5 Bank Stocks Worth a Second Look

NEW YORK ( TheStreet) -- An analysis of the stocks underperforming a hot banking sector this year highlights some food for thought, while underlining the case that the largest U.S. bank stocks are dirt cheap.

The KBW Bank Index ( I:BKX) was up 24% year-to-date through the end of last week -- following a 25% drop during 2011 -- with some of the most familiar banking names bringing home stellar short-term returns for investors, since shares were trading way below book value at the end of last year.

Using data provided by HighlineFI, we have identified a select list of the five actively traded bank stocks that underperformed with year-to-date total returns of less than 10% through Thursday, trading at the lowest price multiples to forward earnings estimates. Most are smaller players, but one large regional name is included.

The first thing that will come to mind for many investors will be that this group probably underperformed last year. Two of the stocks actually posted positive returns during 2011, while the worst of the lot saw a relatively moderate decline of 12%.

While most of the five names trade for low multiples to book value, all trade at higher multiples to forward earning estimates than two of the largest U.S. bank holding companies, which are still trading at very significant discounts to book value, despite stellar year-to-date returns:
  • Shares of Bank of America (BAC) closed at $9.23 Thursday, returning 66% year-to-date, following a 58% tumble during 2011. The shares still trade for just 0.7 times the company's Dec. 30 tangible book value of $12.95, and for nine times the consensus 2013 EPS estimate of $1.05, among analysts polled by Thomson Reuters. The consensus first-quarter EPS estimate for Bank of America is 12 cents, with a full-year 2012 estimate of 68 cents.
  • Citigroup (C) closed at $34.79 Thursday, returning 32% year-to-date, following last year's 44% decline. Citi's shares are also heavily discounted, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for eight times the consensus 2013 EPS estimate of $4.69. Analysts expect the company to post first-quarter EPS of 99 cents, and EPS of $4.09 for all of 2012.

Three of our select group of stocks underperforming the banking sector year-to-date trade at or below tangible book value, according to HighlineFI, while all five of them are more expensive to forward earnings than Bank of America and Citigroup, trading for between nine and 11 times consensus 2013 earnings estimates. But the way things are now shaping up for the sector, those valuations aren't particularly high.

Here's a look at all five of the underperforming names, in descending order, by year-to-date stock performance:

5. KeyCorp

Shares of KeyCorp ( KEY) of Cleveland closed at $8.14 Thursday, returning 8% year-to-date, following a 12% decline during 2011.

The shares trade for 0.9 times their reported Dec. 30 tangible book value of $9.11, and for 10 times the consensus 2013 EPS estimate of 81 cents. The consensus 2012 EPS estimate is

Following the completion of the Federal Reserve's 2012 bank holding company stress tests in March, KeyCorp announced that its board of directors had authorized "a common stock repurchase program of up to $344 million," and that the board would consider raising the quarterly dividend to five cents a share from three cents, at its regular May meeting.

Based on the current three-cent quarterly payout, the shares have a dividend yield of 1.47%.

KeyCorp is scheduled to report its first-quarter results on April 19, with a consensus EPS estimate of 19 cents, compared to earnings of 20 cents a share during the fourth quarter, and 19 cents during the first quarter of 2011.

Citigroup analyst Josh Levin rates KeyCorp a "Buy," with a $10 price target, based on a discounted valuation to book value compared to peers, and said that with strong capital, "KEY offers more downside protection than most of its peers in a market sell-off."

Levin also said that "KEY has one of the more straightforward stories in our coverage universe" being "focused on commercial and industrial lending with an emphasis on middle market companies," and having "above average ability to defend its net interest margin given that it has the highest cost of interest-bearing deposits in our coverage universe."

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

4. Virginia Commerce Bancorp

Shares of Virginia Commerce Bancorp ( VCBI) of Arlington closed at $8.32 Thursday, returning 8% year-to-date, following a 25% return during 2011.

The shares trade for 1.2 times tangible book value, according to HighlineFI, and for 9.5 times the consensus 2013 EPS estimate of 88 cents. The consensus 2012 earnings estimate is 75 cents.

Virginia Commerce Bancorp had $2.9 billion in total assets as of Dec. 30. The company owes $71 million in federal bailout funds received through the Troubled Assets Relief Program, or TARP, in December 2008.

CEO Peter Converse said during the company's first-quarter conference call in January that Virginia Commerce was continuing to target incremental TARP repayment utilizing operating earnings and liquidity beginning by the end of the second quarter of 2012 and, of course, subject to regulatory approval," according to a transcript provided by Thomson Reuters.

The company is scheduled to report is first-quarter results on April 18, with a consensus EPS estimate of 17 cents, matching its fourth-quarter results, but increasing from earnings of 12 cents a share during the first quarter of 2011.

