4 Community Banks Out-Earning the Big Guys

NEW YORK (TheStreet) -- 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 (I:BKX) was up 24% year-to-date through the end of last week -- following a 25% 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 a at least 1.00% 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 (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. 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 (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 $4.68. 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:

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