10 Midwest Bank Stocks Finally Paying Off

NEW YORK ( TheStreet) -- We've repeatedly said that the group of 10 Midwest Bank Stocks TheStreet has tracked since March of last year were "long-term" choices for investors, and the group is bearing fruit this year.

Eight of the 10 saw negative returns during 2011, when the The KBW Bank Index ( I:BKX) declined 25%. It's no surprise to see all 10 with positive returns so far this year, with the KBW Bank Index rising 26% through Friday's close.

The banking sector has been on fire, with continued positive indications from U.S. Labor Department unemployment reports, and of course, signs of a manufacturing resurgence, especially for the automobile manufacturers, bodes well for the entire Midwest.

The Federal Reserve's annual stress tests have also served as a catalyst for the group, with several of the larger Midwest bank holding companies announcing capital actions last week, including dividend increases and share buybacks.

When we last looked at the group in November, shares of the largest Midwest banking players were facing major pressure as investors anticipated fourth-quarter revenue hits from the Federal Reserve's new caps on debit card interchange fees, as required by the Durbin Amendment to the Dodd-Frank bank reform legislation.

With one full quarter of Durbin behind us, seven of the 10 names trade for 1.5 times tangible book value, or less, according to HighlineFI. All 10 Midwest bank stocks listed here trade for at least 10 times their 2012 consensus 2012 earnings estimates. Some trade much higher, making most of the group relatively expensive, when compare to the "big four" U.S. bank holding companies:
  • Shares of Citigroup (C) closed at $36.69 Friday, returning 40% year-to-date, following a 44% decline during 2011. The shares are heavily discounted, trading for just 0.7 times tangible book value, according to HighlineFI, which is a lower multiple than any of the Midwest banks listed here. Citi trades for nine times the consensus 2012 earnings estimate of $3.97, among analysts polled by Thomson Reuters, which is lower estimated 2012 multiple than any of our Midwest group. The consensus 2013 EPS estimate is $4.78.
  • Shares of Bank of America (BAC) closed at $9.80 Friday, returning 76% year-to-date, following a 58% drop during 2011. The shares trade for 0.8 times tangible book value, which is also a lower multiple than any of the Midwest banks listed here. The shares trade for a relatively high 14 times the consensus 2012 earnings estimate of 69 cents. The consensus 2013 EPS estimate is $1.19.
  • Shares of JPMorgan Chase (JPM) closed at $44.57 Friday, returning 35% year-to-date, following a 20% decline during 2011. The shares trade for 1.4 times tangible book value and for nine times the consensus 2012 EPS estimate of $4.73. The consensus 2013 EPS estimate is $5.51. Last Tuesday, JPMorgan announced it would raise its quarterly dividend by a nickel to 30 cents, and that its board of directors had authorized $15 billion in common stock buybacks.
  • Shares of Wells Fargo (WFC) closed at $33.89 Friday, returning 23$ year-to-date, following last year's 10% pullback. The shares trade for 2.2 times tangible book value and for 11 times the consensus 2012 EPS estimate of $3.20. The consensus 2013 EPS estimate is $3.69. Wells Fargo last Tuesday raised its quarterly dividend to 22 cents from 12 cents. The company also said that the Federal Reserve had approved its plan to increase share buybacks over 2011 levels.

Here's the latest on the 10 Midwest picks, again in descending order by forward price-to-earnings ratio:

10. TCF Financial

Shares of TCF Financial ( TCB) of Wayzata, Minn., closed at $12.15 Friday, returning 19% year-to-date, after falling 29% during 2011.

Based on a five-cent quarterly payout, the shares have a dividend yield of 1.63%.

TCF on March 13 announced it would prepay $3.6 billion in wholesale borrowings and sell $1.9 billion in mortgage-backed securities, as part of its strategy of moving away from longer-term residential and commercial real estate loans and MBS investments, to a focus on "originating high-yielding, low-risk, secured loans and leases funded by a low-cost, core deposit base," according to CEO William Cooper.

The company said it would recognize "a one-time, net after-tax charge of $293 million, or a loss of $1.85 per common share, recorded in the first quarter of 2012."

The good news for TCF's net interest margin, is that the company has "replaced $2.1 billion of 4 percent weighted average fixed-rate, Federal Home Loan Bank advances with a mix of floating and fixed-rate borrowings with a current rate of .5 percent," while terminating "$1.5 billion of 4 percent weighted average fixed-rate repurchase agreement borrowings." The company expects its net interest income to improve by $74 million, annualized, and for its net interest margin to increase by 96 basis points.

