The Tool Desk
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What a bank-stock analysis must answer
A bank is a leveraged business whose funding, assets, capital and earnings are tightly linked. Deposits and other funding support loans and securities; those assets produce interest income but can lose value or stop paying; provisions and charge-offs recognize credit damage; and capital absorbs losses that remain after earnings and reserves. A bank can report a strong capital ratio while facing a costly deposit run, or show rapid loan growth while quietly taking more concentration risk.
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Your analysis should therefore answer four practical questions:
- Are deposits stable, diversified and reasonably priced relative to the assets they fund?
- Are delinquencies, nonaccrual loans, charge-offs and provisions signaling deterioration, and are reserves sufficient for the exposures?
- Would capital and liquid assets absorb plausible losses without forcing a distressed asset sale or emergency funding?
- Do recurring earnings compensate shareholders for those risks at the current valuation?
The framework below is U.S.-focused. A bank’s legal entity, charter, geography, accounting choices and regulatory category affect which disclosures apply, so use the institution’s own filings rather than relying on a broad sector average.
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1. Understand the bank and choose comparable peers
Before reading ratios, identify what the institution actually does. A consumer lender, commercial real-estate lender, custody bank, payments business, wealth manager and diversified universal bank have different deposits, assets, margins and risks. Geography matters because local employers, housing markets and industries influence both deposit behavior and borrowers’ ability to repay.
Build a like-for-like peer group
Choose peers with meaningful similarities in:
- Business model and revenue mix.
- Asset size and regulatory category.
- Geographic footprint and economic exposure.
- Loan composition, including commercial real estate, commercial and industrial, consumer, residential real estate, agriculture and small-business lending.
- Deposit franchise, branch strategy and use of brokered or other wholesale funding.
A national diversified bank and a small regional lender may report the same loan-to-deposit ratio or CET1 percentage, yet face very different concentration, liquidity and earnings risks. Compare each bank with its own history first, then with peers that share the same underlying exposures.
2. Evaluate deposits and funding
Deposits are a funding source, not merely a growth statistic. Examine how much funding the bank has, what it pays for it, how likely customers are to retain it under stress, and whether the funding duration matches the assets being financed.
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Track deposit growth beside loan growth
Build a quarterly and annual series for total deposits and total loans. Deposit growth that lags loan growth can force a bank to use certificates of deposit, brokered deposits, central-bank facilities, secured borrowing or other wholesale sources. The Federal Reserve reported that deposits grew at most banks in the third quarter of 2025, but loan growth outpaced deposit growth. That observation is a system-level description, not a conclusion about any individual institution.
Calculate the loan-to-deposit ratio as total loans ÷ total deposits and use it as a screening measure. It does not establish that deposits are stable or that liquid assets are adequate: two banks with the same ratio can have very different uninsured balances, deposit concentrations, securities portfolios and contingent funding capacity.
Study the deposit mix and its price
Separate noninterest-bearing demand deposits, interest-bearing transaction accounts, savings, money-market accounts and time deposits when the bank reports them. A larger share of noninterest-bearing balances can lower funding costs, but the balance may be more rate-sensitive or operationally concentrated than the label suggests. Watch the average rate paid on deposits and the change in that rate from quarter to quarter. If deposit costs rise faster than asset yields, net interest margin and earnings can compress even while deposits remain stable.
Look for disclosures about:
- Uninsured deposits and the portion held by large commercial or institutional customers.
- Concentration by customer, industry, geography or channel.
- Brokered deposits and other rate-sensitive funding.
- Wholesale borrowing, secured funding and maturities.
- Deposit beta or other management discussion of how quickly deposit rates respond to market rates.
Uninsured deposits are not automatically unsafe, but a concentrated or flight-prone base can require faster replacement funding during stress. Read management’s explanation of retention and pricing rather than inferring stability from deposit growth alone.
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Match funding with asset liquidity
Ask whether deposits fund long-dated, difficult-to-sell assets and whether the bank holds enough cash, marketable securities and borrowing capacity to meet withdrawals. The Office of the Comptroller of the Currency defines liquidity as “the risk to a bank’s earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses.” This definition highlights two points: a liquidity problem can damage earnings and capital, and meeting obligations by selling assets at a steep loss is not a satisfactory solution.
