How to Become a Bank Voyeur

voyeurI have another confession.  I’m a bit of a bank voyeur.  There was a point where I could list some odd tidbit of information on every bank on Montgomery St. in the financial district of San Francisco.  Passing by the Beal Bank branch on my way to work was always a treat, knowing that it was an outpost in Andy Beal’s empire of “I’ll see your undervalued mortgage backed security and raise you a KAJILLION dollars” value investing banking on steroids.

Scanning through hundreds of banks on bankregdata.com, looking for gems, is, well, a joy for the few of us banking data oddballs, even if my fiancé gives me weird looks when I say it’s fun.  Glad I never got into baseball data, though at least then I could have talked to someone about it.  Then again, baseball geeks are a scary breed.

Anyway, I figured it’s time to apply some of the quantitative methods from the How to Analyze a Bank series. Strangely enough, the goal is not to find undervalued banks; the goal is to amass a list of great banks that we can sit and watch from afar, maybe even salivate a little over, but remain disciplined enough to wait till the market offers us a good price.

Banks can go all the way to zero, so having a little extra margin of safety built into the price is a good thing, even more so than typical stocks.  So we’re going to be waiting.  And waiting.  Think on the order of years and perhaps decades.  And that’s ok.  Keep yourself busy by amassing even more information on companies you like watching.  Or even better, try to start a business on the side (not that that’s a huge time sink or anything).

It’s best to have a reservoir of banks you have analyzed and love, so that when a disruption occurs, you’ve done most of the heavy lifting already and just need to make sure your thesis is still intact. Doing the analysis now when your mind is clear and not screaming, “BUY! BUY! BUY!” will ensure you don’t brush past those extra derivatives you don’t understand on the balance sheet, or think, “Boy, they must have magical voodoo powers when it comes to underwriting construction loans.” (Trust me, they don’t.)  In addition, you won’t spring for the cheapest bank when the markets crash and burn as they’re wont to do, but you’ll stick to the higher quality banks, something you really want to do if you’re going to be a part of this boom or bust industry. Buying quality here is important.

Using some of the quantitative criteria from our bank analysis, I’ve found three smaller banks that are worth digging into further.  I haven’t read enough of their annual reports and filings to get a real feel on them yet or discover any checkered pasts, nor do I think any of them are trading with enough margin of safety, but they are promising.  I’ve added them to my watchlist as they’ll make great banks to study and learn from.

Larger Bank, Local Flavor in Rural Texas

First Financial Bancshares (FFIN)

The Data:

Trailing Twelve Month Pre-Provision Pre-Tax Income: 2.29%
Non-Performing Assets / Average Total Assets: 0.85%
Tier 1 Common Equity / Tangible Total Assets: 8.7%
Texas Ratio: 6.73%
Non-Core Funding Dependence: 6.7%
Loans to Assets: 43.88%

The Details:

First Financial is a bank holding company for similarly named banks in rural Texas.  Apparently they give a great deal of local autonomy to areas as each is run as a completely separate bank, keeping a bit of the local bank feel and agility.  I’m generally a fan of this model as it has a bit of the Berkshire “let good managers do their job without interference” touch.  And they find ways to get economies of scale in their tech infrastructure without adding undue process.

I grew up in Fort Worth, and First Financial appears to be rallying the wagons around my former metroplex, grabbing deposits and loans in all the funny named little counties around where I used to live.  They have a pretty equal split of CRE, 1-4 family, and C&I loans with some farm and auto loans making up the rest.  The NPA rate on the commercial loans of 0.28% was a joy to see.

The thing that I really enjoyed seeing was the 44% loan to assets.  When loan demand returns (it will, but who knows when), they’ll likely be able to take advantage of it, much to the benefit of their rather high PPPT for a bank not operating at full capacity.

Wild, Wonderful… OK Fine, Boring in West Virginia

City National Bank of West Virginia (CHCO)

The Data:

Trailing Twelve Month Pre-Provision Pre-Tax Income: 2.51%
Non-Performing Assets / Average Total Assets: 0.85%
Tier 1 Common Equity / Tangible Total Assets: 9.37%
Texas Ratio: 12.42%
Non-Core Funding Dependence: 5.98%
Loans to Assets: 69.88%

The Details:

I love boring with a 2.51% PPPT.  From what I can tell, they seem boring.  And I discovered something I LOVED in their annual report.

They break down the ranking of their C&I and CRE loan portfolios by the categories exceptional, good, acceptable, pass/watch, special mention, substandard, and doubtful with descriptions of each.  Most banks do this but don’t expose it, and I love the very few that actually put it in their annual reports as THIS is what determines loan loss reserves, not loans already in non-accrual status.  It gives a little more information with which to understand how management thinks.

