(Updated with return on asset ratios of Bank of America and Citigroup for further comparison and stock price action.).



) -- Bank stocks have been rallying in the early weeks of 2012, but the headwinds for the sector have not exactly disappeared.

With the Fed pledging to keep short-term rates near zero until 2014, the much anticipated foreclosure settlement to see roadblocks, the prospect of a disorderly greek default looming larger and more anti- Wall Street rhetoric from Washington than ever, the environment remains challenging for bank stocks.

Bank stocks were seeing tepid action on Friday, after the government reported a fourth-quarter GDP growth of 2.8%, below the estimate of 3%.

Investors might be better off focusing on the more highly profitable banks that bring home the bacon, because they are better placed to navigate the tough environment.



10 banks that rank the highest

on "returns on average assets"(ROA) in 2011. ROA is a measure of how profitable a bank is relative to its total assets

All actively traded U.S. banks and thrifts -- excluding those traded on the Pink Sheets -- with average daily trading volume of over 50,000 shares were considered. Only those that reported fourth quarter results have been considered, as full-year numbers are being considered.

All data is from SNL.

10.Wells Fargo

Wells Fargo

(WFC) - Get Report

has received much analyst love after it reported a stellar fourth quarter.

The San Francisco-based bank reported a net income of $4.1 billion or 73 cents per share, compared to a year-ago net income of $3.41 billion or $0.61 per share and a third quarter net income of $4.06 billion or $0.72 per share.

Revenue came in at $20.61 billion, down from $21.49 billion a year earlier. In the third quarter, the bank reported revenue of $19.63 billion.

Analysts applauded the solid growth in mortgage banking income; mortgage origination revenues jumped 59% over the third quarter versus a 12% decline at

JPMorgan Chase

(JPM) - Get Report


It also managed a positive gain in net interest margins-a measure of how much banks earn on their loans versus what it costs them to borrow- when most analysts expected it to fall.

14 analysts raised their price target for the bank shares immediately following the results, even though the bank continues to trade at a premium over its peers.

Wells delivered a return on asset of 1.28% in 2011, up from 1.03% in 2010, while JPMorgan, the other high-quality name in the banking space, managed only about 0.86%.

That is still better than


(C) - Get Report

, which earned a return on asset of 0.58% and

Bank of America's

(BAC) - Get Report

dismal 0.06%.

23 analysts rate the stock a buy, 9 a hold and 1 analyst has a sell rating on the stock.

9. Commerce Bancshares

Kansas City- based

Commerce Bancshares

(CBSH) - Get Report

reported record earnings in 2011, as it witnessed strong growth in core deposits, improving credit quality and higher auto and commercial real estate loans.

Net income amounted to $256.3 million in 2011 compared to $221.7 million in 2010, or an increase of 15.6%.

The return on average assets was 1.34% in 2011, up from 1.22% in 2010.

The stock, which was among the top performers in the banking sector in 2011, is up about 3% so far in 2012.

The bank has about $20 billion in assets and a tangible common equity ratio of 9.72% as of the end of 2011.

The stock trades at 14.5 times on-year forward earnings, which explains why most analysts seem more inclined to a hold rating than a buy. Only one analyst currently has a buy rating on the stock, while 11 have a hold rating and 2 have a sell.

8. First Republic Bank

San Francisco- based

First Republic

(FRC) - Get Report

also had a record year, posting a net income of $352 million in 2011.

The bank saw a 20% increase in loan volume, even as it maintained high credit quality. Non performing assets account for about 11 basis points.

The bank's return on assets improved from 1.33% in 2010 to 1.41% in 2011. The management attributes its profitability to its focused business model.

"We are in well-established lines of businesses and operate in a limited number of urban coastal markets which we understand and know very well," CEO Jim Herbert said in a conference call. "In short, First Republic is a simple, almost one of a kind entity. A traditional bank focused intently on a few core businesses but with very modern delivery."

First Republic has solid capital ratios, with Tier I Capital ratio oat 13.36% and Tier 1 Risk-based Capital ratio of 13.81%.

