Small Banks Offer Golden Opportunities

Continuing with my week of columns devoted to banks, while everyone else on Wall Street is focusing on the reports from the big banks, I am much more interested in searching for stocks that fit my "trade of the decade" theme. I do not really care how much the big guys made from  trading, restructuring mortgages or investment banking. They may bounce when the economy recovers, but they will not provide the many multiples of purchase price returns I think we can get from their smaller brethren. Today I want to talk about the core of my strategy for profiting from the small bank recovery and mergers-and-acquisitions (M&A) boom I see developing and playing out over the next decade.

There are several different ways to play the small banks but the core of my portfolio is devoted to finding what I like to call perfect banks. First and foremost I want banks that trade below tangible book value. As Marty Whitman of Third Avenue Value and others have pointed out, buying otherwise solid banking institutions at 80% of tangible book value is a profitable investment activity most of the time. I want these banks to be solid with enough capital to make it through the tough times. I want banks with a tangible equity to asset ratio above an absolute minimum of 5 and the higher the better. It has been a tough few years but smart bankers with good underwriting practice have edged many of the bad loan bullets. I want banks that have loan losses well below the national average and focus on those with non-performing loans less than 2% of total loans. Last I want a bunch of conservative folks running the bank who hate to lose money and reserve more than enough capital to deal with potential losses....469 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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