Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. But concerns about loan losses and tightening regulations have tempered enthusiasm, limiting the banking industry’s gains to 13.3% over the past six months. This return lagged the S&P 500’s 15.3% climb.

Investors should tread carefully as many of these banks are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three bank stocks best left ignored.

Merchants Bancorp (MBIN)

Market Cap: $1.59 billion

With a strategic focus on low-risk, government-backed lending programs, Merchants Bancorp (NASDAQCM:MBIN) is an Indiana-based bank holding company specializing in multi-family mortgage banking, mortgage warehousing, and traditional banking services.

Why Does MBIN Fall Short?

1. Net interest margin of 2.9% reflects its high servicing and capital costs
2. Earnings per share fell by 8.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Low tier one capital ratio of 8.9% indicates the company may struggle to maintain adequate liquidity during periods of economic stress

Merchants Bancorp is trading at $34.42 per share, or 0.8x forward P/B. If you’re considering MBIN for your portfolio, see our FREE research report to learn more.

Lake City Bank (LKFN)

Market Cap: $1.50 billion

Dating back to 1872 and deeply rooted in Indiana's communities, Lakeland Financial Corporation (NASDAQ: LKFN) operates Lake City Bank, providing commercial and consumer banking services throughout Northern and Central Indiana.

Why Do We Think Twice About LKFN?

1. 2.4% annual revenue growth over the last two years was slower than its banking peers
2. Net interest income trends were unexciting over the last five years as its 6.5% annual growth was below the typical banking firm
3. Incremental sales over the last five years were less profitable as its 3.5% annual earnings per share growth lagged its revenue gains

Lake City Bank’s stock price of $58.87 implies a valuation ratio of 2x forward P/B. Read our free research report to see why you should think twice about including LKFN in your portfolio.

Hilltop Holdings (HTH)

Market Cap: $2.14 billion

Transformed from a residential communities business to a financial services powerhouse in 2007, Hilltop Holdings (NYSE: HTH) is a Texas-based financial holding company that provides banking, broker-dealer, and mortgage origination services.

Why Do We Think HTH Will Underperform?

1. Loans are facing end-market challenges during this cycle, as seen in its flat net interest income over the last five years
2. Overall productivity is expected to decrease over the next year as Wall Street thinks its efficiency ratio will degrade by 33.2 percentage points
3. Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 13.1% annually, worse than its revenue

At $34.83 per share, Hilltop Holdings trades at 1x forward P/B. Dive into our free research report to see why there are better opportunities than HTH.

Stocks We Like More

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