA) ranging from 1.11% to 1.27% over the past five quarters. None of the other big four club members even come close.

With so many banks still trading below tangible book value, it's clear that there are still plenty of bargains out there for investors, but as we saw in 2011, the killing may not always be quick. You may have to go in for a few years, and patiently wait-out the headline risk -- especially for the largest banks facing mortgage putback demands -- as the economy continues to improve.

Here are the TheStreet's 10 banks trading below book value, with the most upside potential:

10. StellarOne Corp.

Shares of StellarOne Corp. ( STEL) of Charlottesville, Va., closed at 12.12 Wednesday, returning 7% year-to-date, after a decline of 21% in 2011.

The shares trade just below their Dec. 30 tangible book value of $12.95.

The company on Jan. 31 raised its quarterly dividend by 50% to 6 cents a share, for a dividend yield of 1.92%, based on Friday's closing price.

StellarOne had $2.9 billion in total assets as of Dec. 30. The company reported fourth-quarter earnings available to common shareholders of $3.8 million, or 17 cents a share, increasing from $2.4 million, or 10 cents a share, in the fourth quarter of 2010. The earnings results included $973 million in dividends and accretion on $22.5 million in preferred shares held by the government for assistance provided in 2008 under the Troubled Assets Relief Program, or TARP. StellarOne fully redeemed its TARP preferred shares on Dec. 28, after previously repaying $7.5 million.

The fourth-quarter earnings improvement also reflected a decline in the provision for loan losses to $1.8 million, from $5.3 million, a year earlier.

The net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- was a tax-adjusted 3.79% during the fourth quarter, narrowing from 3.87% a year earlier, and reflecting a general industry trend, in the prolonged low-rate environment.

The shares trade for 17.5 times the consensus 2012 earnings estimate of 72 cents a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 85 cents.

BB&T analyst Cary Morris on Jan. 27 reiterated his "Hold" rating for StellarOne, saying the company's capital levels were "solid," and that he was "encouraged with results and the repayment of TARP (especially in absence of a capital raise)," and that he expected "expansion in 2012 to take place in the markets of Charlottesville, Richmond and Hampton Roads," in Virginia.

Morris stuck with a neutral rating on the shares, based on below-consensus earnings estimates of 69 cents a share in 2012, and 78 cents in 2013.

Interested in more on StellarOne? See TheStreet Ratings' report card for this stock.

9. Hanmi Financial

Shares of Hanmi Financial ( HAFC) of Los Angeles closed at $8.60 Wednesday, returning 16% year-to-date, after last year's 20% decline.

The shares trade just below their Dec. 30 tangible book value of $9.02, having undergone a 1-for-8 reverse split on Dec. 19.

The company in November raised $77.1 million in common equity, net of expenses, and reported a strong regulatory Tier 1 leverage ratio of 13.34%, and a total risk-based capital ratio of 18.66%, as of Dec. 30.

Hanmi had $2.7 billion in total assets as of Dec. 30.

The company reported its fifth consecutive quarter profit, with fourth-quarter net income of $5.5 million, or 22 cents a share, compared to $5.3 million, or 28 cents a share, in the fourth quarter of 2010.

For Hanmi's investors, quite a bit is riding on the company's deferred tax assets, or DTA, which can only be recaptured in the event of sustained, and significant, profitability. During the company's fourth-quarter conference call on Jan. 19, CFO Lonny Robinson said that "as we see profitability continuing, we believe that we may be able to recover some although not all of the approximately $80 million deferred tax asset valuation allowance,: but that "DTA recoveries are typically not a one-time event but rather a series of credits over several quarters."

The shares trade for eight times the consensus 2012 EPS estimate of $1.14.

KBW analyst Julianna Balicka has a "Market Perform" rating on Hanmi Financial, with an $8.50 price target, saying on Jan. 26 that "things are aligning well for Hanmi," as the company's tangible common equity ratio HAD "improved to 10.4%," the DTA recapture was "anticipated in 2012," and because of "lending momentum, especially in SBA."

