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The list below features five regional banks currently considered more profitable than competitors while also appearing undervalued on several measures.

We created the list by first screening for those regional banks with strong profitability compared to industry peers, with higher gross, operating, and pretax margins than their industry averages by at least 5% on each margin. This indicates that these companies are taking a greater percentage of their revenues as profits, and they also have stronger control over their cost structures.

We then ran a screen to determine each stock's Graham Number. The Graham Number is a measure of maximum fair value based on a stock's EPS and book value per share (BVPS) created by the champion of value investing, Benjamin Graham.

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued and considered an attractive buy when compared to other defensive criteria.

To find evidence of further undervaluation, we searched this list for stocks with a P/E below 15. According to Finviz, the average P/E for the regional banking sector is 18.48.

We were left with five stocks on our list.

The List

For an interactive version of this chart, click on the image below. One year returns sourced from Zacks Investment Research.

Do you agree that these banks are undervalued and deserve consideration? Use this list as a starting point for your own analysis.

1. Bank of Marin Bancorp (NASDAQ:BMRC): Operates as the bank holding company for Bank of Marin that offers a range of commercial and retail banking products and services in California.

  • Market cap at $215.84M, most recent closing price at $39.75.
  • TTM gross margin at 93.09% vs. industry average at 78.18%. TTM operating margin at 56.54% vs. industry average at 46.6%. TTM pretax margin at 39.23% vs. industry average at 26.2%.
  • Diluted TTM earnings per share at 3.26, and a MRQ book value per share value at 29.1, implies a Graham Number fair value = sqrt(22.5*3.26*29.1) = $46.20. Based on the stock's price at $39.06, this implies a potential upside of 18.28% from current levels.
  • P/E: 12.23

BMRC has performed mostly in line with the rest of its industry since 4/8/13, returning 1.09% over the last month. This performance has been better than Cullen/Frost Bankers, Inc. (NYSE:CFR) and East West Bancorp, Inc. (NASDAQ:EWBC), but worse than industry leaders like Zions Bancorp. (NASDAQ:ZION) and SVB Financial Group (NASDAQ:SIVB), which returned 7.63% and 6.75% respectively.

BMRC has a higher than average projected earnings growth rate over the next 5 years (10.50%). This is higher than the likes of ZION (projected EPS growth over next 5 years at 7.80%) and EWBC (projected EPS growth over next 5 years at 5.63%).

And on April 22, 2013 the company announced Q1 2013 earnings were $4.9 million, matching the $4.9 million from Q1 2012, but surpassing the earnings of $4.7 million in Q4 2012.

2. WSFS Financial Corp. (NASDAQ:WSFS): Operates as the thrift holding company for the Wilmington Savings Fund Society, FSB, which provides various financial services primarily in the mid-Atlantic region of the United States.

  • Market cap at $439.09M, most recent closing price at $50.01.
  • TTM gross margin at 80.12% vs. industry average at 61.68%. TTM operating margin at 42.39% vs. industry average at 34.79%. TTM pretax margin at 22.71% vs. industry average at 16.6%.
  • Diluted TTM earnings per share at 3.61, and a MRQ book value per share value at 47.81, implies a Graham Number fair value = sqrt(22.5*3.61*47.81) = $62.32. Based on the stock's price at $49.39, this implies a potential upside of 26.17% from current levels.
  • P/E: 13.85

WSFS has recorded a solid performance over the last month, returning 6.29% since 4/8/13. This performance has surpassed competitors such as First Citizens Bancshares Inc. (NASDAQ:FCNCA) and BB&T Corporation (NYSE:BBT), but falls behind SVB Financial Group , which returned 6.75% during the same holding period.

WSFS recently welcomed two new members to its Board of Directors, as reported by Yahoo! Finance. Eleuthere I. du Pont, currently President of the Longwood Foundation, is described by WSFS Chairman Marvin N. Schoenhals as providing, "a wealth of knowledge on corporate governance, accounting and finance…" among other areas of expertise. And David G. Turner, VP and Partner at IBM Global Business Services, brings along previous experience in banking, having previously held senior leadership roles with MBNA/Bank of America.

