5 Bank Stocks That Can't Stop Posting Profits

Updated with Bank of America and Citigroup upgrades.

NEW YORK ( TheStreet) -- While the business media tends to focus on stocks that are hot right now, it can pay to take a longer-term approach on occasion.

An excellent way to pick bank stocks at the beginning of 2012 turned out to be focusing on the beleaguered big names trading at the greatest discounts to tangible book value, which included Bank of America ( BAC), which was trading for just 0.4 times tangible book value after dropping 58% during 2011, and Citigroup ( C), which traded for roughly half its tangible book value after falling by 44%, there was a host of large-bank plays trading at significant discounts to book value. Bank of America's stock wound up returning 110% during 2012, while Citigroup's shares returned 51%.

The book-value plays are no longer an obvious way to go. Shares of Bank of America traded for 0.9 times their reported Sept. 30 tangible book value of 13.48, when they closed-out 2012 at $11.61. Citigroup's shares closed at $39.56 Monday, trading for 0.8 times their reported Sept. 30 tangible book value of $52.70.

Then again, with Congress and President Obama averting the Fiscal Cliff late on Tuesday, some analysts believe that these two stocks will be headed much higher. Guggenheim analyst Marty Mosby on Thursday closed his "short-term trading sell" call on Bank of America, saying that the Fiscal Cliff agreement "mitigates much of the economic short-run bite," that would have been felt if the full set of mandated federal income tax increases and spending cuts had taken place. Mosby rates Bank of America a "Buy," with a $14 price target.

Also on Thursday, Sterne Agee analyst Todd Hagerman upgraded Citigroup to a "Buy" rating from a neutral rating, while raising his price target for the shares to $50 from $38, saying that the appointment of Michael Corbat as CEO in October was "a game changer." Citigroup last month announced a series of moves cut annual expenses by up to $1.1 billion by laying off 11,000 employees and closing 84 branches while giving up only $300 million in annual revenue. Hagerman said that Citi "operates a unique global banking franchise, which would be extremely difficult to replicate and has re-emerged as a compelling restructuring play heading into 2013.

As the banking industry continues its climb back to what analysts call "normalized earnings," another approach that might work for investors looking to make long-term investments is to focus on names trading at low multiples to consensus forward earnings estimates, which we discussed in 10 Cheapest Bank Stocks for 2013.

But when we consider the ridiculous last-minute fiscal cliff negotiations that were completed this week in Washington, the next round of federal debt-ceiling brinksmanship that will probably come in February, the uncertainty in Europe, the continued tightening of bank regulation in the U.S., the narrowing net interest margins and the credit crisis that many banks are still working their way to overcome, there could be some big surprises in store for bank stock investors.

Using data provided by Thomson Reuters Bank Insight, TheStreet has identified 34 actively traded banks -- with average daily trading volume of over 50,000 shares -- that have achieved positive returns on average tangible common equity for every single quarter since the beginning of 2006. That means they made money right through the credit crisis and beyond, without even having to book a bad quarter in order to beef-up loan loss reserves.

While this approach may leave out many bargains for traders and sell-side analysts forced only to consider 12-month price targets, these banks keep making money, and when a bank continues to build capital, good things eventually happen for investors, including dividend increases and share buybacks, which raise forward earnings estimates, supporting higher stock valuations.

Of course, this approach excludes banks that went public since the first quarter of 2006, leaving out plenty of good performers.

In order to narrow down the list and consider the "new reality" for banks in the post-credit crisis environment, we pared the list to eight banks with returns on average tangible common equity of at least 10% for the entire period from the first quarter of 2010 through the third quarter of 2012.

With these eight banks not having the wonderful (or potential) "rags to riches" stories of so many of the best-known U.S. banks, some of the stocks were not stellar performers during 2012, and one was down for the year. However, all of them had positive returns over five years, while the KBW Bank Index ( I:BKX), was down 42% from the end of 2007 through Monday's close at 51.28.

The five banks with the best returns on average tangible common equity since the beginning of 2010 are discussed below.

