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Is it time to buy smaller banks?



February 11, 2008 – Comments (0) | RELATED TICKERS: MSL , COB , IBOC

After doing a search of about 10 small regional banks I find myself wondering if many of these have hit bottom or their prices reflect more downside. A number are down 50% from their highs, not unlike other small caps. And those that have any analyst coverage (for what it's worth) don't show an earnings turnaround until 2009, with one exception.

The banks I looked at are SCMF,NPBC,NBBC,IBOC, FSNM, FNBN, and MSL. All these banks reported earnings recently. I'll look at MSL because it's fairly typical of small bank operations and may be an indicator of what's to come.

This La. bank has 33 branches and 123 ATM's. Fourth quarter earnings were up slightly from the prior year and the bank has none of the write offs associated with subprime loans etc. It's 4th qtr. loan loss provision increased from $180,000 to $545,000. This was caused primarily by a 100% increase in indirect auto loans, 2 commercial loans, and residential mortgage loans . Non performing assets increased to .35% from .29%, a manageable number, but a 25% increase.

Now the good news. Interst income increased 16.5 % on higher loan volume and a slightly higher average loan rate. In addition, non interest fees, primarily ATM and debit card fees, increased 24%. Deposit volume was picking up despite lower interest rates.

A truly mixed bag that held up earnings in the 4th quarter, but how long can they squeeze fees and increase loan volume if the economy gets worse.  It doesn't appear that defaulting mortgages have taken a bite out of earnings yet, and that's another factor that will play out if unemployment rises substantially. I am a big poker player from way back, but I'm not willing yet to place any bets from what I see. The Market has played a role in this decision. Despite decent earnings and no exotic loan losses, none of these banks made any headway in their stock prices. And if Mr. Market isn't willing to pony up, why should I.

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