3. West Bancorp., Inc. (NASDAQ:WTBA): Operates as a bank holding company for West Bank that provides community banking and trust services primarily in the Des Moines and Iowa City, and Iowa metropolitan areas.

  • Market cap at $193.66M, most recent closing price at $11.13.
  • TTM gross margin at 84.37% vs. industry average at 78.18%. TTM operating margin at 52.67% vs. industry average at 46.6%. TTM pretax margin at 37.54% vs. industry average at 26.2%.
  • Diluted TTM earnings per share at 0.92, and a MRQ book value per share value at 7.84, implies a Graham Number fair value = sqrt(22.5*0.92*7.84) = $12.74. Based on the stock's price at $10.94, this implies a potential upside of 16.45% from current levels.
  • P/E: 12.23

WTBA has performed poorly since 4/8/13, especially when compared to industry competitors. The stock returned 2.20% over the last month, much lower than BOK Financial Corporation (NASDAQ:BOKF) and Commerce Bancshares, Inc. (NASDAQ:CBSH), which returned 4.18% and 2.73% respectively, during the same time period. Only Cullen/Frost Bankers, Inc. performed worse, returning -0.43%.

However, the company has reported strong earnings growth over the last year, with EPS growing by 24.01%, higher than competitors like CFR (EPS growth over the last year at 8.75%) and CBSH (EPS growth over the last year at 8.03%).

And Forbes recently singled out WTBA as a top dividend stock, citing institutional buying as well as attractive profitability and valuation criteria.

4. Citizens & Northern Corp. (CZNC): Operates as the holding for Citizens & Northern Bank, which provides various banking and mortgage products and services to individual and corporate customers in north central Pennsylvania and southern New York.

  • Market cap at $239.82M, most recent closing price at $19.45.
  • TTM operating margin at 54.95% vs. industry average at 46.6%. TTM pretax margin at 41.66% vs. industry average at 26.2%.
  • Diluted TTM earnings per share at 1.77, and a MRQ book value per share value at 14.86, implies a Graham Number fair value = sqrt(22.5*1.77*14.86) = $24.33. Based on the stock's price at $19.32, this implies a potential upside of 25.92% from current levels.
  • P/E: 10.51

CZNC has returned a weak performance since 4/8/13, especially when compared to its peers. The stock returned 0.41% over the last month, much lower than First Citizens Bancshares Inc. and BB&T Corporation , which returned 5.0% and 3.72% during the same time period. Only Susquehanna Bancshares, Inc. (NASDAQ:SUSQ) performed worse, returning -0.67%.

Yet CZNC was named a top ten financial by Dividend Channel on April 26, 2013. According to Forbes, CZNC currently provides and annual dividend yield of 5.12%, and shows signs of positive long-term growth rates.

5. Ames National Corporation (ATLO): Provides commercial banking services primarily within the central Iowa counties of Boone, Marshall, Polk, and Story.

  • Market cap at $192.44M, most recent closing price at $20.67.
  • TTM gross margin at 88.21% vs. industry average at 78.18%. TTM operating margin at 55.% vs. industry average at 46.6%. TTM pretax margin at 39.91% vs. industry average at 26.2%.
  • Diluted TTM earnings per share at 1.53, and a MRQ book value per share value at 15.66, implies a Graham Number fair value = sqrt(22.5*1.53*15.66) = $23.22. Based on the stock's price at $19.92, this implies a potential upside of 16.56% from current levels.
  • P/E: 13.60

ATLO has recorded a solid performance over the last month, returning 5.24% since 4/8/13. This performance has eclipsed the likes of BB&T Corporation and M&T Bank Corporation (NYSE:MTB), but lagged SVB Financial Group , which returned 6.75% during the same holding period.

But the company's earnings growth looks weak, with EPS growing by 2.84% over the last year. This is considerably weaker than competitors like Susquehanna Bancshares, Inc. (EPS growth over the last year at 91.71%) and MTB (EPS growth over the last year at 18.75%).

*All accounting data sourced from Google Finance, profitability data sourced from Fidelity, EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: Are These 5 Small Cap Regional Banks Truly Profitable And Undervalued?