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APJ4RealHoldings (42.19)

Small Banks. Potential for Riches or Rags



September 24, 2009 – Comments (7) | RELATED TICKERS: PFBI , NARA.DL , CVBF

First off, props to streetflame & posting great resources at his blog here

See towards the bottom of my reply for a full fledged listing of bank tickers I looked at & my thoughts on them. 

What is the key criteria for bank in my mind?

Two things:  1) Asset Quality  2) Core Deposits (& its growth/stability)

1)  Because I tend to look @overall numbers fairly quickly on many, numerous banks, I don't delve deep enough into asset quality.  However, there's one key concept that I do stick to.  I look for banks that have not aggressively expanded its assets from 2005 to 2008.  The more they expanded, the more of a penalty I assess them.  Asset prices on both residential/commercial side were too high during this time period & expected income levels at that time either by a household or a business were likely too close for comfort in their ability to make loan payments for the loan life, therefore I penalize these assets.   Observing cash flows may be a more accurate, (also) more timely way to acheive this. 

Another factor is geographic area.  I also tweak the penalty/bonus on valuation of these banks depending on the area.  IE Banks in New Condo City, Florida would be penalized much mroe than say a major city in a midwestern state.  Any areas that were red hot during teh upward sky-high movement of asset prices during the bubble from 2003-2008 are weak, conversely the opposite is true for areas that remained cool. 

2) Any bank in the world is NOTHING without deposits.  Deposits are key, and what is respected most & also very crucial in the banking industry are core deposits.  For my due diligence purposes I'm counting only non-interest bearing demand deposits as core deposits.  For all the tickers I've looked at, I brought up call reports/TFRs for Q3 2008, Q4 2008, Q1 2009, & Q2 2009 & noted down both core dep. & total dep. for each of the quarters.  I computed the ratio & compared them across the quarters & compared the ratios across peers.  I tried to keep an eye on any funny movements & also an eye on movement of total deposits through recent quarters.  I assigned penalties/bonuses in my valuation accordingly. 

Then I just look at total (normal) equity in more recent quarter, make my adjustments, add in (if I believe there's) potential for future income, and then compare that total to today's market value. 

List of tickers looked at todate:

ORPB, CWBK, NARA, CVBF, PFBI, FRGB, FPTB & north carolina banks: ASFE, SSFC, & CSBC

From my valuation I liked: ORPB, FPTB, & PFBI alot

I thought ASFE, CWBK & CSBC were close to fairly valued

& think that the rest were too risky to touch. 

There's still quite a few tickers I'm going to look at in the next week. 



1)   : great for finding banks by state, figuring year opened, observing balance sheet changes over the years (estimating by graphs). 

2) (or typing in "call report" 1st google result)  : great for pulling up detailed information on banks by quarter (I liked to pull latest quarter equity, and also deposit information by quarters)

3)   : get market cap, & also (click financials on left, click annual data) another resource to see annual changes in balance sheet for just about ANY company

4)  (a link provided by downescalator on above mentioned blog)  It's's bank report card on health,  I looked at it, but dont really use it/don't see the value.  


Some disclosure on mentioned tickers:

I bought ORPB today, & hoping to fill an order on a buy for ASFE.  Holding onto PFBI. 

Looking to get rid of long positions on NARA & CVBF & FRGB sometime soon. 

Ending on a morality note:  Any person not satisfied in the direction our country has taken in the past 20 years is advised to move all their deposits out of the bigs (BofA, Chase, Wells Fargo, Etc) and into a smaller community bank (or credit union) - this will vastly change representationship within the Federal Reserve & in many cases may be much more powerful than your vote. 

7 Comments – Post Your Own

#1) On September 25, 2009 at 12:11 AM, ozzfan1317 (69.17) wrote:

I bank at a smaller bank less fees and a better atmosphere. I am A BAC shareholder though.

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#2) On September 25, 2009 at 12:30 AM, checklist34 (98.78) wrote:

rec & agreed.  smaller banks... 

i almost hope this downturn is significant and punishing to financials.

because while that would hurt my portfiolio, which is (while very nicely hedged against downside) mostly financials, ...  it'd provide a great buying opportunity.

great buying opportunity.  someo f those little banks are really cheap

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#3) On September 25, 2009 at 12:44 AM, APJ4RealHoldings (42.19) wrote:

Thanks ozzfan, best of luck on your investments.  For my portfolio's sake, I hope BAC goes the other way ;) I am now banking with a credit union to which anyone was open to joining, pretty nice.

Thanks checklist.  Yeah, during this runup, I've begun to look more closely at the smaller banks because many of them did not participate in the move up, and I foresee great opportunity to diversify (more beta) as I believe many of those wont fall (atleast as much) if the market does dive.  

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#4) On September 25, 2009 at 1:14 AM, checklist34 (98.78) wrote:

you and me both, APJ.

small banks will make fortunes (as you headline suggests) and probably cost someone or other his arse as well.

they are my #1 focus from here.  I have mobs of hedges against my big positions and i'm comfortable with my assessment of the valuation of them (from vastly overvalued (so severely hedged) to still really cheap (so not hedged)).

small banks are where its going to be at from now (or the bottom of whatever dip to get them even cheaper) to 1-2-5-10 years from now.

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#5) On September 25, 2009 at 1:10 PM, goldminingXpert (28.83) wrote:

Since you asked for my opinion, I don't buy US banking stocks -- ever -- but I looked at your list and there appeared to be some interesting tickers there. I never buy banks though, so I will refrain from offering advice as I don't know much on the subject.

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#6) On September 27, 2009 at 4:00 PM, APJ4RealHoldings (42.19) wrote:

Fair enough, thanks gmx for your opinion!

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#7) On November 07, 2009 at 6:57 PM, APJ4RealHoldings (42.19) wrote:

Guidelines to avoid investing in a shutdown bank (FDIC receivorship):

-Avoid banks with total debt/equity > 65% (using google finance)

-Avoid banks with total loans/deposits > 105% (rough calculation via MR call report: take total assets less all cash & AFS investment securities divide by total deposit)

-Have a bank that has not decreases of deposits >3% from prior qtr

-Have a bank that has total noninterest bearing deposits above 12% of total deposits

-Not increased assets significantly during boom years as discussed above


identify an acquiring bank through FDIC receivorships AND apply the rules above with exceptions of 1-2 bullet points allowed.  Decrease in deposit however should never exceed 7%

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