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4 Community Banks Out-Earning the Big Guys 

TheStreet has identified a select group of community banks that are expected to continue their strong earnings track records, when first-quarter results are reported.

The KBW Bank Index was up 24 percent year-to-date through the end of last week — following a 25 percent drop during 2011 — marking a rally driven by very low price multiples to book value, at the end of the year.

This year’s rally is driven by the large national and regional banks that dominate the industry, and most of the group still hasn’t managed to put up impressive earnings numbers, with bottom lines padded by the release of loan loss reserves, as bankers face narrowing net interest margins in the prolonged low-rate environment, and several hits to fee revenue, including the Durbin Amendment's cap on debit card interchange fees.

Using data provided by HighlineFI, we have identified a very small list of four actively traded community bank stocks that achieved respectable returns on average assets (ROA) of at least 1 percent during each quarter of 2011, and for which the consensus first-quarter 2012 earnings estimates predict year-over-year earnings growth, with results at least matching those of the fourth quarter.

We identified “community banks” as those with total assets of less than $10 billion as of Dec. 30, and stuck with actively traded names, with average daily trading volume of at least 40,000 shares.

It won’t be much of a surprise that these four strong community banks trade at relatively high price multiples, with price-to-tangible-book-value ratios ranging from 1.4 to 2.6, and shares trading for between 13 and 16 times the consensus 2013 earnings estimates, among analysts polled by Thomson Reuters.

These valuations stand in stark contrast to those of two of the best-known U.S. banking names:

  • Shares of Bank of America closed at $9.23 Thursday, returning 66 percent year-to-date, following a 58 percent 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 earnings per share (EPS) estimate of $1.05, among analysts polled by Thomson Reuters. Bank of America will report its first-quarter results on April 19, with a consensus EPS estimate of 12 cents, and a full-year 2012 estimate of 68 cents.
  • Citigroup closed at $34.79 Thursday, returning 32 percent year-to-date, following last year’s 44 percent 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 $4.68. Citi is set to report its financial results on April 16. Analysts expect the company to post first-quarter EPS of $1.01, and EPS of $4.09 for all of 2012.

So, for investors looking for short-term bargains, Bank of America and Citi could be just the ticket, despite the strong year-to-date rally, with opportunities to add on the dips, and a long-term opportunity to boot. Then again, there seems to be a political and regulatory target on the back for the big banking names, and there have been seasonal slumps following first-quarter earnings, during each of the past two years.

For our high-flying select group of community banks, investors are clearly looking at long-term plays, although we may be seeing a sector dip following earnings. You get what you pay for, and these companies earn money through thick and thin. Two of the community bank stocks also feature attractive dividend yields.

Here’s a look at our select list of four community banks expected to continue their strong earning ways, ordered by ascending 2011 ROA:

4. Trustmark Corp.

Shares of Trustmark Corp. of Jacks, Miss., closed at $24.40 Thursday, returning 1 percent year-to-date, following a 2 percent return during 2011. The company’s return on average assets for 2011 was 1.11 percent.

Based on a quarterly payout of 23 cents, the shares have a dividend yield 3.77 percent.

The shares trade for 1.8 times tangible book value, according to HighlineFI, and for 15 times the consensus 2013 EPS estimate of $1.66. The consensus 2012 EPS estimate is $1.60.

The company had $9.7 billion in total assets as of Dec. 30. Trustmark on March 16 completed its acquisition of Bay Bank & Trust of Panama City, Fla., for roughly $22 million in cash and stock, brining on seven branches, with $117 million in loans and $207 million in deposits.

Trustmark is scheduled to report its first-quarter results on April 24, with a consensus analyst estimate of 39 cents, increasing from 38 cents in the fourth quarter, and 37 cents during the first quarter of 2011.

Our of nine analysts covering Trustmark, even have neutral rating, while two rate the shares “underperform” or “sell.” Considering that most analysts have 12-month outlooks for their recommendations and price targets, it’s not surprising that a quality name like Trustmark, trading at rather high multiples, would have some analysts recommending that investors steer clear.

JPMorgan analyst Steven Alexopoulos last Wednesday reiterated his “underweight” rating on Trustmark, with a $12 price target, saying the company “ended the final quarter of 2011 on a mixed note, with a mixture of both positive and negative indicators pointing in no clear direction for 2012,” and that “although progress was made on the credit front,” there was “still ample wood to chop, including [a nonperforming assets] ratio that ended 2011 at 3.8 percent.”

Alexopoulos said that “while downside risk may be abating, given a growth picture that is likely to trail peers and profitability level that is unlikely to exceed the bank's cost of capital for several years, we see fair valuation of BXS shares near tangible book value,” implying significant downside for the shares.