TCF earned $109.4 million, or 71 cents a share, during 2011, declining from $151 million, or $1.08 a share, during 2010, as the company saw a major decline in account fees and service charges from the debit card overdraft "opt-in" rule that the Federal Reserve implemented during the third quarter of 2010. TCF also saw its card revenue decline during the fourth quarter of 2011, as the Federal Reserve implemented the cap on debit card interchange fees charged to merchants, as required by the Durbin Amendment of the Dodd-Frank bank reform legislation.

KBW analyst Christopher McGratty was impressed with TCF's balance sheet restructuring, saying on Friday that the company's strong capital levels enabled "them to be aggressive and still maintain ample capital for future growth," and that the "projected earnings pick-up is also meaningful at about $0.27/share annually."

Despite what McGratty called "a 20% hit" to tangible book value, investors reacted positively, sending TCF's shares up 6.5% on the day of the restructuring announcement.

The shares trade for 1.2 times tangible book value, according to HighlineFI. The consensus among analysts polled by Thomson Reuters is for TCF Financial to post a full-year net loss of $1.19 a share for 2012, followed by earnings of $1.15 a share in 2013.

McGratty has a "Market Perform" rating on TCF, with a $12 price target, but said "TCB pulled the earnings power forward in what remains an uncertain environment, ultimately positioning it for a sale down the road (banks get sold on earnings power)."

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

9. Associated Banc-Corp

Shares of Associated Banc-Corp ( ASBC) of Green Bay, Wis., closed at $14.44 Friday, returning 30% year-to-date, following last year's 26% decline.

On February 15, the company raised its quarterly dividend to five cents, from a penny. Based on the new quarterly payout, the shares have a dividend yield of $1.39.

Associated earned $114.94 million, or 66 cents a share during 2011, improving from a net loss of $30.4 million, or 18 cents a share, in 2010, when the company recorded $390 million in provisions for loan losses. During 2011, total provisions for loan losses fell to $52 million.

The shares trade for 1.4 times tangible book value, and for 16 times the consensus 2012 earnings estimate of 92 cents a share. The consensus 2013 EPS estimate is $1.30.

At the KBW Boston Bank Conference on Feb. 29, Associated CEO Phil Flynn said the company in 2011 "grew loans 11% year over year and 17% growth in the commercial and business space," and that he expected the company's 2012 earnings to "significantly increase" over last year.

KBW analyst Christopher McGratty rates Associated Banc-Corp "Market Perform," with a $12 price target for the shares, but said on March 2 that the company "posted some of the best growth in the Midwest in 2011 (+11%), including 16% in Q4," and that for 2012, he expected "the positive momentum to continue," with loans expanding "an additional 12% this year, which is likely to vault the company near the top of the list in the Midwest from a growth perspective."

At the KBW conference, Associated indicated that with continued credit quality improvement, it was likely to see its 2012 provision for loan losses to be near zero, which, along with the growth, could provide a significant boost to earnings.

McGratty estimates that Associated will earn 95 cents a share during 2012, followed by 2013 EPS of a dollar.

Interested in more on Associated Banc-Corp? See TheStreet Ratings' report card for this stock.

8. FirstMerit

Shares of FirstMerit ( FMER) of Akron, Ohio, closed at $17.21 Friday returning 15% year-to-date, following a 20% decline during 2011.

Based on a 16-cent quarterly payout, the shares have a dividend yield of 3.72%.

FirstMerit earned $119.6 million, or $1.10 a share during 2011, increasing from $102.9 million, or $1.02 a share, during 2010.

At the KBW Boston Bank Conference on Feb. 29, FirstMerit CEO Paul Greig said that the company had "earned money 51 consecutive quarters, with "returns on average assets and equity are strong versus our peers."

The 2011 ROA was 0.82%, putting the company in the middle of this group of 10 Midwest bank holding companies.

KBW analyst Christopher McGratty rates FirstMerit "Market Perform," with a $14 price target, saying on March 2 that he company remained "well-positioned to pursue attractive M&A opportunities in the Chicagoland market, and we anticipate the company will remain a disciplined and selective buyer."

McGratty estimates that FirstMerit will earn $1.15 a share during 2012, followed by EPS of $1.25 in 2013.

The shares trade for 1.7 times tangible book value, and for 15 times the consensus 2012 EPS estimate of $1.13. The consensus 2013 EPS estimate is $1.21.

