5 Bank Stocks That Won't Bankrupt You or America

When considering the highest-flying bank stocks of 2012, it pays off to consider the level of risk you feel comfortable with.

By now, most investors know that Bank of America is one of the biggest winners this year, returning 45% through Monday's close at $8.04. But keep in mind that the shares fell 58 percent in 2011, throttled by mortgage risk.

If you had held the shares for the 52-week period ending Monday, you would have lost 43 percent of your money.

In addition to the recent mortgage foreclosure settlement that at least gave some clarity to the exposure Bank of America faced from federal regulators and state attorneys general over sloppy foreclosure filings, the company's shareholders got a piece of good news on Monday.

The U.S. Court of Appeals for the Second Circuit issued a unanimous opinion that BofA's contested $8.5 billion settlement of Countrywide mortgage putback demands with private investor, should be decided upon, in New York State court.

Credit Suisse analyst Moshe Orenbuch said the decision was "a positive for Bank of America in that the settlement is more likely to be finalized according to its original terms," which were arrived at last June.

Since the settlement was "structured under New York State law," Bank of America can settle with the entire trust, rather than with individual investors. Bank of New York Mellon is the trustee that agreed to the original $8.5 billion settlement.

Assuming the settlement is finalized, one more piece of Bank of America's mortgage puzzle will be solved, and since the company already set aside the settlement money last June, it is baked into the share price.

Finalizing the settlement will provide significant clarity to Bank of the America's entire mortgage risk picture, and likely lead to a reversal of the recent slew of earnings estimate cuts among analysts following the company.

Orenbuch rates Bank of America "outperform," with an $11 price target.

At Monday's close, Bank of America's shares traded for 0.7 times tangible book value, according to HighlineFI, and for 11 times the consensus 2012 earnings estimate of 71 cents, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.20.

On Wednesday, Fannie Mae in its fourth-quarter press release took aim at Bank of America, saying that "the seller/servicer with which Fannie Mae has the most repurchase requests outstanding, slowed the pace of its repurchases" during the fourth quarter.

"As a result of Bank of America's failure to honor its contractual obligations in a timely manner," Fannie said, "the already high volume of Fannie Mae's outstanding repurchase requests with Bank of America increased substantially."

The government-sponsored mortgage giant said it was "taking steps to address Bank of America's delays in honoring Fannie Mae's repurchase requests," including a decision not to renew its "existing loan delivery contract with Bank of America at the end of January." Bank of America had already decided last week to stop selling new first mortgage loans to Fannie Mae.

A quick look at the "laggards" for year-to-date returns among bank stocks, shows some quality names that posted relatively strong earnings results in 2011, and performed much better than the The KBW Bank Index, which fell 25 percent during 2011, but was up 15 percent year-to-date, through Monday's close at 45.30.

And Now, to the 5 Stocks

In order to come up with a quality list of actively traded "laggards" we narrowed the list down to the five bank stocks with the worst year-to-date total returns through Monday, that have average daily trading volume of at over 50,000 shares, and achieved returns on average assets (ROA) exceeding 1 percent for every quarter during 2011.

All data was provided by HighlineFI.

Here are the five quality bank stocks lagging the market, in descending order by year-to-date total return:

5. Community Bank System

Shares of Community Bank System of DeWitt, N.Y., closed at $27.74 Monday, down slightly year-to-date, following a 4 percent return in 2011. Based on a quarterly payout of 26 cents, the shares have a dividend yield of 3.60 percent.

The company on Jan. 23 priced a public offering of 1,852,000 shares at a price of $27, looking to raise $50 million, in part to pay for the purchase of 19 Upstate New York branches and $955 million in deposits from First Niagara Financial Group , in connection to that company's purchase of roughly 200 branches from HSBC.

Community Bank System had $6.5 billion in total assets as of Dec. 30. The company's ROA ranged between 1.14 percent and 1.24 percent in 2011, according to HighlineFI. The shares trade for 2.5 times tangible book value, and for 13 times the consensus 2012 earnings estimate of $2.08 a share. The consensus 2013 EPS estimate is $2.20.

Guggenheim analyst David Darst has a neutral rating on Community Bank System, with a $28 price target, based on the relatively high valuation of the shares, but said on Feb 1 that "the branch acquisition creates a great outcome for CBU in the FNFG divestiture given improved market conditions for the capital raise and management's ability to craft mid-single-digit EPS accretion from the acquisition given cost-saving opportunities."

