10 Bank Plays for the Manufacturing Recovery: KBW

JUPITER, Fla. ( TheStreet) -- Manufacturing growth in the Midwest and some regions of California can pay off big over the next several years for local banks and their investors.

In a report released late on Sunday KBW analyst Fred Cannon named 10 regional banks that "should be able to produce outsized loan and deposit growth over time," from the resurgence in manufacturing activity.

While there has been a very significant decline in U.S. manufacturing employment since 2007, the last two years have seen strong growth in manufacturing jobs, mainly in the Midwest, as the auto industry has recovered.

There are 1.9 million fewer workers employed by U.S. manufacturers than there were at the end of 2007, according to KBW. However, over the past two years, seven states have seen double-digit growth in manufacturing employment, including Indiana, Ohio, Illinois, Michigan, Georgia and Washington.

Manufacturing growth "tends to have high multiplier effects as increases in incomes to those with manufacturing jobs drive increased demand for housing and other consumer goods," according to Cannon, who also wrote that that "this manufacturing renaissance in the former rust belt is being driven by a resurgence in the U.S. auto industry and by low energy prices stimulated by the drive toward energy independence."

The Bureau of Labor Statistics on Friday said that, on a seasonally adjusted basis, 236,000 nonfarm jobs were created in the Unites States during February. Of that total, 14,000 were in manufacturing, and 48,000 were in various construction industries.

Regional economies see "large benefits" from manufacturing expansion, "because growth in the production of manufacturing products tends to be driven by demand outside a regional economy, so manufacturing and other 'export', oriented jobs stimulate the natural economic growth that occurs in a region's service sector based on demand internal to a region," according to Cannon.

Cannon noted that "the state data we reviewed can mask sub-state regions where manufacturing is expanding," including California's Bay Area. KBW's research team highlighted seven Midwest banks that the firm's analysts see benefiting from the manufacturing recovery, along with three California names.

KBW has "market perform" ratings on most of these stocks. Then again, these ratings are based on a 12-month investment outlook, which is not really a "long-term" horizon, when playing an economic recovery. Most of these banks are all in good shape, and most saw decent or better earnings performance during 2012.

FirstMerit ( FMER) of Akron, Ohio, had $14.9 billion in total assets as of Dec. 31, with a 2012 return on average assets (ROA) of 0.91%, according to Thomson Reuters Bank Insight. The stock closed at $15.45 Friday, trading for 1.4 times tangible book value, and 10.8 times the consensus 2014 earnings estimate of $1.43 a share, among analysts polled by Thomson Reuters. Based on a quarterly payout of $0.16, the shares have a dividend yield of 4.14%. Please see TheStreet's 10 Buy-Rated Bank Stocks With Highest Dividend Yields, for much more information on FirstMerit.

Old National Bancorp ( ONB) of Evansville, Ind., had $9.5 billion in total assets as of Dec. 31, and its 2012 ROA was 1.04%. The company's stock closed at $13.95 Friday, trading for 1.7 times tangible book value, and for 12.4 times the consensus 2014 EPS estimate of $1.13. With a quarterly payout of $0.10, the shares have a dividend yield of 2.87%. Please see TheStreet's Midwest Banks vs. Northeast Banks for more on Old National Bancorp.

Associated Banc-Corp ( ASBC) of Green Bay, Wis., had had $22.5 billion in assets as of Dec. 31, and its ROA during 2012 was 0.81%. The stock closed at $14.74 Friday, trading for 1.3 times tangible book value, and for 13.7 times the consensus 2014 EPS estimate of $1.08. Based on a quarterly payout of $0.08, the shares have a dividend yield of 2.17%.

Lakeland Financial ( LKFN) of Warsaw, Ind., had $3.1 billion in total assets as of Dec. 31, and its 2012 ROA was 1.19%. The shares closed at $25.64 Friday, trading for 1.4 times tangible book value, and for 11.4 times the consensus 2014 EPS estimate of $2.26. With a quarterly payout of 17 cents, the shares have a divided yield of 2.65%. Check out Midwest Banks vs. Northeast Banks for more on Lakeland Financial.

PrivateBancorp ( PVTB) of Chicago had $14.1 billion in total assets as of Dec. 31. The company's 2012 ROA was 0.60%. The shares closed at $18.39 Friday, trading for 1.3 times tangible book value, and for 13.4 times the consensus 2014 EPS estimate of $1.37. Check out TheStreet's recent discussion on bank consolidation for more on Chicago's highly competitive market.

First Financial Bancorp ( FFBC) of Cincinnati had $6.5 billion in total assets as of Dec. 31, and its 2012 ROA was 1.07%. The stock closed at $15.65 Friday, trading for 1.5 times tangible book value, and for 14.1 times the consensus 2014 EPS estimate of $1.11. Based on a quarterly payout of $0.15, the shares have a dividend yield of 3.83%.

Peoples Bancorp ( PEBO) of Marietta, Ohio, had $30.3 billion in assets as of Dec. 31. The bank's ROA during 2012 was 0.97%. The shares closed at $21.96 Friday, trading for 1.5 times tangible book value, and for 11.9 times the consensus 2014 EPS estimate of $1.84. With a quarterly dividend of $0.12, the shares have a yield of 2.19%.

SVB Financial Group ( SIVB) of Santa Clara, Calif. had $22.8 billion in total assets as of Dec. 31, and its ROA during 2012 was 0.82%. SVB's stock closed at $68.65 Friday, trading for 1.2 times tangible book value, and for 17.3 times the consensus 2014 EPS estimate of $3.98.

Heritage Commerce Corp. ( HTBK) of San Jose, Calif., had $1.7 billion in total assets as of Dec. 31. The company's 2012 ROA was 0.72%. The company's shares closed at $6.98 Friday, trading for 1.2 times tangible book value, and for 20.5 times the consensus 2014 EPS estimate of $0.34.

Bridge Capital Holdings ( BBNK) of San Jose, Calif. The bank's stock closed at $15.33 Friday, trading for 1.6 times tangible book value, and for 14.3 times the consensus 2014 EPS estimate of $1.07.

-- 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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