Here are the other three:
  • Cullen/Frost Bankers (CFR) of San Antonio, Texas. The company's return on average tangible equity from the first quarter of 2010 through the third quarter of 2012 was 13.38%. The stock closed at $54.27 Monday, returning 6% for 2012 and 23% for three years, through Monday's close. The five-year total return of was 27%
  • NBT Bancorp (NBTB) of Norwich, N.Y. The company's return on average tangible equity from the first quarter of 2010 through the third quarter of 2012 was 14.32%. The shares closed at $20.27 Monday, down 5% in 2012 and returning a negative 16% for three years, through Monday's close. The five-year total return was 7%.
  • First Financial Bankshares (FFIN) of Abilene, Texas. The company's return on average tangible equity from the first quarter of 2010 through the third quarter of 2012 was 16.26%. The shares closed at $39.01 Monday, returning 20% during 2012. The three-year total return was 18.5% and the five-year total return was 79%.

The following are the five actively traded banks that have been profitable every quarter since the beginning of 2006, with the highest returns on average tangible common equity since the beginning of 2010:

5. Bank of Hawaii


Shares of Bank of Hawaii ( BOH) of Honolulu closed at $44.05 Monday, returning 3% during 2012, with a three-year total return of 15% and a five-year return of 6%.

The shares traded for twice their tangible book value, according to Thomson Reuters Bank Insight, and for 12.6 times the consensus 2013 earnings estimate of $3.49 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.49.

Based on Monday's close and a quarterly payout of 45 cents, the shares had a dividend yield of 4.09%.

For the first quarter of 2010 through the third quarter of 2012, Bank of Hawaii's return on average tangible common equity was 17.60%, according to data supplied by Thomson Reuters Bank Insight.

Among 12 sell-side analysts polled by Thomson Reuters, only two rate Bank of Hawaii a "Buy," while six analysts have neutral ratings and four analysts rate the shares "Underperform" or "Sell." While there's no question that Bank of Hawaii has been a strong and consistent performer, analysts with 12-month investment horizons are concerned about "limited growth prospects and relatively weak NIM defense," according to Jefferies analyst Casey Haire.

Bank of Hawaii earned $41.2 million during the third quarter, or 92 cents a share, increasing from $40.7 million, or 90 cents a share, in the second quarter, but declining from $43.3 million, or 92 cents a share, in the third quarter of 2011. Earnings increased sequentially mainly because the company's mortgage banking revenue increased to $11.7 million from $7.6 million. During the third quarter of 2011, mortgage banking income totaled $5.5 million.

The return on average tangible common equity for the third quarter was 16.78%, according to Thomson Reuters Bank Insight.

Earnings were down from a year earlier because the increase in mortgage income was partially offset by a decline in income from fees and service charges, and also because of a decline in net interest income, as the net interest margin (NIM) narrowed to 2.98% in the third quarter from 3.09% a year earlier.

Haire on Oct. 23 lowered his 2013 EPS estimate for Bank of Hawaii by a nickel to $3.50, citing "a weaker net interest income trajectory," but also saying that "negative revisions would have been greater if not for decent momentum in mortgage banking and ongoing efficiency initiatives, which should keep operating leverage metrics respectable near-term."

The analyst rates Bank of Hawaii a "Hold," with a $46 price target.

BOH Chart BOH data by YCharts

Interested in more on Bank of Hawaii? See TheStreet Ratings' report card for this stock.

4. Community Bank System


Shares of Community Bank System ( CBU) of DeWitt, N.Y., closed at $27.36 Monday, returning 2% during 2012, with a three-year total return of 33.5% and a five-year return of 70%.

The shares traded for 2.1 times tangible book value, and for 12.9 times the consensus 2013 EPS estimate of $2.13. The consensus 2014 EPS estimate is $2.15.

Based on Monday's close and a quarterly payout of 27 cents, the shares had a dividend yield of 3.95%.

For the first quarter of 2010 through the third quarter of 2012, Community Bank System's return on average tangible common equity was 19.36%.

