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Strategies & Market Trends : Value Investing

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To: E_K_S who wrote (25088)	10/22/2006 6:25:13 PM
From: Spekulatius	Read Replies (3) of 78748

Community banks valuation - The opinions about the correct valuation of community banks differ. First of all i would distinguish between the "half public" MHC like OSHC, KRNY, CSBK or community banks that have been public for a long time. What matters for banks is tangible capital, not book value, IMO. In most cases the difference is goodwill due to acquisitions. A well managed community bank should be able to achieve a return on assets of at least 1%, which translates into a ROE of about 15% assuming reasonable leverage. The ROA is a better measure than the ROE because it compensates for different leverage. Another value metric I look at is Deposit/ market cap ratio (of course it matters if deposits are growing too). A reasonable valuation is 20% of deposits. This ratio should be more meaningful for an acquirer of a bank than for example book value.Most important is the quality of assets/loans. A rapid rise in nonperforming loans or lan past due is a red flag, IMO.Right now the percentage of nonperforming loans of medium sized community banks is about 0.5%, so I would not like to see values much higher than that.

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