NEW YORK (TheStreet) -- Buying a home or a car? You probably love those low interest rates we've had since the Great Recession. Well, banks don't, especially small banks.
Small community banks need interest rates to rise sooner rather than later, given that the majority of their profit is made lending to consumers and commercial borrowers.
But banks may have to wait awhile longer before rates rise back to their pre-financial crisis levels. Last week, the Federal Reserve hinted that it would raise interest rates at a slower-than-expected pace.
And that may mean impatience on the part of bank investors.
"The [small-to-mid-cap] bank group isn't without its challenges, most notably the impact on bank profitability from the persistently low interest rate environment both domestically and abroad," said Jefferson Harralson, Keefe, Bruyette & Woods' head of Small-Cap and Mid-Cap Bank Research, in a 2015 bank outlook. "The resulting impact on bank net interest margins (NIM) - the most meaningful input to forward [earnings] estimates - remains significant. In addition, expense headwinds from increased financial regulation remain a consideration for underlying bank profitability entering 2015, though regulatory headline risk appears to be showing some signs of abating."
Still there are plenty of community bank stocks worth considering.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
The stocks on this list are all small-cap regional banks with Buy, A- or better ratings. Check out which banks made the list. And when you're done see which bank stocks could make or break your portfolio in the era of low oil prices. Year-to-date returns are based on March 23, 2015 closing prices.
1. Auburn National Bancorp (AUBN)
Rating: Buy, A-
Market Cap: $90.2 million
Year-to-date return: 2.8%
Auburn National Bancorporation, Inc. operates as the holding company for AuburnBank that offers various banking products and services in East Alabama. The company's deposit products include checking, savings, and transaction deposit accounts, as well as certificates of deposit.
"We rate AUBURN NATIONAL BANCORP (AUBN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- AUBURN NATIONAL BANCORP has improved earnings per share by 10.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, AUBURN NATIONAL BANCORP increased its bottom line by earning $2.04 versus $1.94 in the prior year.
- The net income growth from the same quarter one year ago has significantly exceeded that of the Commercial Banks industry average, but is less than that of the S&P 500. The net income increased by 9.6% when compared to the same quarter one year prior, going from $1.73 million to $1.90 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Commercial Banks industry and the overall market on the basis of return on equity, AUBURN NATIONAL BANCORP has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- In its most recent trading session, AUBN has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- You can view the full analysis from the report here: AUBN Ratings Report