Community Bank System in the third quarter acquired 19 branches in Central, Western and Northern New York from First Niagara Financial Group ( FNFG) and HSBC ( HBC) for roughly $27 million, taking on $798 million in deposits and $160 million in loans. The company had $7.6 billion in total assets as of Sept. 30.

Third-quarter earnings were $18.4 million, or 46 cents a share, declining from $21.1 million, or 53 cents a share, the previous quarter, and from $18.8 million, or 48 cents a share, a year earlier. The earnings decline mainly reflected expenses associated with the branch acquisitions.

Third-quarter net interest income increased to $58.8 million from $57.88 million in the second quarter and $54.6 million in the third quarter of 2013 because of the branch acquisitions, along with growth in mortgage and auto loans, but the net interest margin narrowed to 3.79% from 3.96% the previous quarter and 4.04% a year earlier.

CBU's third-quarter return on average tangible common equity was 14.09%.

KBW analyst Damon DelMonte rates Community Bank System "Market Perform" with a $28 price target, saying in October after the third-quarter results were announced that "positive momentum continues for CBU as the bank once again posted record operating results. CBU has been able to maintain top-line revenue dollars, despite experiencing margin compression."

DelMonte expects "the level of top-line revenue growth to slow, as new assets come on at lower yields; however, sound expense control and further expansion of fee-based products should help offset the top-line impact."

The analyst estimates that Community Bank System will earn $2.18 a share in 2013, as the net interest margin narrows further to 3.66%.

CBU Chart CBU data by YCharts

Interested in more on Community Bank System? See TheStreet Ratings' report card for this stock.

3. Bank of the Ozarks


Shares of Bank of the Ozarks ( OZRK) of Little Rock, Ark., closed at $33.47 Monday, returning 15% during 2012, with a three-year total return of 143% and a five-year return of 180%.

The shares traded for 2.5 times tangible book value, and for 14.6 times the consensus 2013 EPS estimate of $2.29. The consensus 2014 EPS estimate is $2.42.

Based on Monday's close and a quarterly payout of 14 cents, the shares had a dividend yield of 1.67%.

For the first quarter of 2010 through the third quarter of 2012, the bank's return on average tangible common equity was 22.05%.

Bank of the Ozarks had $3.8 billion in total assets as of Sept. 30. The bank has been expanding through acquisitions, including the purchase of seven failed institutions from the Federal Deposit Insurance Corp. in 2010 and 2011. The bank's most recent acquisition was Genala Banc., Inc., which held The Citizens Bank of Geneva Ala., which had $166.8 million in total assets as of Sept. 30. Bank of the Ozarks paid roughly $27.5 million in cash and stock to complete the deal.

The bank reported third-quarter earnings of $19.3 million, or 55 cents a share, increasing from $19.1 million, or 55 cents a share, the previous quarter, and $18.9 million, or 55 cents a share, a year earlier. Bank of the Ozarks bucked the industry trend, with its net interest margin expanding to 5.97% in the third quarter from 5.84% in the second quarter and 5.90% in the third quarter of 2011.

The third-quarter return on average tangible common equity was 16.84%.

FIG Partners analyst Brian Martin rates Bank of the Ozarks "Market Perform," with a $35 price target, saying on Oct. 15 that "an increased focus on organic loan growth sets the stage for positive earnings momentum in the coming quarters even without the benefit of M&A," although he also said that "M&A is a key priority for OZRK as they continue to build capital at a faster rate than they can deploy it with any deal announced expected to be additive to EPS and tangible book value given pricing disciplines."

Martin said that his neutral rating for the shares was "value driven," although "on a fundamental basis, OZRK remains one of the best performing banks in our coverage universe and industry."

The analyst estimates that Bank of the Ozarks will earn $2.34 a share in 2013.

OZRK Chart OZRK data by YCharts

Interested in more on Bank of the Ozarks? See TheStreet Ratings' report card for this stock.

2. U.S. Bancorp


Shares of U.S. Bancorp ( USB) of Minneapolis closed at $31.94 Monday, returning 21% during 2012, with a three-year total return of 36%, although the five-year total return was 13%.