Balicka increased her 2012 EPS estimate for Hanmi to $1.50 from 53 cents, and her 2013 estimate to $1.30 from 76 cents, "modeling $30mm of the DTA valuation allowance reversal in our 2012 numbers, followed by $20mm in 2013," improving tangible book value per share by an estimated $1.59.

Interested in more on Hanmi Financial? See TheStreet Ratings' report card for this stock.

8. Fox Chase Bancorp

Shares of Fox Chase Bancorp ( FXCB) of Hatboro, Pa., closed at $12.53, for a flat performance year-to-date, after returning 7% in 2011.

The shares trade for 0.9 times their Dec. 30 tangible book value of $14.41.

The company had $1.0 billion in total assets as of Dec. 30, and reported fourth-quarter net income of $1.0 million, or nine cents a share, increasing from $893,000, or seven cents a share, during the fourth quarter of 2010. Net interest income totaled $8.0 million in the fourth quarter, compared to $7.4 million a year earlier, with the improvement reflecting lower funding costs. This improvement partially offset an increase in the provision for loan losses to $2.8 million during the fourth quarter from $1.4 million a year earlier. The fourth-quarter bottom line was greatly boosted by $1.1 million in gains on the sale of securities.

Sterne Agee analyst Matthew Kelley on Feb. 2 reiterated his "Buy" rating for Fox Chase Bancorp, with a $15 price target, saying that the company was continuing "to make progress in improving core earnings power and credit quality."

Fox Chase's fourth-quarter ROA was 0.41% according to HighlineFI, and the ROA has ranged as high as 0.47% over the past five quarters. Kelley said that he saw "profitability as measured by ROA improving to 0.55% - 0.60% over the next two years," and that the shares, at a closing price of $12.73 on Feb. 1, remained "attractively valued at 86% of our projected yearend 2012 TBV estimate of $14.77 per share."

Kelley estimates that the company will earn 45 cents a share in 2012, followed by EPS of 55 cents in 2013.

The shares trade for 30 times the consensus 2012 EPS estimate of 42 cents. The 2013 consensus EPS estimate is 50 cents, making the case that investors will need to be quite patient with Fox Chase Bancorp.

Interested in more on Fox Chase Bancorp? See TheStreet Ratings' report card for this stock.

7. E*Trade Financial

Shares of E*Trade Financial ( ETFC) of New York closed at $9.32 Wednesday, up 17% year-to-date, following last year's 50% decline.

The shares trade just below their Dec. 30 tangible book value of $9.49.

E*Trade Financial is, of course, mainly an on-line broker, but the company also holds E*Trade Bank, which had $45.8 million in total assets as of Dec. 30.

The company reported a fourth-quarter net loss of $6.3 million, or two cents a share, compared to a loss of $24.1 million, or 11 cents a share, a year earlier. Net revenue declined 8% from a year earlier, to $475 million in the fourth quarter, however, the bottom line saw quite a boost from a decline in the provision for loan losses to $123.0 million in the fourth quarter, from $193.8 million, in the fourth quarter of 2010.

Meanwhile total operating expenses were down slightly from a year earlier, to $304.3 million.

The shares trade for 19 times the 2012 EPS estimate of 49 cents. The 2013 EPS estimate is 79 cents.

Following a meeting with analysts by E*Trade's management, Deutsche Bank analyst Michael Carrier on Feb. 13 reiterated his "Hold" rating on the stock, with a price target of $9.00, saying that E*Trade's management continued to "focus on what they can control, including cleaning up the balance sheet, improving regulatory ratios, and controlling costs while investing in growth."

"While the long term potential upside at ETFC is significant," Carrier said he was sticking with his neutral rating, "given the near-term rate/macro headwinds, regulatory transition from the Office of Thrift Supervision to the Office of the Comptroller of the Currency, and time for normalized earnings and capital deployment, we remain at Hold."

Carrier estimates that E*Trade will earn 55 cents a share in 2012, followed by EPS of 75 cents in 2013.

Interested in more on E*Trade Financial? See TheStreet Ratings' report card for this stock.

