Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. Market leaders have certainly capitalized on rising interest rates and strong loan demand to boost profitability, helping fuel a 8.4% gain for the banking industry over the past six months - 5.8 percentage points higher than the S&P 500.

Nevertheless, investors should tread carefully as many banks are cyclical due to their exposure to credit risk and regulatory changes. Keeping that in mind, here are three bank stocks we’re swiping left on.

Preferred Bank (PFBC)

Market Cap: $1.15 billion

Founded in 1991 with a focus on serving the Pacific Rim community in Southern California, Preferred Bank (NASDAQ: PFBC) is a commercial bank that provides banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, and high net worth individuals.

Why Are We Cautious About PFBC?

1. Net interest income trends were unexciting over the last five years as its 9.2% annual growth was below the typical banking firm
2. Net interest margin shrank by 76.5 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive
3. Earnings per share have dipped by 1.8% annually over the past two years, which is concerning because stock prices follow EPS over the long term

Preferred Bank is trading at $94.51 per share, or 1.3x forward P/B. Dive into our free research report to see why there are better opportunities than PFBC.

First Financial Bankshares (FFIN)

Market Cap: $4.47 billion

With roots dating back to 1890 and a network spanning over 70 locations across the Lone Star State, First Financial Bankshares (NASDAQ: FFIN) is a Texas-focused regional bank providing commercial banking, trust services, and wealth management across numerous communities throughout the state.

Why Does FFIN Fall Short?

1. Muted 5.3% annual revenue growth over the last five years shows its demand lagged behind its banking peers
2. Annual net interest income growth of 7.4% over the last five years was below our standards for the banking sector
3. Earnings per share lagged its peers over the last five years as they only grew by 4.7% annually

First Financial Bankshares’s stock price of $31.28 implies a valuation ratio of 2.1x forward P/B. To fully understand why you should be careful with FFIN, check out our full research report (it’s free).

Walker & Dunlop (WD)

Market Cap: $1.64 billion

Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE: WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.

Why Should You Sell WD?

1. Customers borrowered less money this cycle as its net interest income declined by 40.1% annually over the last five years
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 14.6% annually while its revenue grew
3. Annual tangible book value per share declines of 6.8% for the past five years show its capital management struggled during this cycle

At $47.87 per share, Walker & Dunlop trades at 0.9x forward P/B. If you’re considering WD for your portfolio, see our FREE research report to learn more.

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