Should Investors Consider Community Banks Over the Big Financials? (JPM, BAC, BDGE, SUBK)

Community banks may be beginning to offer better returns than their “too big to fail” competitors as they focus on more conservative investment strategies and more money for loans becomes available.

Community bank performance is more closely tied to how the community is recovering than larger banks performance, Federal Reserve Chairman Ben Bernanke said last week at conference of community bankers. Perhaps not surprisingly, the communities that are growing the fastest also have the fastest growing banks.

"Like larger banks, community banks are also being affected by the state of the national economy," Bernanke said. "Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending."

The standard to be in the top 200 community banks has declined according to American Banker, an industry magazine that compiles an annual ranking based on three-year return on equity. In 2010 the worst performing banks on the list had an ROE of 8%. In 2011 it slipped to 7%.

Communities which fared better in the real estate boom and bust are more likely to have high performing community banks, American Banker said.

Some community banks have been consistent high-performers. Suffolk Bancorp SUBK ranked in the top ten for the third year in a row. The Riverhead, New York-based bank reported a net income $1.16 million the fourth quarter of 2011. The fourth quarter of 2010 the bank reported a net income of $3.07 million.

The decrease in income was fueled by an increase in non-performing assets, which the company made progress in reducing during the quarter and will continue to focus on removing in 2012. The bank is estimated to have an annual revenue of $74.3 million in 2012 after reporting a revenue of $79.6 million in 2011.

Bridge Bancorp BDGE was ranked in the top ten by American Banker for the second year in a row. The Bridgehampton, New York-based bank reported a net income of $2.95 million in the fourth quarter of 2011. The company earned $2.41 million in the fourth quarter of 2010.

Earnings were fueled by the completion of the bank's first acquisition, Hamptons State Bank, in May and growth of deposits.

Still, these community banks may be subjected to the same pressure as the larger financials. On Wednesday, large financial stocks like JP Morgan JPM and Bank of America BAC traded lower. Bridge Bancorp and Suffolk Bancorp did not escape the trend, as their stocks traded down even more notably than the larger financials.