Rising Rates Mean Rising Profits For These Banks

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 |  Includes: AMNB, BBCN, CHCO, MBWM, PWOD, RBCAA, USB
by: Matt Hylland

The potential for Fed tightening and rising rates has the market on edge. This week saw the worst weekly performance of the Dow this year as investors fear a future with higher interest rates.

However, some banks currently stand to profit from the rising rates. This means a potential investment opportunity if stocks continue to sell off as rates rise.

Finding the Winners in A Rising Rate Environment

Many banks report the estimated effects rising rates would have on the value of their loans and their net income (or net interest income) if rates were to rise in their 10-Q or 10-K statements. For example, see below:

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This is usually buried deep within the company's statement under the "risk management" section. It is meant to tell investors the sensitivity the bank's balance sheet has to a potential rise in interest rates. However I think investors may be able to use it to instead gauge potential winners in a rising rate environment.

There are over 6,900 banks in the U.S. today. Analysis of each bank for this article means going through the company's latest 10-Q filing, transferring some numbers on a spreadsheet and doing some minor calculations. To do this for 6,900 banks is a little more work than I would like to do, so I wanted to narrow down the number of banks to look into.

In order to do this, I used Yahoo Finance stock screener for stocks that exhibited the following criteria:

  • Return on Assets greater than 1.2%
  • Return on Equity greater than 10%
  • Dividend yield greater than or equal to 2%

The ROA and ROE numbers come from a slightly relaxed criteria determined to be figures consistent with thriving banks according to the Federal Reserve. You can learn more about that in a previous article found here on Seeking Alpha: "Identifying Thriving Small Banks Using Federal Reserve, FDIC Data".

The dividend was put in the screen to ensure that if rates stay steady for some time, at least investors will at least get some return while waiting.

Not all banks report the effect rising rates will have on their incomes, so if a bank made it through the screen, but did not report these numbers explicitly in their latest 10-Q, they will not appear in the article here.

Presented below is the results, starting with the bank who currently appears to benefit the least from rising rates and ending with the bank appearing to benefit the most.

To arrive at the "Estimated 'New' Income" in the tables below I added the change in estimated net interest income after the corresponding rate rise to the banks previous bottom line to arrive at the income the bank would see if rates rise.

"New" P/E is calculated assuming today's market cap, meaning the stock price remains unchanged.

All stock data below comes from Yahoo Finance. All estimates for change in income from rising interest rates comes from the company's latest 10-Q report.

(NASDAQ:CBSH) - Commerce Bancshares, Inc.

ROA (%) ROE (%) Dividend Yield (%)
1.22 12.00 2.0
Market Cap Net Income Avl to shareholders Today's P/E
4.09B 257M 15.92
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
300 -1.98% 245,140,000 16.68
200 -0.75% 252,440,000 16.20
100 -0.02% 256,810,000 15.93
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(CBU) - Community Bank System Inc.

ROA (%) ROE (%) Dividend Yield (%)
1.22 10.58 3.2
Market Cap Net Income Avl to shareholders Today's P/E
1.36B 78.04M 17.43
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
200 -1.60% 73,611,000 18.48
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(NYSE:USB) - U.S. Bancorp

ROA (%) ROE (%) Dividend Yield (%)
1.48 14.66 2.5
Market Cap Net Income Avl to shareholders Today's P/E
67.8B 5.52B 12.82
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
200 +1.53% 5,604,456,000 12.09
50 +1.22% 5,587,344,000 12.13
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(CVBF) - CVB Financial Corp.

ROA (%) ROE (%) Dividend Yield (%)
1.2 10.33 3.0
Market Cap Net Income Avl to shareholders Today's P/E
1.38B 77.23M 17.87
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
200 -0.75% 76,650,775 18.00
-100 -0.59% 76,774,343 17.97
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(NASDAQ:CHCO) - City Holding Co.

ROA (%) ROE (%) Dividend Yield (%)
1.38 12.26 3.30
Market Cap Net Income Avl to shareholders (($,TTM)) Today's P/E
694M 42.1M 16.48
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
400 +2.90% 43,320,900 16.01
300 +3.80% 43,699,800 15.88
200 +2.80% 43,278,800 16.04
100 +0.20% 42,184,200 16.45
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(NASDAQ:RBCAA) - Republic Bancorp Inc.

ROA (%) ROE (%) Dividend Yield (%)
2.67 22.86 2.6
Market Cap Net Income Avl to shareholders Today's P/E
564M 46.76M 12.07
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
300 +2.90% 49,813,000 11.33
200 +2.35% 49,236,000 11.46
100 +1.29% 48,119,000 11.72
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(NASDAQ:MBWM) - Mercantile Bank Corp.

ROA (%) ROE (%) Dividend Yield (%)
2.45 25.77 2.6
Market Cap Net Income Avl to shareholders Today's P/E
171.9M 14.08M 12.21
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
400 +3.70% 15,760,000 10.91
300 +2.90% 15,390,000 11.17
200 +1.20% 14,610,000 11.77
100 +0.80% 14,420,000 11.93
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(NASDAQ:PWOD) - Penns Woods Bancorp Inc.

ROA (%) ROE (%) Dividend Yield (%)
1.74 16.82 4.1
Market Cap Net Income Avl to shareholders Today's P/E
208M 14.11M 14.74
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
400 +3.83% 15,680,000 13.27
300 +3.36% 15,487,000 13.43
200 +2.11% 14,973,000 13.89
100 +0.84% 14,454,000 14.39
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(NASDAQ:BBCN) - BBCN Bancorp Inc.

ROA (%) ROE (%) Dividend Yield (%)
1.47 10.7 2.1
Market Cap Net Income Avl to shareholders Today's P/E
1.14B 80.06M 14.24
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
200 +5.31% 84,311,186 13.52
100 +2.51% 82,069,506 13.89
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(NASDAQ:AMNB) - American National Bankshares Inc.

ROA (%) ROE (%) Dividend Yield (%)
1.63

12.78

3.90
Market Cap Net Income Avl to shareholders Today's P/E
185.15M 15.92M 11.63
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Basis Point Change in Rates Est. Change in Net Interest Income Est. "New" Income "New" P/E
400 +19.50% 24,377,000 7.60
300 +14.60% 22,245,000 8.32
200 +9.50% 20,021,000 9.24
100 +4.30% 17,790,000 10.40
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Conclusion

Maybe some investors shouldn't fear rising rates after all.

Keep in mind that banks can add or remove hedges on interest rates at any time, so be sure and investigate new 10-Qs as they get reported for any changes.

Will the sell off due to investors being scared of rising rates continue? For potential investors in some of these banks, they should hope so, because they may be able to pick up some very cheap shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.