For retail investors with a generally bullish outlook on the market, regional banks offer what Equities.com quantitative analyst Nicholas Bhandari calls the “purest play” on the market itself. Unlike investment banks like Goldman Sachs Group (GS) and JPMorgan Chase and Co. (JPM) , which are highly leveraged with opaque revenue sources, regional banks tend to be less exposed to risky assets and built on traditional banking.
This can be attractive to investors who like businesses that have a simpler correlation to the market itself. That is, when times are good, the regional bank can lend out more money and turn a higher revenue. When they’re bad, they have to be more stingy.
We’ve previously looked at quality Pacific Regional banks. This time, we decided to turn our attention to the middle of the country, and find small Midwestern lenders with strong fundamentals.
To find the Midwestern bank stocks with the best fundamentals, we looked for companies that possessed the following attributes:
- Worth between $300 million and $2 billion.
We decided to limit our search to small-cap banks, that are neither too small (and thus riskier) nor too large to have a reasonable expectation of ever experiencing exponential growth.
- Return on Investment (ROI) over 15 percent.
ROI shows how well a bank is using their invested capital. Since banks are essentially made up of all invested capital, this is an important statistic.
- Operating Margin over 25 percent.
Operating margin shows how efficiently a company is operating is business after a good is sold.
- Price-to-cash and price-to-book over 1.
A P/C and P/B of 1 should be the minimum floor for a regional bank.
- Analyst recommendation consensus of “buy” or better.
While we trust our metrics, it certainly never hurts to have experts on our side.
We found five small Midwestern region banks that possess all the aforementioned attributes. They are:
First Busey Corporation (BUSE)
German American Bancorp (GABC)
Lakeland Financial (LKFN)
Mainsource Financial Group (MSFG)
Wilshire Bancorp Inc. (WIBC)
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