5 Small-Cap Bank Stock Winners Nobody's Talking About

NEW YORK (TheStreet) -- In a hot market for bank stocks, it may pay for long-term investors to consider smaller community banks in addition to the large-caps that receive so much daily coverage.

After a second-quarter hiccup, bank stocks have been strong, despite several near-term challenges for the industry.

Following a 25% decline during 2011, the KBW Bank Index (I:BKX) has risen 30% year-to-date, and 12% since the end of June.

While it was easy to spot potential bargains at the end of last year, by isolating undervalued names to those trading quite low to tangible book value, things are not so simple now, and returning to a focus on names with strong business models and growth potential seems the order of the day.

Among the "big four" U.S. banks and the largest two investment banks, KBW rates three names outperform heading into third-quarter earnings:

• JPMorgan Chase (JPM) has seen its stock return 30% year-to-date, through Friday's close at $41.82. The shares have recovered most of the value they lost following CEO James Dimon's announcement in late May that the company was facing large second-quarter losses from trading activities within its Chief Investment Office. JPMorgan announced soon after that it was suspending its share buyback program, but after the company achieved a $5 billion second-quarter profit, despite $4.4 billion in hedge trading losses, Dimon said that the company might be able to resume buybacks in the fourth quarter, subject to Federal Reserve approval. The shares trade for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters. The company will kick off third-quarter earnings season for the large banks on Friday, with a consensus EPS estimate of $1.22. KBW analyst David Konrad as a $49 price target for JPM.
• Citigroup (C) closed at $34.77 Friday, returning 32% year-to-date, following last year's 44% decline. The shares are trade for 0.7 times tangible book value, and for eight times the consensus 2013 EPS estimate of $4.53. The company will announce its third-quarter results next Monday, with the consensus among analysts being a 96-cent profit. Konrad last Tuesday upgraded Citi to an "Outperform" rating, from "Market Perform," while raising his price target for the shares by four dollars to $44. The analyst said that even though the shares appeared "cheap," the "primary drivers" of the upgrade included "1) expectations for continued run-off of Citi Holdings following QE3; 2) improving Basel III capital ratio; 3) expectations for capital deployment in 2013; and 4) expectations for continued market share gains in global trade finance."
• Shares of Goldman Sachs (GS) closed at $119.31 Friday, returning 34% year-to-date, following a 46% drop during 2011. The shares trade just below tangible book value, and for 9.5 times the consensus 2013 EPS estimate of $12.55. The company will announce its third-quarter results on Oct. 16, with a consensus EPS estimate of $2.12. Konrad's price target for Goldman's shares is $145, and the analyst on Thursday said that "despite a sluggish seasonal quarter, we expect Goldman to put up pretty solid results given the improvement in market values, relatively stable volatility and market share gains in its merger and acquisition business." The analyst raised his third-quarter operating EPS estimate for Goldman to $2.15 from $1.68.

KBW analyst Catherine Mealor on Thursday said that for regional and community banks, third-quarter themes include continued "favorable" overall loan growth, with "slowing commercial and industrial (C&I) growth," continuing pressure on net interest margins "being offset through additional duration/securities risk," and a continued boost to earnings, with loan loss "reserves heading toward normalized levels."

Moving past the "big four," and the large investment banks, KBW has "Outperform" ratings on 37 regional and smaller banking names. In order to feature some names that are "off the beaten path," we have isolated the five names with total assets of less than $5 billion as of June 30, with the greatest upside potential, based on KBW's price targets.

Here they are, ranked by ascending upside potential, based on the KBW price targets:

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