6. First Bancorp

Shares of First Bancorp of San Juan, Puerto Rico, closed at $3.99 Wednesday, returning 14% year-to-date, following A 49% drop in 2011.

The shares trade for 0.6 times their Dec. 30 tangible book value of $6.54.

First Bancorp in October completed a $525 million capital raise, by selling 150 million shares for $3.50 a share to institutional investors, including Thomas H. Lee Partners and Oaktree Capital Management. In connection with that capital raise, First Bancorp's $424.2 million in TARP preferred shares were converted to common shares.

The company reported a fourth-quarter net loss $14.8 million, but with a $278 gain on the issuance of 32,941,797 shares of common stock to the U.S. Treasury to retire the TARP preferred shares, fourth-quarter earnings attributed to common shareholders was $263.2 million, $93.4 million. This compares to a net loss to common shareholders of $269.9 million in the fourth-quarter of 2010, when the company set aside $196.3 million for loan loss reserves, partially in connection with the transfer to held-for-sale of $447 million in loans, and also booked at $93.4 million tax valuation allowance.

The consensus 2012 EPS estimate is a loss of 17 cents a share.

B. Riley analyst Joe Gladue rates First Bancorp a "Buy," with a $5.50 price target, saying on Fe. 2 that "with the issue of adequate capital no longer front and center, FBP management can now focus more on resolving problem assets and improving profitability," and that a valuation of 90% of tangible book value "is achievable a year from now if the company makes the progress that our earnings model anticipates."

Gladue estimates that First Bancorp will lose 16 cents a share during 2012, and earn 36 cents a share in 2013.

Interested in more on First Bancorp? See TheStreet Ratings' report card for this stock.

5. Bank of America

Shares of Bank of America closed at $7.95 Wednesday, returning 43% year-to-date, following a decline of 58% in 2011.

The shares trade for 0.7 times their Dec. 30 tangible book value of $12.69, and for 11 times the 2012 EPS estimate of 71 cents. The consensus 2013 EPS estimate is $1.20.

With the shares seeing such a strong year-to-date run, BernsteinResearch analyst John McDonald was among several analysts recently downgrading Bank of America to a neutral rating, saying on Feb 15 that he continued to "see long-term upside in the shares," but that it would "take time for BAC's earnings power to recover amid low interest rates, loan runoff, and a long tail to elevated mortgage-related expenses."

For investors considering Bank of America, it's very important to consider what "long term investment" really means. Sell-side analysts tend to have a 12-month outlook in the recommendations and price targets, because this is what so many investors want, but Bank of America's mortgage-putback risk and associated headline risk, will take more than 12 months to play out.

Rochdale Securities analyst Richard Bove on Feb. 7 made an interesting case for Bank of America to be a $30 stock in three to four years , saying in an interview that " I think there's $3 in earnings power there and this stock can easily sell at 10 times earnings, once you recognize that the company is two companies: its Countrywide and its Bank of America and once you get Countrywide taken out of Bank of America, which is the lawsuits are paid, the bad loans are paid the foreclosures are done, all of a sudden Bank of America is there and Bank of America can earn three bucks."

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

4. Oriental Financial Group

Shares of Oriental Financial Group ( OFG) of San Juan, Puerto Rico, closed at $11.54 Wednesday, down 5% year-to-date, following a 1% decline last year.

The shares trade for 0.8 times their Dec. 30 tangible book value of $15.12.

Oriental had $6.7 billion in total assets as of Dec. 30, and saw a major expansion with its purchase of the failed Eurobank of San Juan from the Federal Deposit Insurance Corp. in April 2010.

The company reported a fourth-quarter net loss to common shareholders of $13.1 million, or 31 cents a share, compared to earnings of $3.9 million, or eight cents a share, in the fourth quarter of 2010. The fourth-quarter loss mainly resulted from a $15 million impairment charge on securities.

The company repurchased 2.8 million common shares during the fourth quarter, and is authorized under its current buyback plan to repurchase another $40 million worth of shares.

The shares trade for 10 times the 2012 consensus EPS estimate of $1.21. The 2013 EPS estimate is $1.66.

