Thursday, June 28, 2018

A Bank Analyst Makes Recommendations. I Make a List.

What should you look for in a bank stock?

How should I know? I'm not a financial advisor. I would have to take a test to prove that I am worthy of such predictions.

But I read. And part of my reading includes Boenning & Scattergood's quarterly Bank DCF Analysis. In the report, analysts Matt Schultheis and Scott Beury laid down the criteria they recommend investors use when evaluating bank stocks:

1. Superior Growth Prospects

2. Excess Capital

3. Strong Deposit Franchises

Well, ok then Matt and Scott. I'll search on that.

I sorted all publicly traded US banks on the following criteria: year over year asset growth (2016-17) greater than 10%, tangible equity/tangible assets greater than 9%, and CD's as a percent of total deposits less than 30%. I also filtered out banks with greater than 2% non-performing assets/assets.

This netted a total of 78 banks ranging in asset size from $113 million (Republic Bank of Arizona) to $44 billion (Signature Bank). No SIFI banks. 

I then set out to single out the best bank in a few of the categories. The first was for growth, as measured by year over year asset growth. I skipped banks that grew via acquisition during that time. The second was to highlight the most favorable deposit mix, as determined by the lowest level of CDs. I know this is imperfect. There could be ample municipal deposits in checking or money market accounts. Not an ideal funding source but also not CDs.

The third category was performance judged by their first quarter 2018 ROA. Again, not ideal. But directionally correct. The fourth was value based on the bank's price/tangible book. Most of the 78 financial institutions were below $1 billion in total assets. Investors tend to favor price/book metrics in looking at smaller institutions. The lower the multiple, the more value that might be on the table for the investor.

The last category was a balanced approach between all of the measurements I used, including EPS growth. There was judgement involved and I must admit I tended to discount the smaller financial institutions because of their low trading volumes and inefficient valuations. Personal bias, I know. My apologies to Metro Phoenix Bank ($181 million in assets, 1.88%/11.83% ROA/ROE). 

The results are in the table below.

MCB - Metropolitan Bank Holding Corp., New York, NY
IIBK - Idaho Independent Bank, Coeur d'Alene, ID
SBT - Sterling Bancorp, Inc., Southfield, MI
FSDK - First Citizens National Bank of Upper Sandusky, Upper Sandusky, OH
BOCH - Bank of Commerce Holding, Sacramento, CA

Who else should be on the list?

Drop me a line with your contact info if you want the spreadsheet with all 78 banks.

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works well.


  1. Hi Jeff: could I please get a copy of the 78 stocks list ?
    It feels like the '90s again, re:the urge to merge in bank land.......
    and hope the Caps enjoy their summer w/ the Cup !
    I'm Rob at
    mucho gracias !

  2. Good afternoon,

    Would appreciate opportunity to review the 78 bank spreadsheet:

    Your post was mentioned on the Timyan twitter feed:

    "I must admit I tended to discount the smaller financial institutions because of their low trading volumes and inefficient valuations. Personal bias, I know. My apologies to Metro Phoenix Bank ($181 million in assets, 1.88%/11.83% ROA/ROE)."

    FSDK - listed as one of the top 5, yet traded less than 2K shares over past 9+ months

    MCB growth may be due to serving as depository behind virtual currency brokers. Believe there is also some Taxi Medallion risk.

    SBT heavy in mortgage recently went public (capitalizing on peak valuation?) and trading at about 2.5x tangible book. Branches scatter throughout the country - unsure whether befitting of what might be thought of as 'regional-organic' growth. Homestreet cutting back on its mortgage arm - will be interesting to see how SBT fares this quarter.

    IIBK is one have tended to avoid - significant family ownership.

    Would be interesting to ask Boenning & Scat for their definition of 'Superior Growth Prospects'. Yours indicated organic growth to which banks focused on 'roll-up' strategies were discounted (eliminated from consideration). Would be interesting to see a screen of growth-through-mergers culled for 'acquirers of choice'. Certainly, CARO would make the list (from the moment it went public) or SMBK which has been picking up steam in its TN,AL,FL footprint.

    If the full spreadsheet is also available (including those institutions which have grown through mergers/acquisitions), would be interested to review.

    Online lenders are tearing up the landscape and definition of growth.

    For example, if you listen to a Live Oak (LOK) conference call (or transcript on SeekingAlpha), will find they onboard/draw/manage over 1+ billion in deposits (MMDA) with just 6 employees. Not only that, but host their software through Amazon Web Services (AWS Cloud) at an expense of around $100K(?) per quarter where they had been spending $6M per year for data center.

    It isn't only the large institutions flocking to raise deposits nationally. For example, Riverview Bank (small family owned bank in Wisconsin) which put up their online "Incredible Bank" - drawing down 2B(?) in online MMDA deposits which they then lend out through businesses that sell RVs - providing financing.

    Live Oak (on the other hand) uses their deposits to make SBA loans targeting specific niches through online platform. Sporting insane growth & selling off portfolios of loans per quarter. Live Oak's SBA NPA rose last quarter to around 1.7%, yet those are backed by SBA such that their NPA is effectively less than 0.5%

    LOK may look appealing although they back a great many FinTech start-ups through their venture capital subsidiary potentially not terribly appealing to traditional bank investor.

    KBW published a research report last night on deposits ~ screening for banks are at greatest risk for earnings shortfalls due to climbing interest rates. That is, those banks with high loan-to-deposit ratios that may be facing severely compressed NIM.



    1. The "Balance" column is the only column where I didn't select institutions because they were small and low trading volumes. All of the other four columns were numbers based. No judgement other than to find the highest asset growth rate without acquisition.

      Each bank should be evaluated on its individual merits. But in terms of the criteria that Boenning used, there ya have it.

      I e-mailed you the list.

      Thank you for reading and your excellent comment.

      ~ Jeff

  3. can you send a copy to plz thank you!