Janney Capital Markets analyst David Peppard on March 16 lowered his rating for Virginia Commerce to "Neutral" from "Buy," "strictly due to valuation," since the stock was trading right at Janney's "12-month fair value estimate of $9."

Peppard also said that "The company's efforts to resolve asset quality issues and improve funding have remained on track - helped in part by the DC metro economy, and that "the odds of a common stock offering to repay $71 million of TARP have substantially declined as capital is built through retained earnings and the exercise of outstanding warrants," adding that his firm's "analysis suggests that Virginia Commerce has the financial ability to immediately repay TARP preferred stock, should it decide to do so."

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

3. Flushing Financial Corp.

Shares of Flushing Financial Corp. ( FFIC) of Lake Success, N.Y., closed at $13.02 Thursday, returning 4% year-to-date, following a 6% decline during 2011.

The shares trade for just over tangible book value, according to HighlineFI, and for 11 times the consensus 2013 EPS estimate of $1.22. The consensus 2012 earnings estimate is $1.14 a share.

Based on a 13-cent quarterly payout, the shares have a dividend yield of 3.99%.

The company had $4.3 billion in total assets as of Dec. 30.

Flushing Financial Corp. will report its first-quarter results on April 24, with a consensus EPS estimate of 27 cents, matching last quarter's bottom line, and just ahead of first-quarter 2011 earnings of 26 cents a share.

Guggenheim Securities analyst David Darst rates Flushing Financial Corp. a buy, with a $15 price target, and said back in February that his rating was based on "an attractive valuation and yield coupled with healthy profitability; however, improving asset quality remains elusive and we believe this is limiting upside in the stock," adding that he expected "asset quality improvement later this year, which is the primary catalyst."

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

2. Berkshire Hills Bancorp

Shares of Berkshire Hills Bancorp ( BHLB) of Pittsfield, Mass., closed at $22.67 Thursday, returning 3% year-to-date, following a 3.5% return during 2011.

The shares trade for 1.5 times tangible book value, according to HighlineFI, and for 10 times the consensus 2013 EPS estimate of $2.18. The consensus 2012 EPS estimate is $1.92.

Based on a 17-cent quarterly payout, the shares have a dividend yield of 3.00%.

Berkshire Hills Bancorp had $4.0 billion in total assets as of Dec. 30.

The company has a deal in place to acquire Connecticut Bank & Trust Co. ( CTBC) of Hartford for $30 million in cash and stock. The target company had $2805 million in total assets as of Dec. 30. The deal is contingent upon Connecticut Bank & Trust's repayment of $5.5 million in TARP money, and is expected to be completed during the second quarter.

Berkshire Hills Bancorp is scheduled to report its first-quarter results on April 24. The consensus among analysts polled by Thomson Reuters is for the company to post EPS of 45 cents, increasing from 40 cents in the fourth quarter and 20 cents during the first quarter of 2011.

Sterne Agee analyst Mike Shafir rates Berkshire Hills Bancorp a buy, with a $25 price target, and said in February after the company reported its fourth-quarter results that the company's results were "highlighted by strong commercial loan growth and tight expense controls."

Shafir believes "the company will continue to be an acquirer in its core markets and supplement organic loan growth with whole bank and fee income acquisitions."

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

1. Oriental Financial Group

Shares of Oriental Financial Group ( OFG) of San Juan, Puerto Rico, closed at $11.68 Thursday, pulling back 3% year-to-date, following a 1% decline last year.

The shares trade for 0.8 times tangible book value according to HighlineFI, and for 8.5 times the consensus 2013 EPS estimate of $1.37. The consensus 2012 EPS estimate is $1.06.

Based on a six-cent quarterly payout, the shares have a dividend yield of 2.05%.

The company had $6.7 billion in assets as of Dec. 30.

Analysts polled by Thomson Reuters expect Oriental Financial Group to report first-quarter earnings of 18 cents a share, improving from a 31-cent loss last quarter, when the company took $15 million in securities impairment charges. During the first quarter of 2011, Oriental earned eight cents share.

B. Riley analyst Joe Gladue has a neutral rating on Oriental, with a $12 price target, and said on Jan. 31 after the fourth-quarter results were announced that "Oriental maintains very high capital, enabling the company to pursue strategic acquisitions or to return capital to shareholders through dividends and stock repurchases."

Gladue expects Oriental "to continue to pursue its stock repurchase program aggressively over the next few quarters," and for the company "to raise the dividend gradually from the current $0.06 per quarter toward the $0.14 quarterly dividend the company paid out prior to the financial crisis."

>>To see these stocks in action, visit the 5 Bank Stocks Worth a Second Look portfolio on Stockpickr.

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

-- 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.

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