KBW analyst Derek Hewett rates Oriental Financial Group "Outperform," with a $15 price target, saying on Feb. 1 that the company's "credit still looks relatively good given the difficult operating environment in Puerto Rico," and that its disappointing fourth quarter reflected a 27 basis point decline in the net interest margin to a low 1.74%, "as increased prepayment speeds resulted in higher premium amortization."

Oriental Financial Group projects a 2.50% net interest margin for 2012.

Hewett estimates that Oriental will earn $1.25 a share in 2012, followed by EPS of $1.65 in 2013.

Interested in more on Oriental Financial Group? See TheStreet Ratings' report card for this stock.

3. Citigroup

Shares of Citigroup ( C) closed at $32.36 Wednesday, returning 23% year-to-date, following last year's 44% decline.

The shares trade for 0.7 times their Dec. 30 tangible book value of $50.43, and for eight times the consensus 2012 EPS estimate of $3.98. The 2013 EPS estimate is $4.76, underlining Citigroup's attractive multiple to forward earnings.

At a presentation by Citigroup at the Credit Suisse Financial Services Forum, CFO John Gerspach said that the company's long-term return of capital to investors through dividends and share buybacks would be supported by $40 billion in deferred tax assets not included in the company's Tier 1 capital, as well as "about $24 billion of our regulatory capital that should be eventually released as Citi Holdings winds down."

Citi Holdings is the subsidiary in which Citigroup has placed noncore assets to wind down, as part of CEO Vikram Pandit's "good bank/bad bank" strategy to trim the company's balance sheet.

Despite the solid year-to-date return, Bank of America Merrill Lynch analyst Guy Moszkowski sees plenty of potential for Citigroup. He rates the shares a "Buy," with a $44 price objective, and said on Feb. 8 that although the deferred tax asset "realization will take time (contingent on generating higher U.S. taxable earnings) and Holdings wind-down will not be completed for years,:" he expects the company "to be well positioned to support significantly higher payouts" by 2014.

Over the short haul Citigroup's investors face less mortgage-related headline risk than Bank of America's investors, but the Wall Street Journal report on Wednesday saying that Citi valued its 49% portion of the joint Morgan Stanley Smith Barney venture by $5 billion more than Morgan Stanley ( MS) did, and could be forced to take a large write-down, is an example of a news item that could cause a bump in the road for the shares.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

2. Doral Financial

Shares of Doral Financial of San Juan, Puerto Rico, closed at $1.49 Wednesday, returning 55% year-to-date, following a 31% decline in 2011.

The shares trade for just over half their Dec. 30 tangible book value of $3.80.

Doral had $1.9 billion in total assets as of Dec. 30 and reported fourth-quarter net income attributable to common shareholders of $9.2 million, or seven cents a share, compared to a loss of $38.5 million, or 30 cents a share, in the fourth quarter of 2010. The fourth-quarter profit reflected an $8.6 million income tax benefit.

The company's fourth-quarter net interest income increased to $49.4 million from $47.6 million a year earlier, mainly from a decline in funding costs. The fourth-quarter net interest margin was 2.67%, increasing from 1.85% a year earlier, as the company reduced its brokered-deposits and lowered rates on retail deposits.

The provision for loan losses declined to $9.9 million in the fourth quarter, from $21.1 million a year earlier.

The company booked $8.3 million in gains on loans securitized and sold, along with the capitalization of mortgage servicing rights, compared to $3.5 million in the fourth quarter of 2010.

Doral's nonperforming assets comprised 9.62% of total assets as of Dec. 30, improving slightly from 9.86% a year earlier.

Loan loss reserves covered 1.93% of total loans (excluding FHA/VA guaranteed loan balances and loans collateralized by deposits). The company's regulatory capital ratios were solid, with a Tier 1 leverage ratio of 9.13% and a total risk-based capital ratio of 13.43%. The Tier 1 common equity ratio was 6.22%.

