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3 Small-Cap Bank Stocks to Buy From FBR

NEW YORK ( TheStreet) -- FBR Capital Markets analyst Paul Miller on Thursday resumed or "reinitiated" his firm's coverage on 11 small-cap banks on Thursday, with outperform ratings for three of them.

Miller said that "like most other community banks, these banks should continue to experience earnings pressure as loan growth remains sluggish, interest rates stay low, and new regulations weigh on fee income" adding that although he expects "asset quality to continue to improve for some, credit issues will prevent some banks from effectively deploying capital to selectively grow their balance sheets."

The three favored small-cap banks represent three different stories, with one focused on expansion through government-assisted acquisitions of failed banks, another with share discounted to peers because of federal bailout funds owed, and the third representing a solid growth story.

These banks have underperformed the largest U.S. banks this year, and all trade above tangible book value. All three also trade at higher multiples to forward earnings estimates than two of the dominant industry players:
  • Shares of Bank of America (BAC - Get Report) closed at $8.86 Wednesday, returning 60% 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 $1.06, 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 70 cents.
  • Shares of Citigroup (C - Get Report) closed at $33.59 Wednesday, returning 30% year to date, following last year's 44% decline. Citi's shares are also heavily discounted to book, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for seven times the consensus 2013 EPS estimate of $4.68. Citi will report its financial results on April 16. Analysts expect the company to post first-quarter EPS of 99 cents, and EPS of $4.07 for all of 2012.

These numbers make a clear case that despite the year-to-date run-up in the shares, Bank of America and Citi are bargain-priced for long-term investors who have faith in the national economic recovery, although the low valuations also reflect investor angst over continued regulatory threats to revenue, including the unresolved Volcker Rule's ban on "proprietary trading."

There have also been seasonal market slumps for bank stocks, following first-quarter earnings season, during each of the past two years.

Here are the three small-cap banks rated outperform by FBR on Thursday:
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