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 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 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: State Bank Financial Shares of State Bank Financial of Atlanta closed at $17.40 Wednesday, returning 15% year to date, following a 4% return during 2011.
The shares trade for 1.4 times tangible book value, according to HighlineFI, and for 13 times the consensus 2013 earnings estimate of $1.34 a share. The consensus 2012 EPS estimate is $1.37.
The company was recently included among TheStreet's list of four community banks that achieved quarterly returns on average assets (ROA) exceeding 1.00% during 2011, for which consensus first-quarter estimates indicated that earnings would grow year-over-year and at least match fourth-quarter results.
State Bank Financial has acquired 12 failed institutions from the Federal Deposit Insurance Corp. since 2009. The company had $2.7 billion in total assets as of Dec. 30.
The consensus estimate for State Bank Financial is first-quarter earnings of 34 cents, increasing from 28 cents in the fourth quarter, and 25 cents during the first quarter of 2011.
Miller on Thursday reinstated FBR's coverage of State Bank Financial with an outperform rating and $21 price target, which is 1.2 times his year-end tangible book value estimate of $13.62. The analyst matches the first-quarter consensus EPS estimate of 34 cents, and is ahead of the consensus, with full-year estimated EPS of $1.40 for 2012 and 2013.
Miller said that although "earnings will be quite volatile given the significant amount of accretable yield on the company's balance sheet and several recent acquisitions still being absorbed, we expect shares to experience significant book value growth as the company continues to use its significant capital base (14.2% TCE ratio) to acquire more distressed banks."
There should be plenty of additional failed-bank acquisition opportunities in Georgia, with 29 undercapitalized institutions included on TheStreet's fourth-quarter watch list of teetering banks, and only three of them failing since the list was published on Feb. 16.
Miller said that after another wave of expansion through failed-bank purchases, he would "expect the company to return excess capital to shareholders (most likely a special dividend) and to operate under a more efficient capital structure with a TCE ratio closer to 8%."
Interested in more on State Bank Financial? See TheStreet Ratings' report card for this stock.Virginia Commerce Bancorp Shares of Virginia Commerce Bancorp of Arlington, Va., closed at $7.90 Wednesday, returning 2% year to date, following a 25% return during 2011.
The shares trade for 1.1 times tangible book value, and for nine times the consensus 2013 EPS estimate of 88 cents. The consensus 2012 EPS estimate is 75 cents.
Virginia Commerce was recently included among TheStreet's list of five actively traded bank stocks underperforming the sector so far this year, with the lowest price multiples to forward earnings.
Virginia Commerce Bancorp had $2.9 billion in total assets as of Dec. 30. The company owes $71 million in federal bailout funds received through the Troubled Assets Relief Program, or TARP, in December 2008.
CEO Peter Converse has said that the company is looking to begin an incremental repayment of the TARP money, through operating earnings and excess liquidity, beginning in the second quarter.
The company is scheduled to report first-quarter results on April 18, with a consensus EPS estimate of 17 cents, matching its fourth-quarter results, but increasing from earnings of 12 cents a share during the first quarter of 2011.
Miller on Thursday assigned an outperform rating to Virginia Commerce, with a $10 price target, which is 1.3 times an estimated year-end 2012 tangible book value of $7.93. FBR believes "the company has adequate capital ratios (7.4% TCE ratio) and earnings to repay the $71 million of TARP in the next few quarters without having to raise significant equity capital."
Miller added that "should Virginia Commerce pay back TARP in the next year, we expect the company to receive a P/TBV multiple closer to peers at 1.4x TBV."
The analyst estimates that Virginia Commerce will post first-quarter EPS of 17 cents a share -- matching the consensus -- and estimates full-year EPS of 72 cents for 2012 and 90 cents for 2013.
Interested in more on Virginia Commerce Bancorp? See TheStreet Ratings' report card for this stock.Cardinal Financial Shares of Cardinal Financial of McLean, Va., closed at $11.30 Wednesday, returning 6% year to date, following a 7% decline during 2011.
The shares trade for 1.3 times tangible book value and for 11 times the consensus 2013 EPS estimate of $1.02. The consensus 2012 EPS estimate is 95 cents.
Cardinal Financial had $2.6 billion in total assets as of Dec. 30.
Miller resumed FBR's coverage of the Cardinal on Thursday, with an outperform rating and $13 price target, which is 1.4 times an estimated year-end 2012 tangible book value of $9.30, "in line with small-cap and Washington, D.C. regional peers."
The analyst said that "the company warrants at least an in-line multiple with small-cap regional peers given its strong credit metrics (0.96% NPAs), solid capital base (9.5% TCE), and robust growth expectations in an otherwise lackluster economic environment."
Miller estimates that Cardinal Financial will report first-quarter earnings of 24 cents, in line with the consensus, and estimates full-year EPS of 93 cents for 2012 and $1 for 2013.
Interested in more on Cardinal Financial? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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