4. Trustmark Corp.

Shares of Trustmark Corp. of Jackson, Miss., closed at $24.08 Monday, down 1 percent year-to-date, following a 2 percent return in 2011. Based on a 23-cent quarterly payout, the shares have a dividend yield of 3.82 percent. The company had $9.7 billion in total assets as of Dec. 30, with branch operations in Florida, Mississippi, Tennessee and Texas.

Trustmark has a deal in place to acquire Bay Bank & Trust Co. of Panama City, Fla., for $22 million in cash and stocks. Bay Bank & Trust had $233 million in assets as of Dec. 30. Trustmark's ROA in 2011 ranged between 1.01 percent and 1.31 percent.

The shares trade for 1.8 times tangible book value and 15 times the consensus 2012 EPS estimate of $1.58. The consensus 2013 EPS estimate is $1.63.

Sterne Agee analyst Peyton Green has a neutral rating on Trustmark, and says the relatively high valuation for the shares "takes into account TRMK's solid returns (ROA: 1.1 percent; [return on tangible equity]: 12 percent) and a high likelihood that TRMK will be a winner in the forthcoming M&A wave that seems likely to build over the next two years."

3. BOK Financial

Shares of BOK Financial of Tulsa, Okla., closed at $54.10 Monday, for a year-to-date decline of 1 percent, following a 5 percent return last year. Based on a 33-cent quarterly payout, the shares have a 2.09 percent dividend yield.

The company had $25.1 billion in total assets as of Sept. 30, with branch operations in Oklahoma, Texas, New Mexico, Colorado, Arkansas, Arizona, Kansas, Missouri and Utah. BOK Financial's ROA ranged from 1.05 percent to 1.38 percent in 2011.

The shares trade for 1.6 times tangible book value and for 13 times the consensus 2012 EPS estimate of $4.18. The consensus 2013 EPS estimate is $4.36.

The company reported fourth-quarter earnings of $67.0 million, or 98 cents a share, declining from $85.1 million, or $1.24 a share, the previous quarter, reflecting a 17% decline in transaction card revenue as the Durbin Rule clamping down on debit card interchange fees was implemented, as well as a decline in brokerage and trading revenue and the previous quarter's securities gains.

Morgan Stanley analyst Ken Zerbe has a neutral rating on BOK Financial, with a $60 price target, and said on Feb. 2 after the fourth-quarter results were announced, that the results were consistent with his "broader concerns about limited top line growth across the industry."

Zerbe said BOK Financial "faces considerable [net interest margin] compression and has limited ability to cut expenses or drive material top line growth without a stronger economy."

2. Home Bancshares

Home Bancshares of Conway, Ark., has seen its stock decline 1 percent year-to-date, to $25.55 on Monday, following a remarkable 19 percent return in 2011. The company had $3.6 billion in total assets as of Dec. 30, with branch operations in Arkansas and Florida, and it was a strong and steady earnings performer during 2011, with ROA ranging from 1.46 percent to 1.58 percent.

Home Bancshares on Feb. 16 completed the purchase of all 17 branches of Vision Bank of Panama City, Fla., from Park National Corp., for $27.9 million.

The shares trade for 1.8 times tangible book value and 12.5 times the consensus 2012 EPS estimate of $2.04. The consensus 2013 EPS estimate is $2.13.

FIG Partners analyst Brian Martin has an "outperform" rating on Home Bancshares, with a $29 price target, saying on Jan. 23 that "the game plan heading into 2012 is M&A," including possible failed bank acquisitions as well as traditional deals, after "good pricing discipline prevented any M&A from occurring in 2011 as HOMB was an active bidder."

1. Cardinal Financial

Shares of Cardinal Financial of McLean, Va., closed at $10.42 on Monday, pulling back 3 percent year-to-date, following a 7 percent decline in 2011. The company's ROA ranged from 1.14 percent to 1.56 percent during 2011.

The shares trade for 1.2 times tangible book value and for 11 times the consensus 2012 EPS estimate of 95 cents. The consensus 2013 EPS estimate is 94 cents.

BB&T Capital Markets analyst Cary Morris has a "hold" rating on Cardinal Financial, saying on Jan. 19 that "we like the CFNL story given their best-in-class credit metrics, full capital levels and solid profitability results.

However, the volatility and relative contribution of the mortgage company is reflected" in the shares relatively low multiple to book value.

Morris added that he "would look for a better entry point or more positive economic news to become more constructive on the shares at this time."

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