The shares traded for 2.6 times tangible book value, and for 10.3 times the consensus 2013 EPS estimate of $3.08. The consensus 2014 EPS estimate is $3.32.

Based on Monday's close and a quarterly payout of 19.5, the shares had a dividend yield of 2.44%.

For the first quarter of 2010 through the third quarter of 2012, U.S. Bancorp's return on average tangible common equity was 22.84%.

The company reported third-quarter net income of $1.474 billion, or 74 cents a share, earnings increasing from $1.415 billion, or 71 cents a share, during the second quarter, and $1.273 billion, or 64 cents a share, during the third quarter of 2011. The third-quarter net interest margin was 3.59%, increasing slightly from 3.58% in the second quarter, but narrowing from 3.65% a year earlier. The improved earnings reflected strong loan growth and mortgage fee income.

The third-quarter return on average tangible common equity was 20.88%.

Following the company's earnings announcement, UBS analyst Greg Ketron on Oct. 17 reiterated his "Buy" rating for U.S. Bancorp, with a $38 price target, saying "the bank continues to post above average returns, was able to maintain its NIM while there has been sharp contractions at peers, and has had above average loan growth."

Ketron said the company was "on track for a 50% efficiency ratio." The efficiency ratio is, essentially, the number of pennies of overhead expenses a bank incurs for each dollar of revenue. Ketron said that during the third quarter, "the efficiency ratio improved to 50.4% from 51.1% in 2Q12. The 50.4% is the lowest level since 1Q10 and we believe USB will be able to generate levels near or below 50% on a long-term basis."

The analyst estimates that USB will earn $3.10 a share in 2013, with EPS rising to $3.40 in 2014.

USB Chart USB data by YCharts

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

1. Prosperity Bancshares


Prosperity Bancshares ( PB) of Houston saw its shares return 6% in 2012, closing Monday at $42.00. The three-year total return was 53% and the five-year return was 56%.

The shares traded for 2.9 times tangible book value, and for 12.3 times the consensus 2013 EPS estimate of $3.42. The consensus 2014 EPS estimate is $3.52.

Based on Monday's close and a quarterly payout of 21.5 cents, the shares had a dividend yield of 2.05%.

For the first quarter of 2010 through the third quarter of 2012, Prosperity's return on average tangible common equity was 24.87%.

The company in July acquired American State Financial Corp. of Lubbock, Texas, adding about roughly $3.2 billion in total assets and adding 37 branches spread across 18 counties in West Texas.

Prosperity Bancshares had $13.7 billion in total assets and 213 branches as of Sept. 30. Third-quarter net income available to common shareholders of $46.2 million, or 82 cents a share, increasing from $37.0 million, or 78 cents a share, in the second quarter, and $36.4 million, or 77 cents a share, in the third quarter of 2011. The third-quarter net interest margin was 3.56%, expanding from 3.55% the previous quarter, but narrowing from 4.03% a year earlier.

The third-quarter return on average tangible common equity was 24.58%.

FIG Partners analyst Christopher Marinac on Oct. 23 upgraded Pinnacle Financial Partners to an "Outperform," with a price target of $47.25, "based on solid 3Q12 EPS and the initial positive integration of several acquisitions recently by the company," and said that "quarterly EPS have superb opportunity to consistently rise through 2013 given flexibility on NIM-Net Interest Margin and NII-Net Interest Income via loan discount accretion from recent mergers (i.e., as loans already credit marked experience payoffs) and as loans rise relative to securities."

Marinac underlined the potential for balance-sheet realignment and margin improvement, saying that "in 3Q12, Loans were only 42% of Average Earning Assets."

The analyst also said that "PB continues to run a highly-efficient banking model with less than 42% Expenses-to-Revenues (i.e., Efficiency Ratio) on a core basis in 3Q12," and that there was room for further efficiency improvement, "as cost savings are realized, particularly in the West Texas merger integration."

Marinac estimates that Prosperity Bancshares will earn $3.50 a share in 2013.

PB Chart PB data by YCharts

Interested in more on Prosperity Bancshares? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.