Why Digging In Matters

A little change of pace today with a quick post on why one needs to dig deeper than Capitalization, ROE, P/E. and TBV when analyzing small community banks.

As the first step in looking for investment opportunities, I run a couple screeners on community banks with varying thresholds on capital metrics, income metrics, asset quality/mix, and deposit quality/mix. My hurdles tend to be high and typical return a more conservative mix of bank franchises. But one still needs to dig deeper and look at bank-specific disclosures prior to targeting a company for an investment opportunity.

As an example, here is a Virginia-based bank (VABK) that screens quite well:


I love just about every metric in this table; bank profitability is top-notch, capital ratios are great, and asset quality is strong. But in digging in to the loan book, one sees a ~16.5% allocation to Consumer Loans (on its face, this not a bad thing). Digging deeper, the bank has ~$57 million of purchased student loans on the books, and this little kicker of a note in the quarterly filings:

Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods

So, after a review, this bank has an uninsured student loan allocation totaling ~80% of its Total Capital. It is not my intent to infer that this bank is overvalued, poorly-operated, risky, or anything of that sort. My conclusion is that the bank is concentrated in an asset class that I prefer to avoid and, therefore, got crossed of the list for continued due diligence and potential investment. Hopefully, this post/exercise illustrates the necessity to look beyond cursory screening/analysis in the community banking sector.


Author: Golden Belt Investments

Investor, primarily community banks, small/mid cap, specialty finance

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