The sizeable list of community banks joining the funding round shows that even fairly small institutions are investing as a way to get in on the ground floor of technological development. You have to do business with your customers wherever and whenever they want to do business with you. Louis-based investment bank Stifel Financial Corp. The investment managers billed the fund as a way for community banks to learn about the technology space, given the sheer number of financial technology companies competing for their business.
If you make the wrong decision, it can really set you back. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. You can contact Naomi at nsnyder bankdirector. Needless to say, I didn't know what I was doing and got very lucky. Proceeding my quick return, I left bank stocks for a few years and didn't look back. However, in early , I started to scrounge the OTC boards looking for hidden value.
As I peered through the endless list of pink sheet companies, I came to a realization that the majority of the small and microcap pink sheet companies were small community banks. I thought to myself; why should I be like every other investor and wholly ignore community banks when there are so many of them out there? Furthermore, shouldn't community banks provide good value given that almost no one looks at them? From emerging myself in community banks, I have come to a few conclusions.
First, the majority of investors wholly ignore bank stocks for a variety of reasons. Secondly, there are a tremendous amount of opportunities in community banks to generate alpha. Thirdly, community banks are not that hard to value after all. Finally, there are a few near-term macro catalysts, that make investing in community banks, as a whole, compelling.
I am still not a professional bank investor, however, I continue to develop and learn more about investing in community banks every day. The goal of this article is to help you decide if you should invest in community banks. Ask yourself; why do you avoid investing in banks? If I had to guess, you probably think of banks as too complicated, thus, throwing them in the too hard pile. Community banks are quite simple.
Furthermore, most community banks don't have complex financials and don't utilize derivatives, which makes the valuation concise and unpretentious. In short, community banks have very simple and easy to understand business models. One should note that another reason why some investors avoid banks is due to the high regulatory scrutiny in the space. Sure, regulations have hurt a lot of smaller banks.
As Charles Darwin would say…. Regulatory change has made a decent amount of banks go extinct, however, the ones that have been most responsive to change have benefited massively through industry-wide consolidation and thus less competition.
I am curious to know why you avoid bank stocks. Feel free to leave a comment below explaining why. I am highly interested. There are a few key reasons why investing in community banks may be right for you. These reasons are: a lack of competition, clear undervaluations, consolidation, and boring and predictable. I will briefly explain the rationale behind each of these underlying reasons. Not many investors look at small community banks, and fewer put their money where their mouth is.
Bancorp USB , rally a significant amount of attention from the investment community. Want proof? Just look at the Seeking Alpha followers of each of those small community banks. There are a few reasons for the lack of investor awareness in small community banks. First, a good majority of community banks are microcap stocks.
Microcaps as a whole lack investor awareness; as I have written about extensively here , here and here. Microcaps combined with small community banks, well, I don't think most retail or institutional investors are combining that concoction in their portfolio s. Secondly, small community banks are extremely boring. I try to read at least one annual report a day if I have time. For a company outside of the banking industry, annual reports aren't too bad to plow through.
However, community bank annual reports are very very dry. The majority of community banks have no story. All they do is take in deposits and loan the deposits out, collecting that boring spread. Not only are their financial reports boring, but it is difficult to write an article or research report on a community bank.
Thus, the lack of a story and the extremely boring business model may be the reason for the lack of community bank attention. Thirdly, most community banks are public not to garner investor attention but for access to the equity markets. The vast majority of community banks will not have an IR team, they won't put PRs and if you are lucky, they will just post vanilla earnings.
The lack of self-promotion has effectively hidden the majority of these banks from the investor's eye. Sure, there isn't going to be any previous research done on the vast majority of these community banks, however, the lack of research should spike the interest of an investor in search of alpha. Finally, if you are in search of a community bank, you will need to do some digging.
A good majority of small community banks are on the OTC boards. Companies on the OTC boards typically don't show up on your screener. In addition, not many investors I know manually scan through OTC listings to find investment ideas. It's taxing, it's time-consuming, and it's boring. In short, the lack of an ability to find community banks helps these companies fly over the heads of many investors. Given the lack of investor attention in the community banking space, should there not be clear undervaluation's present?
In my opinion, the answer to that question yields a yes. Ever since I started looking at community banks, I have been amazed at the deals in the industry. It's not unusual to find a bank growing its bottom-line at a double-digit rate, while still selling significantly below TBV. Want an example? Read this article here. I don't want to get into too deep of a discussion on the deals in the community banking industry we will leave that for another article.
However, I would like to drop some names of a few community banks that popped up on my radar recently that are selling significantly below TBV, combined with decent loan growth. Readers should take note that some of the banks listed above do not have updated financials on Yahoo Finance. If you are interested in updated info on these names feel free to drop me a message. One of the most interesting aspects of investing in community banks is the continual consolidation going on in the industry.
Back in 4Q'13, there were 6, banks in the US.
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