The stock trades at 11 times forward earnings. Two analysts rate the stock a buy or outperform, while 7 rate it a hold.

7. Prosperity Bancshares

Houston, Texas- based

Prosperity Bancshares

(PB) - Get Report

was featured in


10 Buy Rated Regional Bank Stocks


10 Well-Run Profitable Banks

earlier this month.

The company has been expanding with small deals, including an agreement announced on Jan, 19 to buy

The Bank Arlington

, which has one office in Arlington, Texas, with assets of $37 million, which follows the completed purchase earlier this month of Texas Bankers of Austin, which included three branches and roughly $71 million in assets, and a deal announced on Dec. 9, to acquire

East Texas Financial Services

of Tyler, for about $20 million.

Prosperity reported fourth-quarter net income of $36.4 million, or 77 cents a share, which was flat from the third quarter, but up from $32.8 million, or 70 cents a share, a year earlier.

The bank's return on assets improved from 1.38% in 2010 to 1.47% in 2011.

The stock trades at nearly 14 times forward earnings estimates.

One analyst rates the stock a buy or outperform, while 17 rate it a hold and one analyst has an underperform rating.

6. Home BancShares

Shares of

Home BancShares

(HOMB) - Get Report

are up an impressive 26% over the past one year, trading near its 52-week high.

Home BancShares of Conway, Ark. was featured in TheStreet's

10 Buy Rated Regional Bank Stocks

in January.

Home BancShares is a small regional bank with about $3.6 billion in total assets as of Dec. 31, with 90 branches in Arkansas and Florida.

The company reported fourth-quarter net income available to common shareholders of $14.2 million, or 50 cents a share, increasing from $13.8 million, or 48 cents a share, the previous quarter and a net loss of $14.5 million, or 51 cents a share, a year earlier, when the company booked a $63 million provision for loan losses, resulting in part from a $53.4 million loan impairment charge.

The bank's return on assets jumped from 0.55% in 2010 to 1.50% in 2011.

The company on Nov. 17 announced an agreement to purchase

Vision Bank

of Panama City, Fla., from

Park National Corp.

for $27.9 million. Home BancShares will take on 17 branches with about $535 million in deposits, along with roughly $379 million in performing loans, with Park National keeping the dregs. The deal is expected to be completed during the first quarter.

The shares trade for 1.8 times tangible book value, according to SNL Financial, and for 13 times the consensus 2012 EPS estimate of $2.02, among analysts polled by FactSet.

5. U.S. Bancorp

Shares of

U.S. Bancorp

(USB) - Get Report

are up 13% in January, with the bank continuing to outperform on loan growth.

The Minneapolis lender reported fourth-quarter earnings of $1.35 billion, or 69 cents a share, improving from $1.27 billion, or 64 cents a share, during the third quarter, and $974 million, or 49 cents a share, during the fourth quarter of 2010.

Return on Assets jumped to 1.50% in 2011 from 1.14% in 2010.

The bank has been gaining market share in commercial lending. Stifel Nicolaus analysts said the bank's fourth quarter performance was "the best combination of earnings quality and quantity" of any large bank in their coverage.

Analysts also praise the bank for its diversified revenue stream. "We would much rather purchase USB shares in a challenging operating environment (no rate hikes until late in 2014?), then chase some of the other regionals that have moved higher in recent weeks that we expect will not be able to generate the type profitability in a normalized earnings environment that USB is generating today," Stifel analyst Chris Mutascio wrote in a report.

The stock trades at about 10.4 times consensus estimates for 2012. 19 analysts rate the stock a buy or outperform, 13 have a hold rating while 2 analysts rate it a sell or underperform.

4. City Holding

City Holding

(CHCO) - Get Report

operates as the bank holding company for City National Bank of West Virginia that offers community banking services to consumers and local businesses.

The Company reported net income per diluted share for 2011 of $2.67 compared to $2.47 per diluted share 2010. Net income for 2011 was $40.7 million compared to $39.0 million for 2010.