3. State Bank Financial Corp.

Shares of State Bank Financial Corp. of Atlanta, closed at $17.34 Thursday, returning 15 percent year-to-date, following a 4 percent return during 2011. The company’s 2011 ROA was 1.56 percent.

The shares trade for 1.4 times tangible book value, and for 13 times the consensus 2013 EPS estimate of $1.34. The consensus 2012 earnings estimate is $1.37 a share.

The company had $2.7 billion in total assets as of Dec. 30. The company has acquired 12 failed institutions from the Federal Deposit Insurance Corp. since 2009.

The consensus estimate for State Bank Financial to report first-quarter earnings of 34 cents, increasing from 28 cents in the fourth quarter, and 25 cents during the first quarter of 2011.

BB&T analyst Blair Brantley on April 3 initiated his firm’s coverage of State Bank Financial with a “buy” rating and a $21 price target, saying the company was “not just a roll-up story,” and was “well positioned to continue its dual operating strategy of managing FDIC acquisitions while growing a core bank in Atlanta and middle Georgia.”

Brantley estimates that BB&T will report first-quarter EPS of 35 cents, and estimates the company will earn $1.43 a share for all of 2012, followed by 2013 EPS of $1.37.

Following its initial stage of “FDIC-assisted transactions to create a platform for core growth,” Brantley said “the company has since grown new loans at an impressive pace while also adding a few smaller, financially attractive, in-market FDIC-assisted deals.”

2. Park National Corp.

Shares of Park National Corp. of Newark, Ohio, closed at $67.63 Thursday, returning 5 percent year-to-date, following a 5 percent decline during 2011. The company’s ROA during 2011 was 1.62 percent.

Based on a 94-cent quarterly payout, the shares have a dividend yield of 5.56 percent.

The shares trade for 1.9 times tangible book value, and for 12 times the consensus 2013 EPS estimate of $5.47. The consensus 2012 EPS estimate is $5.18.

The company had $7 billion in total assets as of Dec. 30, and owes $100 million in federal bailout funds received in December 2008, through the Troubled Assets Relief Program, or TARP.

On Feb. 16, Park National completed the sale of its Florida subsidiary, Vision Bank, to Home BancShares of Conway, Ark., for $27.9 million, while retaining the subsidiaries nonperforming loans. Park National said it would record a “pre-tax gain of approximately $22 million, net of anticipated expenses directly related to the transaction, and increase its already strong capital ratios by approximately 100 basis points.”

Vision Bank was undercapitalized, with a very high level of nonperforming loans. Removing that unit removes a serious distraction for Park National, with its strong Ohio operations. The company has restated its 2010 and 2011 results, “recognition of loan loss provisions and other real estate owned devaluations at Vision Bank in 2010 instead of 2011.”

The consensus estimate is for Vision Bank to post first-quarter earnings of $1.63 a share, improving from EPS of 59 cents in the fourth quarter, and $1.35 during the first quarter of 2011.

1. Bank of the Ozarks

Shares of Bank of the Ozarks of Little Rock, Ark., closed at $31.43 Thursday, returning 6.5 percent year-to-date, following a 39 percent return during 2011. The bank’s 2011 ROA was 2.70 percent.

The shares trade for 2.7 times tangible book value and for 15 times the consensus 2013 EPS estimate of $2.09. The consensus 2012 EPS estimate is $2.05.

Bank of the Ozarks had $3.8 billion in total assets as of Dec. 30. The bank’s 2011 earnings of $101.3 million included $65.7 million in gains on FDIC-assisted acquisitions, along with $10.1 million in accretion of FDIC loss-sharing receivables, and $6.4 million in other loss-sharing income.

The company will announce its first-quarter results on Thursday, after the market close. The consensus first-quarter EPS estimate is 51 cents, matching the fourth-quarter results, but increasing from 42 cents during the first quarter of 2011.

FIG Partners analyst Brian Martin rates Bank of the Ozarks “market perform,” with a price target of $29.50, and said in January after the company reported its fourth-quarter results that the company was still an “active bidder” for FDIC deals, and was “optimistic more deals are on the horizon and that [FDIC loss-share] covered loans will continue to be a key driver of balance sheet growth in 2012.”

Martin said he expected “tangible book value to add over $1.65, or 13 percent over the next year which could be conservative as our forecast does not include any bargain purchase gains for fee income from new FDIC deals. Current capital levels plus strong earnings power appears plenty sufficient to accommodate future growth.”

FIG Partners matches the consensus first-quarter EPS estimate of 51 cents, and estimates Bank of the Ozarks will earn $2.04 a share during 2012, followed by 2013 EPS of $2.07.

Additional News: Why Regional Banks Are Rising: Jim Cramer

Additional Views: Bulls Take Bank of America and Citigroup to the Bank

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks.

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