At Equities we’ve spotlighted sound regional bank stocks twice before, singling out ones from areas with strong housing markets and also ones with a market capitalization of over $2 billion.
But we thought it might interesting to this time eschew the geographical bias and exclusion of small-cap banks, and just look for the regional banks that have the absolutely strongest fundamentals, regardless of location or size.
To find the fundamentally strongest small-cap banks in America, we looked for regional banks that have:
1) A P/C and P/B greater than 1
It is important for finance companies to have strong book value and cash in addition to validation of these assets by the market. As a result, a P/C (profit to cash ratio) or P/B (price to book ratio) of 1 should be a minimum “floor” for investing.
2) An operating margin greater than 25%
Operating margin shows how efficiently a company is operating is business after a good is sold. Gross profit-operating costs. The operating margin is more appropriate for banks because the costs associated with operating are much more significant for a bank than the cogs.
3) An ROI greater than 25%
Return on Investment, or ROI, shows how well a company is using its invested capital. Since banks are essentially made up of all invested capital, this is a very important statistic.
4) An analyst consensus of “strong buy”
While we trust our metrics, it doesn’t hurt to have the support of other number crunchers. We decided to single out stocks that not only fit the criteria we outlined for a strong regional bank stock, but ones that analysts were bullish on as well.
5) A market capitalization under $2 billion
For our purposes, we wanted to find banks that are small-cap, or ones that have a market capitalization of less than $2 billion. Small-cap banks tend to be a little cheaper to buy into and have more room for explosive growth, and while they tend not to be as stable as their large-cap counterparts they are attractive options for investors looking to score big.
Out of all of the bank stocks on the market, we found a total of five regional banks that possess all five of these attributes and thus can be considered to be the fundamentally strongest regional bank stocks in America. They are:
1st Century Bancshares, Inc. (FCTY)
The regional bank holding company controls 1st Century Bank, headquartered in the Century City section of Los Angeles, CA. Ist Century offers up an interesting business model. They have just two physical branches in the LA area, but they service the entire Southern California region by offering to visit customers personally to set up accounts. The company as well has no ATMs; rather, they offer to pay ATM fees for customers, something they can afford to do since they lack the sizable overhead of comparable brick-and-mortar banks.
1st Century is up 70.17 percent on the year to hit $7.93 a share.
Monarch Financial Holdings (MNRK)
This bank holding company’s subsidiary Monarch Bank does almost most of their business in Virginia, with two additional branches located in North Carolina and mortgage offices in Maryland. In July the bank posted their best second quarter earnings report ever, and announced they would begin paying a dividend $0.06 a share.
Monarch is up 40.12 percent on the year to hit $11.63 a share.
Valley Financial Corporation (VYFC)
This company owns and manages Valley Bank, which operates exclusively in Roanoke, Va. and Salem, Va. Comparatively speaking, this bank is still a start-up, as it has only been in existence for 18 years and consists of just eight branches.
The youngest, and smallest bank on this list, Valley Financial has gained just 17.07 percent on the year, but is up 138.39 percent from two years ago. The stock currently sits at $10.75 a share.
Old Line Bancshares (OLBK)
Another Mid-Atlantic regional bank, Old Line Bank has 23 branches scattered throughout Maryland. Headquartered in Bowie, Maryland, Old Line has been in existence since 1989. The bank recently acquired Washington Savings Bank, and will be merging with them this fall.
Old Line is up 16.56 percent on the year to hit $13.16 a share.
Farmers National Banc Corp. (FMNB)
This proudly independent bank has been servicing the Mahoning Valley region of Ohio since 1887, with 21 branches clustered in four counties. The bank recently declaredthey would pay a cash dividend of $0.03 per share to stockholders on record as of September 13.
The bank is down 5.49 percent on the year to hit $6.20 a share.