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Review the maturity and liquidity of securities, unrealized gains and losses, pledged assets, contingent borrowing capacity and management’s liquidity stress disclosures. A high loan-to-deposit ratio may be manageable for a bank with diversified, sticky deposits and liquid assets; a lower ratio may still be risky if deposits are concentrated or assets are hard to monetize.
3. Assess asset quality and reserves
Asset quality is a trend across portfolios, not a single headline percentage. Start with the bank’s loan segments and identify where growth, delinquencies and concentrations are changing.
Use a complete credit-quality set
Follow these indicators by portfolio segment and in aggregate:
- Past-due and delinquent loans.
- Nonaccrual loans and other nonperforming loans.
- Net charge-offs.
- Provision for credit losses.
- Allowance for credit losses and its coverage of problem loans.
- Loan growth and changes in underwriting or borrower mix.
The Federal Reserve’s nonperforming-loan measure includes loans at least 90 days delinquent and nonaccrual loans. Use the definition consistently when comparing periods or peers; a bank’s broader internal watch list may identify risk before an exposure meets that regulatory measure.
Read the portfolio, not only the total
Review concentrations in commercial real estate, commercial and industrial lending, consumer credit, residential mortgages, agriculture, small business and other categories disclosed by the bank. A modest aggregate nonperforming-loan ratio can conceal a severe problem in a concentrated sector if that sector is small relative to total assets. Compare each segment’s growth, delinquency, charge-off and reserve trends with its share of capital.
For commercial real estate, examine property type, geography, debt-service coverage, loan-to-value information and upcoming maturities when disclosed. For consumer portfolios, check credit-card, auto and other delinquencies, loss rates and borrower income sensitivity. For residential lending, distinguish portfolios held on balance sheet from loans serviced or sold, because the risk retained by the bank differs.
Interpret provisions and reserves together
Provision expense is the earnings charge used to build or release the allowance for credit losses. A low provision can mean improving credit, but it can also reflect an already-large reserve, benign assumptions or delayed recognition. Compare provisions with loan growth, delinquencies, charge-offs and the allowance balance. Reserve coverage should be judged against the composition and expected loss severity of the portfolio, not against a universal target.
Watch for a pattern in which loans grow rapidly, delinquencies begin to rise, but provisions and reserves do not keep pace. Also distinguish a one-quarter reserve release from a sustainable improvement in credit. Read the footnotes for criticized or classified assets, modified loans and management’s assumptions about economic conditions.
4. Interpret capital ratios as loss buffers
Capital ratios measure the cushion available to absorb losses; they do not predict a stock’s return and do not remove funding, interest-rate or asset-value risk.
Know what each ratio measures
- CET1 ratio: common equity tier 1 capital divided by risk-weighted assets. Because the denominator assigns different weights to different assets, the ratio is a risk-weighted regulatory measure.
- Leverage ratio: a complementary capital measure that is less dependent on risk-weighting assumptions and relates capital to a broader exposure measure.
- Tangible common equity: a balance-sheet measure with adjustments that differ from regulatory CET1. Do not treat TCE and CET1 as interchangeable.
Compare each ratio with the requirements applicable to that bank, its own multi-year history and genuinely similar peers. A ratio well above a requirement can provide flexibility, but the relevant question is how much capital remains after plausible credit losses, securities losses, deposit outflows and planned distributions.
Account for distributions and risk-weighted assets
Capital can change because of earnings, dividends, share repurchases, other comprehensive income, acquisitions and changes in risk-weighted assets. The Federal Reserve reported that large banks’ aggregate CET1 ratios declined quarter over quarter into the first quarter of 2026 as shareholder distributions and growth in risk-weighted assets outweighed incremental earnings. That does not by itself indicate weakness; it shows why the direction and drivers of a ratio matter.
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Do not confuse capital with liquidity
Capital absorbs losses over time; liquidity supplies cash when obligations are due. A well-capitalized bank can still suffer a liquidity crisis if deposits leave quickly and assets must be sold at unfavorable prices. Include securities duration, unrealized losses, pledged collateral, borrowing capacity and cash-flow projections in the same review as capital ratios.
5. Connect risk to recurring earnings
Earnings show whether the bank is being compensated for the risks it takes and whether it can build capital internally.
Analyze the income statement drivers
- Net interest income and net interest margin: assess asset yields, funding costs, deposit repricing and the effect of fixed- versus floating-rate assets.
