When I talk about my fondness for community bank stocks and outline the reasons I expect to see a portfolio of safe and cheap banks offer outsized returns over the next decade, the first question I usually hear is “do you define safe with a bank stock?”
People have an image of bank stocks being very complex and hard to analyze — and while this can be true of larger banks with lots of moving parts, it is not the case with the smaller ones I favor.
The easiest tool to use to find safe bank stocks is the Texas ratio. This ratio was developed back in the 1980s by RBC Capital markets analyst Gerard Cassidy to find troubled banks. It is really a simple calculation.
You just add non-performing loans and real estate owned, then divide by the sum of tangible common equity and loan loss reserves. Higher numbers indicate institutions that are more financially troubled than those with lower numbers.
Right now, the average Texas ratio for bank stocks is about 13, down about 50% from the levels of three years ago. Bank balance sheets have improved tremendously over the past few years as the credit crisis has faded away and troubled loans have either been charged off or repaired.
I researched smaller bank stocks today and looked for those with better-than-average Texas ratios and bargain share prices. Let’s look at three of them:
3 Bank Stocks With Good Texas Ratios: American National Bankshares Inc (AMNB)
Share Price: $22.67
Texas Ratio: 4.5
American National Bancshares Inc (NASDAQ:AMNB) has 25 banking offices and two loan production offices and operates in southern Virgina and North Carolina. The bank has about $1.5 billion in assets and they have done a fantastic job of managing their loan portfolio and finances.
The Texas ratio has fallen in five of the past six quarters and is currently just 4.5.The stock is trading at just 12 times earnings and 93% of book value right now. Income-oriented investors will find the 4.26% dividend yield attractive.
The company has been growing by acquisition and just closed a deal with the former MainStreet Bancshares in January that added three branches and $200 million in assets.
3 Bank Stocks With Good Texas Ratios: First Connecticut Bancorp, Inc. (FBNK)
Share Price: $15.24
Texas Ratio: 6.8
First Connecticut Bancorp, Inc. (NASDAQ:FBNK) is a full-service community bank with 22 branch locations throughout central Connecticut and about $2.4 billion in assets. The bank has been performing at a very high level, as witnessed by its strong earnings growth in 2014.
The bank reported earnings of 21 cents per share for fourth quarter compared to 7 cents EPS a year ago. For the full year’s FBNK earned 62 cents per share, an increase of 24 cents per share in 2013.
It is in fantastic financial shape with a Texas ratio of just 6.8. Trading at 93% of book value, the shares appear to be a bargain.
3 Bank Stocks With Good Texas Ratios: Republic Bancorp, Inc. (RBCAA)
Share Price: $24.65
Texas Ratio: 6.3
Louisville, Kentucky-based Republic Bancorp, Inc. (NASDAQ:RBCAA) has been one of my top picks for more than a year now. The bank has transitioned from a fast-growing bank with a big presence in tax refund lending to a boring old regular bank with a great deal of success after IRS regulations made that type of lending very difficult.
The Texas ratio is just 6.3 right now as the loan portfolio is in terrific shape. The bank is growing nicely with 13% year-over-year growth in 2014. At 87% of book value, the stock is a steal right now and income investors might like the 3.2% yield.
As of this writing, Tim Melvin owned shares of RBCAA.