When asked during the company's fourth-quarter conference call how much in remaining deferred tax assets investors might look forward to recapturing, Doral CFO Bob Wahlman said that the DTA recapture was related to the performance of two of the company's Puerto Rico subsidiaries, which under the territory's law, file their tax returns independently. Depending on the performance of these subsidiaries, there may be additional tax benefit's boosting Doral's bottom line, but the CFO couldn't say how much.

The shares trade for six times the consensus 2012 EPS estimate of 26 cents. The consensus 2013 EPS estimate is 49 cents.

B. Riley analyst Joe Glade rates Doral a "Buy," with a $3.75 price target, and said on Jan. 23 that the deferred tax valuation allowance "could add roughly $2.78 to tangible book value if it can be taken back onto the balance sheet," and that the company "took a big step forward" during the fourth quarter, and that if and when the company reaches its goal of sustained profitability, "should not only boost tangible book value, but the stock multiple as well."

Interested in more on Doral Financial? See TheStreet Ratings' report card for this stock.

1. Popular, Inc.

The actively traded U.S. bank stock with the most upside potential based on a mean price target among analysts is Popular, Inc. ( BPOP), of San Juan, Puerto Rico. The shares closed at $1.69 Wednesday, rising 22% year-to-date, and the shares have 85% upside potential, based on a mean price target of $3.10.

Popular's shares fell 56% in 2011.

The shares trade for 0.6 times their Dec. 30 tangible book value of $3.08.

Popular owes $935 million in TARP money, having converted the government's preferred shares to trust-preferred shares in August 2009, while paying a $13 million exchange fee for the privilege. While the conversion didn't change the amount of money owed to the government or the 5% coupon on the shares held by the U.S. Treasury, the transaction "resulted in a favorable impact to accumulated deficit on the exchange date of $485.3 million," because Popular assumed a discount rate of 16%, taking into account the much greater dividend rate it would pay if it had offered trust-preferred shares in the open market.

The company took advantage of the economic turmoil in its home territory, purchasing the failed Westernbank Puerto Rico of Mayaguez from the FDIC in April 2010, gaining 46 branches, $8.6 billion in deposits, and a commanding position on the island.

Popular had $37.3 billion in total assets as of Dec. 30. The company reported fourth-quarter earnings applicable to common stock of $2.0 million, or less than a penny a share, compared to a loss of $227.5 million in the fourth quarter of 2010, when the company booked a $354.4 million provision for loan losses, from the reclassification of $1 billion in loans as held-for-sale, and also took a $34.5 million charge related to mortgage putbacks.

During the fourth quarter of 2011, the company recorded a "one-time expense of $15.6 million due to implementation of an employee retirement window," with 369 employees agreeing to leave Popular, for "estimated annual savings of $15 million going forward."

The company's provision for loan losses -- excluding those covered by FDIC loss-sharing agreements -- totaled $123.9 million during the fourth quarter, while provisions for covered loans -- most of which Popular should be recovering from the FDIC - totaled $55.9 million.

Popular's fourth-quarter net interest margin was 4.30%, declining from 4.45% the previous quarter, "principally due to a reduction in loan yields, mainly in mortgage loans and the covered loan portfolio, and to a lower volume of investment and trading securities, partially offset by a reduction in the cost of deposits and the volume of borrowings"

The shares trade for nine times the consensus 2012 EPS estimate of 19 cents. The consensus 2013 EPS estimate is 24 cents.

Morgan Stanley analyst Ken Zerbe has an "Overweight" rating on Popular, with a $3.00 price target, saying on Jan. 25 that Popular's fourth quarter "was actually a fairly decent quarter (albeit highly noisy, as usual)."

Popular estimates that it will earn between $185 and $200 million during 2012. Zerbe estimates earnings of $194 million, or 18 cents a share this year, followed by EPS of 26 cents a share in 2013.

Zerbe said that "Popular has made meaningful progress at addressing its sizable credit issues by aggressively building reserves, shrinking its U.S. business, and raising capital," with a year-end Tier 1 common equity ratio of 12.1%, and that the shares have "an attractive valuation that more than reflects potential credit concerns."

Interested in more on Popular, Inc.? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 10 Bank Stocks Trading Below Book With Upside portfolio on Stockpickr.

-- 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.

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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