- Noninterest revenue: identify fees from payments, wealth management, servicing, investment banking or other businesses, and separate recurring fees from volatile markets-related gains.
- Operating costs: track efficiency, personnel expense, technology spending, litigation and restructuring charges.
- Provision for credit losses: link the expense to loan growth, delinquencies, charge-offs and reserve changes.
- Return on average assets and return on equity: compare trends and determine whether changes come from margins, credit costs, fees, expenses, leverage or one-time items.
A higher return on equity is not automatically better if it results from unusually high leverage, under-reserving or a temporary gain. A falling margin may be acceptable if the bank is deliberately replacing expensive funding or reducing risk; examine the explanation and subsequent quarters.
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Reconcile reported earnings with underlying operations. Flag gains or losses from securities sales, branch or loan sales, tax settlements, merger accounting, restructuring, litigation and unusual reserve releases. Then ask whether the bank can generate enough recurring profit to support organic capital growth, maintain its dividend and invest in controls without relying on favorable market conditions.
6. Add valuation only after the risk review
Price-to-tangible-book value and price-to-earnings ratios are useful summaries, but neither is meaningful in isolation. Compare valuation with sustainable return on equity, capital needs, credit and funding risk, growth quality and the durability of earnings.
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A bank trading below tangible book may be signaling expected losses, weak returns, expensive funding or a franchise problem; it may also be mispriced. A premium valuation requires evidence that recurring returns, deposits and risk controls justify the premium. Calculate valuation from current company-specific market data and financial statements rather than inferring it from regulator-wide statistics.
7. A repeatable step-by-step process
- Define the business and peer set. Record the bank’s size, charter, geography, major loan categories, deposit channels and nonbank businesses. Remove peers whose risk profile is materially different.
- Collect primary documents. Download the latest annual and quarterly regulatory filings, earnings release, investor presentation and call transcript. Use FDIC Data Tools for financial reports on insured banks and historical data extending back to 1992. Confirm the latest quarter because conditions change rapidly.
- Build a funding schedule. Chart deposits, loans, loan-to-deposit ratio, deposit mix, average deposit cost, uninsured deposits and wholesale funding for at least several quarters. Note maturities and secured borrowing capacity.
- Build a credit schedule. Record delinquencies, nonaccrual and nonperforming loans, charge-offs, provisions, allowance balances and coverage by portfolio segment. Mark concentrations and unusually fast growth.
- Build a capital and liquidity schedule. Track CET1, leverage capital, tangible common equity, risk-weighted assets, dividends, repurchases, cash, securities liquidity, unrealized losses and contingent funding.
- Normalize earnings. Recalculate the direction of net interest margin, net interest income, fee revenue, operating costs, provisions, return on average assets and return on equity after identifying one-time items.
- Test adverse linkages. Consider what happens if deposit costs rise, loan losses increase in the largest concentration, securities values fall or wholesale funding becomes unavailable. Ask whether earnings and capital can absorb the scenario without forced asset sales or a distribution cut.
- Compare valuation with the evidence. Use price-to-tangible-book and price-to-earnings only after deciding whether the observed returns and capital position are sustainable.
- Document what would change your view. Set monitoring triggers such as accelerating deposit outflows, rising uninsured concentration, worsening delinquencies, falling reserve coverage, shrinking CET1, widening funding costs or earnings dependent on one-time gains.
8. How to compare two banks
Put both institutions on the same definitions and time periods. The following checklist keeps the comparison focused on factors that affect risk and earning power.
