Investors' views of high-performing banks are often shaped by a composite of specific criteria and a whole bunch of subjective extras.

Return on assets and return on equity have been standby measures for gauging performance, with investors historically preferring to see banks generate 1% ROA and 10% ROE.

Expectations for return on equity have shifted in recent years to reflect challenges to bank earnings that have created a lower numerator and a higher denominator linked to regulators' expectation that banks hold more capital.

Banks that are unable to produce, at minimum, a 1% ROA and 10% ROE should get out of the industry, said Phil Timyan, a private banking investor and bank blogger. Other investors, including Anton Schutz at Mendon Capital, said they prefer to see banks generate ROE in the mid-teens.

Paths — or investment theses — diverge after taking return metrics into consideration. When asked what defines high-performing institutions, bank investors had wide-ranging views. Perhaps that's good news for the banks that are able to meet every expectation. With a variety of tastes, someone is bound to want to know more.

Schutz, Mendon's chief executive, likes banks with a wide range of options at their disposal.

"One option is to go at it alone and focus on organic growth," Schutz said. "Another is having the ability to buy other companies, continue to perform and create a valuable franchise that everyone wants to be in."

A third option, Schutz said, should be the ability to sell the bank at a premium.

But not all top performers are equipped to sell themselves. Certain banks, including a number in the Southeast, are trading at such a rich premium that they could struggle to find a buyer that could pay the high price required to take them out.

Richly priced banks can only succeed by continuing to run their operations, Schutz said.

Investors should also take into account the interest rate environment and fierce competition for loans when assessing top performers, said Joe Stieven, chief executive of Stieven Capital Advisors.

High-performing banks "have a strong core funding base and a lending focus that keeps them away from following the herd," Stieven said.

Banks with a high percentage of core deposits are a hot commodity as the industry looks to shore up funding in advance of rising rates. Banks that have found a lending niche might be better off when rates rise, given how competition is influencing terms and structures in popular loan categories.

Another characteristic of high performers is an ability to increase book value and earnings per share, Stieven said. In prior cycles, analysts and investors compared book value or EPS to a bank's stock price. For instance, price to tangible book value became the standard after the financial crisis because stability mattered more than earnings. Now, investors are increasingly tracking price to earnings.

Stieven wants to focus on both metrics.

"The best-performing bank stocks over decades are those that compound book value and earnings per share," Stieven said. "You have to do both of them. That's how you create shareholder value."

Josh Siegel, chief executive of StoneCastle Partners, said he is not much of "metrics-based investor." For him, metrics don't tell the whole story and, in some cases, they tell a lie. For instance, a bank that is growing at a fast clip might look like an underperformer because its expenses are elevated as it invests in areas like infrastructure and expansion.

"There are false positives and false negatives," Siegel said. "A bank that has figured out how in their market — whether that's geographically or demographically speaking — to be more successful than its direct competitors: that's how I would define a high performer."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.