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.

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Bank Deposits as a selling point

Quick note from an article on SNL today that confirms my priors (just being honest…), and I thought it to be worth sharing as low beta, core deposit funding is a key component I look for in the majority of my community bank investments. From SNL (emphasis mine):

“Matt Kennedy, vice president at investment bank Banks Street Partners, said in an interview that a strong deposit base has move up acquirer wish lists of late. He said lower funding costs attract more potential buyers and thus drives deal prices higher. ‘The conversations when we talk to these acquirers have centered and focused on deposits and the deposit base more over the past two or three quarters than they did previously,’ he said.

Buyers are also increasingly seeking targets with lower loan-to-deposit ratios, Kennedy said, as acquirers want to take that deposit base and use it as a funding source for future loan growth.”

Source: https://www.snl.com/interactivex/article.aspx?KPLT=7&id=46002260 ($)