The Bank Investor's Handbook
Illiquid community banks, the classic nano cap hunting ground.
Summary
Nathan Tobik and Kenneth Yellen wrote this practical guide to analysing and investing in banks, aimed particularly at the small and community banks that institutional investors ignore.
The analytical content covers what a bank actually is as a financial structure: the balance sheet with deposits as the funding and loans as the asset, the net interest margin and what drives it, the loan book composition and its risk characteristics by category, the allowance for loan losses and how to assess its adequacy, non-interest income and expense, and the capital ratios that regulators apply. They explain how to read a call report, which is the regulatory filing every American bank makes and which contains more detail than the annual report.
The investment content covers the specific opportunities in small banks: the discounts at which illiquid community bank shares trade, the mutual holding company conversion process and why it creates value, acquisition as the standard exit and what acquirers pay for, and the situations where a bank is over-capitalised relative to its opportunities. The authors also cover the ways banks fail, principally concentration in a single loan category and growth funded by wholesale rather than core deposits. The book is practical and written for individual investors willing to do work that institutions will not. It predates the 2023 deposit runs, which demonstrated the deposit franchise risk it discusses.
Key takeaways 7
- A bank's value rests on its deposit franchise, meaning the cost and stability of its funding, more than on its lending.
- Call reports contain more detail on loan composition and credit quality than a bank's annual report does.
- Banks fail through concentration in a single loan category and through growth funded by wholesale rather than core deposits.
- The allowance for loan losses is a management estimate, and comparing it with the loan book's composition is the analyst's central task.
- Mutual holding company conversions create value because the converting institution raises capital it does not need at a price set by regulation.
- Small community banks trade at discounts because they are illiquid and unresearched rather than because they are worse businesses.
- Acquisition is the standard exit for a small bank, and acquirers pay for deposits and for cost savings rather than for loan books.
Who should read it
Individual investors and analysts examining small and community banks who need the analytical vocabulary and the regulatory filings that contain the information.
Where it sits in the reference 2
Similar books 6
Chosen by shared topics, the entries that hold them, and the people who recommended both.
