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Sunday, July 10, 2005

Community banks: conclusion

I've looked at a lot of banks and I'm surprised at the lack of bargains, given how small and far removed they are from the main capital markets. Founders buy a dollar of equity for perhaps $1.30 of investment. By the time the shares are public and results are even slightly well established, the stock price is fully valued. Those lucky to start up a bank that rapidly becomes profitable will perhaps double their money.

Perhaps someday later this will all be useful to me. But for now, it was a detour. Back to the pink sheets.

My thinking was that a bank during the startup phase doesn't look very attractive to most investors. They lose money, equity slowly disappears. But as the bank ramps up, it becomes successful and the stock price rises to a full value.

I can take any number of banks and look at all the details during each phase of the startup cycle to get a good sense for what a succesful (and unsuccessful) startup bank looks like. If I can find a new bank where I have confidence that it is ramping up very well, but the stock price is low, then I can make money. This can be tricky because while the bank is ramping up, it's losing equity.

The problem that I see is that community banks seem to have a loyal group of investors and they don't run and panic when the bank loses money during the first year or two. I was hoping to find lots of choices to invest in, but I haven't found them yet. The problem with perhaps finding a single good investment out of 430 potential investments is that the odds become higher that there's something wrong with that one bank that I'm not seeing. I don't like scraping the bottom of the barrel.

How early do you want to get in? If very early, check Bucks County Bank in Southeastern PA. Just opened last year with stock offering. Due to Dream team management and 19.9% ownership position by Yardville National Bank it is having a second public stock offering (rapid loan expansion in first year). Not publicly traded but public can subscribe to stock beginning 7/25/05 if existing shareholders don't fully subscribe the offering.
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