From my little experience I would advise that you read everything they put into print -- and then ask questions.
Many of these smaller regional banks that had to recapitalize in order not to be shut down by the FDIC issued preferred shares and warrants which you may not see (or they may not disclose).
Here's a couple excerpts from a report by one of the small regionals I own with a tiny market cap of ~ 28 million -- TBNC:
The Competitive Landscape
There are far fewer banks to compete with today than when the recession commenced. In January 2008, there were 7,180 banks. Today there are about 5,000. That might seem like an improvement in the competitive landscape. Fewer competitors equals less competition. However, according to data from the Federal Reserve and Bankrate.com, the nation’s ten largest banks control almost two thirds of the $15.9 trillion in banking assets in the U.S. Four of those banks, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, hold just over $8 trillion in total assets, or over half of the banking market. Forbes magazine reports that since 1990, there has been a consistent rise in the consolidation of the nation’s banking assets to the five largest institutions. In our opinion, part of the reason for this is the lingering “Too big to fail” perception that is still widely held by the public when it comes to these and other very large banks. Many community bankers suggest that the large “megabanks” are not their true competitors. That may be true in some respects. However the “Too big to fail” perception presents some challenges to our Bank when marketing deposit services to businesses whose account balances consistently exceed the $250,000 FDIC deposit insurance limit. It is true that T Bank does not compete with the megabanks for products we do not offer in great volume such as consumer loans and residential mortgages. However, one of those banks, Bank of America, is among our fiercest competitors in our Dental lending niche. While our customers and trusted advisors who refer clients to us consistently remark on our superior level of service, our competitors can, and have, simply “bought” the business by offering very low interest rates and other favorable terms. In 2015, approximately one out of every two dental loan proposals we issued to prospective clients was lost to other lenders who undercut our pricing and terms. Despite that, we were able to originate nearly enough new loans to replenish the balances that are lost due to normal amortization and pay-offs. We also compete with the megabanks in our SBA market, but have not felt the pricing pressure as severely as in the dental arena. While the megabanks present challenges to the competitive landscape, we are also faced with increased competition from the nearly 5,000 other banks all scrambling for their share of the remaining one-third of the country’s banking assets. In our much improved economy, competition is fierce for all loan types. This competition has led to what, in our view, is a problematic trend in relaxed underwriting criteria and unreasonable reductions in loan pricing, terms, and loan covenants by our competitors. We are not alone in our observation. Our regulator, the Southern District of the Office of the Comptroller of the Currency (the “OCC”), recently disseminated the following observations: Following several years of steady loan growth, many banks have reached the point where they are starting to “reach” for loan growth. Community bankers are expressing concern over the ability to compete in the current environment. Some are relenting to competitive pressures and extending credit to less creditworthy borrowers. We are seeing banks more willing to relax their underwriting standards they had fortified following the recession. The OCC’s annual survey of credit underwriting standards documents this trend as well as assessments from our examiners. We are seeing concessions on pricing, weaker or non-existent loan covenants, and lengthening of maturities. Finally, a relatively new threat in our competitive landscape is a proliferation of technology based lenders. Most are non-bank internet based small business lenders referred to as online market place lenders or financial technology based lenders collectively referred to as “Fintech”. Fintech targets small businesses by offering loan amounts typically between $5,000 and $250,000. Based on a May, 2016, white paper prepared by the U.S. Treasury Department and information included in an article by Business News Daily, the growth in the industry has been rapid with over $7 billion in loan originations securitized and sold since 2013. Virtually all these non-bank lenders offer a loan decision based on very limited (or no) documentation and some promise a loan decision in as little as one hour. Many offer same day funding or next day funding as well. What else do they have in common? Annual percentage rates and/or fees on their products as high as 144%. Small business lending…meet Pawn Stars! In addition, some will also lend to business owners with credit scores as low as 500. How low is that? Only 3 percent of consumers have a score that is lower according to Kroll Factual Data. Certainly we do not lament competition for borrowers with credit scores in the 500’s. However, some very qualified borrowers who have access to credit on reasonable terms from a bank can and do use these credit sources for convenience sake. While they may pay a $3,000 fee to borrow $25,000 for 12 weeks, it simply may not register, and may not have been disclosed, that they are paying in excess of 48% for that loan. Notably, the Treasury Department found that only 15% of borrowers who accessed these funding sources were satisfied with the experience. None of these non-bank lenders are subjected to regular, systematic oversight or regulation. If you read Michael Lewis’ best seller The Big Short or saw the movie released in 2015, you pretty much know how badly a similar story of poorly documented loans of dubious credit quality ended for almost all involved. Until what we believe will be the unavoidable implosion of that industry, either due to credit quality or government fiat, it is yet another competitive challenge we face.
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To Our Fellow Owners:
Our Results for 2015 Thanks to the efforts of our outstanding, professional, customer centric employees, we ran up our streak of strong performance for the fourth straight year in 2015. We earned net income before income tax expense of $5.1 million. This was up by 6.3% over 2014 pre-tax net income of $4.8 million. Our 2015 net income was $3.3 million after a $1.8 million tax bill. Our return on average assets and return on average equity were 1.93% and 13.37%, respectively. We also increased the book value of our stock, which was up by 14.0% from $5.91 to $6.74. Other key financial metrics include: • Total assets at December 31, 2015 increased $13.8 million, or 8.5%, to $176.9 million, compared to $163.1 million at December 31, 2014. This increase was primarily due to an increase in commercial and Small Business Administration (“SBA”) loans and residential construction lending. Our loans held for investment increased $13.2 million, or 10.6%, to $137.6 million as of December 31, 2015, compared to $124.4 million as of December 31, 2014. • Total deposits increased to $137.0 million at December 31, 2015, an $11.3 million increase from $125.7 million at the end of 2014. • Total SBA and USDA loans as of December 31, 2015 increased to $31.7 million from $23.6 million as of the prior year end. In addition, we sold $21.2 million in government guaranteed loans for a net gain of $1.95 million. • Tier 1 capital to average assets and total capital ratios for the Bank at December 31, 2015 were 15.02% and 18.33%, respectively. These ratios are well in excess of the ratios required to be “Well Capitalized” under the regulatory framework, which are 5% and 10%, respectively. • We closed out 2015 with a little over $1 billion in trust assets under administration/custody. • Our stock traded at $7.45 on May 6, 2016 which is a little higher than a year ago. In addition to what we feel is very solid performance in 2015, 2016 is off to a good start as well. Some financial highlights from March 31, 2016: • Total assets were $193.7 million at the end of the first quarter, representing an increase of $16.8 million, or 9.5%, from December 31, 2015. • Total loans held for investment, net of allowance for loan losses and deferred loan fees, increased $8.2 million, or 6.0%, to $145.8 million at the end of the first quarter of 2016, compared to $137.6 million at the end of 2015. • Total loans held for sale, which consists primarily of the guaranteed portion of SBA 7(a) loans, increased $2.9 million, or 45.3%, to $9.3 million at the end of the first quarter compared to $6.4 million at the end of 2015. • Net income was $788,000 for the quarter. • The book value of our stock increased to $6.95 |