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

7. MB Financial

Shares of MB Financial ( MBFI) of Chicago closed at $21.42 Friday, returning 25% year-to-date, after pulling back 1% during 2011.

The company last Wednesday made good on CEO Mitchell Geiger's promise to repaying $196 million in federal bailout funds received in December 2008 through the Troubled Assets Relief Program, or TARP, in a "shareholder-friendly" way, announcing it had fully repaid the government, "with cash on hand."

MB Financial earned $28.3 million, or 71 cents a share during 2011, increasing from $10.1 million, or 39 cents a share, during 2010, as credit expenses declined. The 2010 results masked some of the improvement, since they included $62.6 million in bargain purchase gains, on failed institutions acquired from the Federal Deposit Insurance Corp.

FIG Partners analyst Brian Martin rates MB Financial "Outperform," with a $21 price target, saying in January that the company's fourth-quarter "highlights included a return to loan growth after a period of contraction, an uptick in the margin, and continued improvement in credit quality." Martin estimates that MBFI will earn $1.50 a share in 2012, followed by EPS of $1.80 during 2013.

The shares trade for 1.5 times tangible book value, and for 14 times the consensus 2012 EPS estimate of $1.49. The consensus 2013 EPS estimate is $1.74.

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

6. First Financial Bancorp

Shares of First Financial Bancorp ( FFBC) of Cincinnati closed at $17.42 Friday, returning 7% year-to-date, after a 5% decline during 2011.

With very strong capital ratios, First Financial's board has "authorized a 100% payout ratio that will consist of two parts: a recurring dividend based on our stated payout ratio of 40% - 60% of earnings; and a variable dividend that will equal the remainder of our quarterly earnings with the variable dividend "expected to continue until we have acquisitions or organic capital utilization rates that equal or exceed our capital generation rates."

Based on the regular quarterly dividend of 12 cents, plus the variable 19-cent dividend to be paid on April 2, 2012, to shareholders of record as of March 2, First Financial's dividend yield is 6.20%.

The company earned $66.7 million, or $1.14 a share, during 2011, increasing from $57.4 million, or 99 cents a share, in 2010.

KBW analyst Christopher McGratty rates First Financial "Market Perform," with a $17 price target, and said on March 5 that "FFBC is well-positioned to "accretively deploy its excess capital" through an acquisition, while remaining "a disciplined and patient buyer." The analyst added that "the company will continue to take advantage of organic growth opportunities as management indicated its loan pipelines remain healthy" during a recent presentation by First Financial CFO Frank Hall.

The shares trade for 1.7 times tangible book value, and for 14 times the consensus 2012 EPS estimate of $1.22. The consensus 2013 EPS estimate is $1.29.

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

5. Citizens Republic Bancorp

Shares of Citizens Republic Bancorp ( CRBC) of Flint, Mich., closed at $15.22 Friday, returning 34% year-to-date, following an 85% return during 2011.

The shares underwent a 1-for-10 reverse split on July 5, 2011.

Citizens Republic owes $300 million in TARP money and has deferred its last eight quarterly dividends to the government. CEO Cathleen Nash said in a letter to shareholders on Feb. 29 that "we expect to pay the accrued dividends on our trust preferred and TARP obligations. We also continue to explore options to repay TARP in the most shareholder friendly way possible, though no firm timetable has been established to do so."

A silver lining for the company is its "deferred tax asset, which was valued at $311 million at year end," according to Nash. Now that the company has been profitable for three quarters, it is looking to "reverse the valuation allowance in 2012," with Nash estimating that "our current valuation allowance would have the effect of increasing our tangible common equity by over 76% as of December 31, 2011."

The company's tangible common equity ratio was a rather low 4.47%, as of Dec. 30.

Citizens Republic Bancorp trades for 1.5 times tangible book value, and for 14 times the consensus 2012 EPS estimate of $1.11.

Oppenheimer analyst Terry McEvoy said in late January that "positive news related to the company's deferred tax asset (DTA) should be the next catalyst for the stock, as it would increase tangible book value by ~80%," adding that he saw "tangible book value growing to $19.21 by the end of '12."

McEvoy rates Citizens Republic "Outperform," with a 12-18 month price target of $15.00. The analyst estimates the company will earn $1.05 a share during 2012, followed by 2013 EPS of $1.15.

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

4. U.S. Bancorp

Shares of U.S. Bancorp ( USB) of Minneapolis closed at $31.65 Friday, returning 17% year-to-date, following a 2% return during 2011.