What kills me is my iPad can’t read the PDF of their annual report.  Oh well.  And the annual report looks like it’s just a photocopy of their 10K.  No long philosophical diatribes about the problems with banking and the US.  No nautical quote with the line “…as we successfully navigated our ship through stormy seas of 2008 and 2009…” Not even a corporate shout out to the rest of the team.  Just the facts.  Boring.  I love it.  I’m getting a little bit of a financial crush on our Dragnet detective of a bank over here, but they are skating the line on loans to assets.  Hopefully they’ll pass a more thorough background check.

Loans in Central California that Aren’t Going Belly Up

Farmers & Merchants Bank of Central California (FMCB)

The Data:

Trailing Twelve Month Pre-Provision Pre-Tax Income: 2.47%
Non-Performing Assets / Average Total Assets: 0.85%
Tier 1 Common Equity / Tangible Total Assets: 9.6%
Texas Ratio: 5.66%
Non-Core Funding Dependence: 16.63%
Loans to Assets: 62.74%

The Details:

Farm loans.  This is an area I need to brush up on as I don’t know all the ins and outs yet, but I do have to say, the numbers from this bank looked really interesting.  40% of loans are agricultural loans of some form, 26% are CRE, 14% C&I and some odds and ends after that.

From what I can tell, farm loans are pretty stable, though I’ll need to dig in on what happens in the rare case of a blight or drought (always know your worst case scenario).  But, to have such great numbers in a location that’s been hit pretty hard, I have to hand it to them.

Hope you enjoyed our look at banks worth spying on.  I love feedback, so feel free to drop me a line at truelson(-at-)dogpatchtech.com or follow me on twitter (@truelson) and ask away.

Photo Credit: johny schorle / photocase.com

Full Disclosure: I have no positions in FFIN, CHCO, FMCB

 

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4 Responses to “How to Become a Bank Voyeur”

  1. Andrew August 4, 2011 at 8:28 pm #

    Those are some interesting names. From what I incidentally know about California and the central valley – a) agriculture has been gangbusters for the past decade b) California ag is able to grow more valuable crops – almonds, grapes, various berries – due to climate that the agriculture goliaths in the Midwest that are stuck with the choice between corn or soybeans.

    I’ve thought over a recent thrift conversion, HARI, located in the boonies of ag land Illinois that has some agriculture loan exposure. On one hand it’s an interesting way to play commodity prices (farmers borrow to purchase new tractors, etc.) but the nature of commodities being boom and bust, I become apprehensive. Even if they underwrite the loans intelligently, there is the possibility of a big hit. Historically farmers spend money like it is going out of style in boom times, but supposedly “this time is different” and they’ve learned their lesson about being prudent.

    What screens do you use to find them? Did you just jot down the ones from bankregdata.com that had stats the stuck out to you?

    • Palmer Truelson August 10, 2011 at 4:44 pm #

      Yep, no screening on bankregdata, so I just looked for high ROA stocks, then dug in.

      Thanks for your thoughts on the agricultural loan business. That makes a lot of sense.

  2. Graeme August 17, 2011 at 11:57 am #

    Any thoughts on Hudson City Bankcorp? I got interested in it as I read about their good ol’ fashioned business model of savings and loan. Plus they do the mortgages of rich New Yorkers. I’m still new to analyzing banks–is HCBK as simple as it seems, or does it have black magic happening in the back rooms? 2 cents?

    • Palmer Truelson August 17, 2011 at 10:28 pm #

      HCBK is a really interesting one to analyze as they do have a little bit of an edge. Like you said, rich New Yorkers make for an interesting business model. Their net interest margin sucks, but because their average loans are so huge (and they’re all home loans) they can afford a low NIM because their efficiency ratio is basically rock bottom. It’s 1,000 employees managing 52 billion in assets (talk about people leverage!) It’s kinda cool to see. I like that type of leverage.

      But what the heck happened this year? Looks like their underwriting is great, but they oddly aren’t doing a good job with interest rate risk. And considering they’ve been adding loans like crazy in these past, low rate years, they may have a lot of interest rate risk exposure still. I haven’t read any of their reports or been following them all that much. Looks like management seems to be skilled in some areas, but boneheaded in others ( or rather, got a little greedy when they thought they were smarter and better underwriters). Yeah, banks that make missteps like that scare me, but I do want to follow them more. Likely will put them in my, “let’s see how this one plays out so I can learn from it” pile.