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Repair Windows errors before they cause bigger problemsFix Now →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →| Comparison axis | Questions to answer | Why it matters |
|---|---|---|
| Business and exposure | Are size, geography, borrower type, loan mix and revenue sources genuinely similar? | Raw ratios can mislead when underlying risks differ. |
| Deposits and funding | Which bank has more stable deposits, lower funding costs, less concentration and less wholesale reliance? | Funding price and availability directly affect liquidity and margin. |
| Asset quality | How are delinquencies, nonperforming loans, charge-offs and provisions trending by segment? | Early deterioration can reduce future earnings and capital. |
| Reserves | Is the allowance appropriate for the portfolio’s concentrations and expected losses? | Coverage links current earnings charges with future credit risk. |
| Capital and liquidity | How do CET1, leverage, tangible common equity, liquid assets and securities exposure compare? | Capital absorbs losses while liquidity meets near-term obligations. |
| Recurring earnings | Which bank has more durable margins, fees, expenses and returns after provisions? | Sustainable earnings replenish capital and support valuation. |
| Valuation | Does price-to-tangible-book or price-to-earnings reflect sustainable returns and risks? | A cheap multiple can reflect real franchise or balance-sheet problems. |
9. How to use current industry statistics without misusing them
Regulator-wide figures provide context, not a pass/fail test for an individual stock. Recent Federal Reserve figures illustrate the proper treatment:
| Statistic | Date and source | Correct interpretation |
|---|---|---|
| $18.3 trillion in aggregate deposits at commercial banks | August 2025, Board of Governors of the Federal Reserve System | Shows the scale of the U.S. commercial-banking system; it is not the deposit level or growth rate of a particular bank. |
| More than 99 percent of all banks were well capitalized | Fourth quarter 2025, Board of Governors of the Federal Reserve System report | Describes the aggregate condition and does not establish that every bank or stock is safe. |
| About 13 percent aggregate CET1 ratios for large and small banks | Year-end 2025, Board of Governors of the Federal Reserve System report | Provides a broad reference point at that date, not a minimum acceptable ratio. |
| 12 percent aggregate CET1 ratio for large banks | End of the first quarter of 2026, Board of Governors of the Federal Reserve System, June 2026 Supervision and Regulation Report | Was measured for large banks as a group; it is not a prediction, valuation signal or threshold for an individual institution. |
The same Federal Reserve reporting noted that most large banks remained well capitalized while aggregate CET1 declined quarter over quarter as shareholder distributions and risk-weighted-asset growth outweighed incremental earnings. Use such context to frame questions, then replace it with the bank’s current filings.
10. Common analytical mistakes
Using deposit growth as a safety score
Fast growth can come from promotional pricing, a concentrated customer or a temporary inflow. Pair growth with retention, average cost, uninsured exposure, concentration and liquid-asset coverage.
Treating one ratio as the verdict
Loan-to-deposit, nonperforming-loan, CET1, return-on-equity and price-to-book ratios each omit important risks. Review their direction, definitions and interactions.
Comparing unlike banks
A custody or payments-heavy institution will naturally have a different balance sheet from a commercial lender. Adjust the peer set before interpreting differences.
Ignoring securities and interest-rate risk
Credit ratios do not capture losses on securities, duration exposure or the cost of replacing deposits. Include liquidity and asset values in the capital analysis.
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Assuming a reserve release proves improvement
A release can lift quarterly earnings while masking a portfolio that is still exposed to deterioration. Reconcile the allowance, charge-offs, delinquencies and management assumptions.
Looking only at reported earnings
One-time gains, restructuring costs and unusual tax or litigation items can distort returns. Normalize the income statement before applying a valuation multiple.
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Turning a regulator average into an investment rule
Aggregate figures describe a population at a specified date. They do not replace institution-level filings, applicable capital requirements or an assessment of the stock price.
11. Where to verify the numbers
Start with the bank’s latest regulatory filings and audited financial statements. FDIC Data Tools provide financial reports for insured banks and historical information reaching back to 1992. Federal Reserve aggregate reports draw on Call Report and FR Y-9C data, but the bank-specific filing is the appropriate source for an individual institution. OCC and FDIC liquidity and funding materials explain supervisory concepts; they are context for analysis, not investment recommendations.
Record the reporting date, measurement definition, legal entity and whether a figure is quarterly, year-to-date or an average. Bank conditions can change between filing dates, so refresh the schedules before making an investment decision.
12. A practical decision framework
After completing the schedules, write a short investment thesis that links cause and effect:
- Funding: deposits are stable or unstable for specific reasons, and the expected cost of replacement funding is clear.
- Credit: the largest exposures are improving, stable or deteriorating, with reserves that match the risk.
- Capital and liquidity: the bank has a defensible buffer after considering losses, securities values, withdrawals and planned distributions.
- Earnings: margins, fees and expenses produce recurring returns rather than a one-quarter boost.
- Valuation: the market price compensates for the identified risks and is supported by sustainable returns.
If you cannot explain how a change in deposits would affect funding costs, how a credit loss would affect reserves and capital, and how those changes would affect earnings and valuation, the analysis is not finished. The strongest bank-stock decisions come from this connected balance-sheet view, not from a single attractive ratio.
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