Following its passing of the Federal Reserve's 2012 stress tests with flying colors, U.S. Bancorp last Wednesday announced it would U.S. Bancorp announced that it would increase its quarterly dividend to 19.5 from 12.5 cents and that it had authorized a new program to buy back up to 100 million shares, replacing the company's previous buyback program.

Based on the new payout, the shares have a 2.46% dividend yield.

The shares trade for 2.9 times tangible book value, and for 12 times the consensus 2012 EPS estimate of $2.69. The consensus 2013 EPS estimate is $2.92. While those valuations look high in the current environment, especially the price-to-book ratio, U.S. Bancorp has distinguished itself with strong, steady earnings performance through the credit crisis.

The company's 2011 return on average assets of 1.51% was, by far, the highest among this group of 10 Midwest banks.

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

3. KeyCorp

Shares of KeyCorp ( KEY) of Cleveland closed at $8.54 Friday, returning 11% year-to-date, following a 12% decline during 2011.

Following the Federal Reserve's public announcement of the stress test results, KeyCorp last Wednesday announced that the regulatory had approved its plan to increase its quarterly dividend to five cents from three cents, and announced that its board of directors would "consider the potential dividend increase at its regular May meeting."

KeyCorp also announced that it had authorized "a common stock repurchase program of up to $344 million."

Based on the new quarterly payout, the shares have a dividend yield of 2.34%.

The shares trade just below tangible book value, and for 11 times the consensus 2012 EPS estimate of 77 cents. The consensus 2013 EPS estimate is 81 cents.

While KeyCorp still trades below book, analyst opinion is mixed. Out of 32 analysts covering the lender, 11 rate the shares a buy, 16 have neutral ratings, and 5 rate the shares "Underperform," or have sell ratings. The mean price target is $8.83.

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

2. Huntington Bancshares

Huntington Bancshares ( HBAN) of Columbus, Ohio, has seen its stock return 18% year-to-date, closing Friday at $6.43, following a 19% decline during 2011.

While Huntington Bancshares was not part of the group of 19 large, complex, bank holding companies whose stress test results were publicly announced by the Federal Reserve, the company was included in the 2012 round of tests, and on Thursday said the regulator had no objections to its capital plan, which "the potential repurchase of up to $182 million shares of common stock and a continuation of Huntington's current common dividend through the first quarter of 2013."

Huntington pays a quarterly dividend of four cents, for a yield of 2.49%.

The shares trade for 1.3 times tangible book value, and for 11 times the consensus 2012 EPS estimate of 59 cents. The consensus 2013 EPS estimate is 64 cents.

Guggenheim Securities analyst Jeff Davis has a neutral rating on Huntington, with a $6.50 price target, and said on Thursday that the company's buyback "modestly higher than the $150 million we had modeled over the next four quarters, approximates 37% of net income we are projecting for 2Q12-1Q13 and 39% net of preferred dividends."

Davis estimates that Huntington will earn 57 cents a share this year, followed by 2013 EPS of 60 cents.

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

1. Fifth Third Bancorp

Shares of Fifth Third Bancorp of Cincinnati closed at $14.33 Friday, returning 13% year-to-date, following an 11% decline during 2011.

The company last Wednesday announced that the Federal Reserve had rejected Fifth Third's plan to increase its quarterly dividend from the current payout of eight cents, and also objected to common share buybacks, except for "the repurchase of common shares in an amount equal to any after-tax gains realized by Fifth Third from the sale of Vantiv, Inc. common shares by either Fifth Third or Vantiv," which has made preliminary filings for a public offering.

Based on the current payout, the shares have a dividend yield of 2.23%.

The shares trade for 1.4 times tangible book value, and for 10 times the consensus 2012 EPS estimate of $1.40. The consensus 2013 EPS estimate is $1.54.

Last Tuesday, after the stress test results were made public, Morgan Stanley analyst Ken Zerbe predicted that Fifth Third would submit a new capital plan to the Fed, and would "receive approval for a roughly 60% combined payout ratio in 2012 (perhaps weighted more toward the back half of the year), equating to buybacks of 3.6% of shares outstanding."

Zerbe said that Fifth Third remained one of his firm's top bank stock picks, "due to its strong profitability, aggressive approach to capital management, and large fee income base."

The analyst's price target for Fifth Third is $18, implying 26% upside from Friday's close. Zerbe estimates Fifth Third will earn $1.45 a share this year, followed by 2013 EPS of $1.50.

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

>>To see these stocks in action, visit the 10 Midwest Bank Stocks Finally Paying Off portfolio on Stockpickr.

-- 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.