Loan balances increased by $108 million, helping net interest margins to remain relatively stable despite lower interest rates.

The bank delivered a return on asset of 1.51%, up from 1.47% in 2010.

City announced in Nov. 2011 the execution of a definitive agreement to acquire Virginia Savings Bancorp of Front Royal, Virginia. The proposed merger is expected to close in the first half of 2012;

TheStreet Ratings recently upgraded the stock to a buy. "The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year, revenue growth, expanding profit margins, notable return on equity and growth in earnings per share. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."

The stock trades at 14 times its forward earnings estimates.

3. Capital One Financial

Credit card company

Capital One Financial

(COF) - Get Report

has the best profitability metrics among the top 20 large banks.

The company finished 2011 with a return on assets of 1.63% compared to 1.52% in 2010.

The bank's fourth-quarter performance disappointed however, with earnings of $407 million, or 88 cents a share, declining from $813 million, or $1.78 the previous quarter, and $697 million, or $1.54 a share, a year earlier. The earnings ding came from higher -than- expected expenses, which included "approximately $90 million in litigation expenses and approximately $40 million in asset write downs and other costs as the company rationalized some facilities and equipment."

The fourth-quarter expense spike also included items related to the company's coming purchase of

ING Direct


ING Groep

for roughly $9 billion, which Capital One still expects to complete during the first quarter.

Analyst sentiment for Capital One, as the company heads into a huge transition with its two major acquisitions, is positive.

"Despite the sharp increase in expenses attributable to both infrastructure investment, in preparation for the acquisitions, and marketing spending, which is driving industry-leading transaction and receivables growth, we continue to view the acquisitionspositively, as COF will be able to reinvest ING Direct's low-yielding securities and mortgage portfolios into HSBC's higher-yielding credit card receivables," FBR Capital analysts said in a recent note.

19 out of 30 analysts rating the shares a buy, while ten analysts have neutral ratings, and one recommends selling the shares.

2. Westamerica Bancorp

San Rafael, California-based

Westamerica Bancorp

(WABC) - Get Report

was the only bank in the list to see a slight drop in its return on assets in 2011.

The measure dropped to 1.78% from 1.95% in 2010. That still places it in the second place in the profitability rankings.

The bank's fourth-quarter profit fell short of estimates, coming in at 77 cents per share. Average loans declined 4% sequentially, due to a 3% drop in legacy balances. Margins also dropped 8 basis points to 5.42%.

Still RBC Capital analyst Joe Morford believes the bank's "superior profitability" and "flight to quality" status makes it an attractive long-term core holding in a challenging environment.

The stock is richly valued at 15 times forward earnings per share. Three analysts rate the stock a buy or outperform, 6 a hold and one has a sell rating.

1. Bank of the Ozarks

Shares of Little Rock, Arkansas-based

Bank of the Ozarks


are up nearly 30% over a one-year period and have gained 7% year to date.

With a return on asset of 2.7%, the bank is a cut above the rest in profitability measures.

Net income for 2011 was a record $101.3 million, a 58.3% increase from $64.0 million for 2010, helped by three acquisitions.

The bank's spreads are among the highest in the industry at 5.84% in 2011.

"We think 4Q11 was an important milestone, as the company demonstrated for the second consecutive quarter that it could sustain its earnings momentum without the benefit from assisted deals," Sandler O' Neill analysts wrote in a note following the results.

However, the bank might remain dependent on deals to drive growth, according to the analysts. "In the absence of further deals, we still think that maintaining the NIM at or close to the current 6.05% is going to be very challenging for this year. Funding costs can only be lowered so much, and the company will be hard-pressed to expand earning asset yields even if it meets its loan growth targets. Thus, we think that the company's ability to execute on additional assisted transactions remains a key component to the story."

All the 10 analysts covering the stock have a neutral rating.

>>To see these stocks in action, visit the

10 Most Profitable Bank Stocks

portfolio on Stockpickr.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.