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Tim Melvin's "Trade Of The Decade" - Regional And Community Banks

I have been following the writings of Tim Melvin for quite some time. For those of you who do not know him, he is a writer for Jim Cramer's paid subscription website called "Real Money". He is one of the few value investors on there and I have really taken to his style. For the past few years he has been writing about what he calls the "Trade of the Decade." If you are unfamiliar with it, one of his latest articles from August 31, 2012 is listed at the bottom of this article. He basically believes that there is an enormous amount of money to be made by investing in small regional and community banks (and I agree).

Over the past few years I have kept an excel spreadsheet that has tracked over 500 community and regional banks. Now, for the first time, I am willing to share it with others. I have shared it with Tim many times and he has always praised it. On 9/16/2009 he even wrote in one of his columns….

"I've had several discussions with friends and associates about banks recently, including with my ambitious and talented young friend Lt. Corban Bates, a recent West Point graduate. He, along with several readers, asked me what my criteria were in compiling a list of community and regional banks to buy for the long term….. I should have known better than to give young Corban my criteria for bank stocks. Apparently, his days are 34 hours long, and over the weekend -- in addition to whatever duties the Army assigned him and to watching every sports event broadcast -- he assembled a spreadsheet of about 400 small banks, with the appropriate ratios and details."

This excel sheet has been continually fine tuned over the past few years and has yielded many winners. Tim has told me many times that I could make a lot of money from this excel sheet and that he has readers always emailing him about it. Out of respect for me he has never passed it along to anyone. However, now that Tim has officially rung the bell on this trade and is saying it's time for everyone to invest, I will for the first the time share my excel spreadsheet with anyone who wants it for $100. None of the information in this spreadsheet is secret, it is all public information. If you are willing to put in the work to build the excel sheet and manually type in all of this data from the FDIC website then you don't need my excel sheet. I must warn you though that it is insanely tedious and time consuming.

This sheet currently contains 540 small regional and community banks. Tim's minimum criteria is that the bank sells below tangible book value, has a tangible equity to assets ratio of at least 5%, has a non-performing loans ratio below 2%, and has a loan loss reserves to non-performing loans ratio of at least 1.

As of 9 February 2013, there are 50 banks on my spreadsheet that meet his criteria. There are an additional 48 that sell below tangible book value but barely miss on one of the other criteria and are worth keeping an eye on. There are also 73 other banks that meet all of his other criteria but are currently selling above their tangible book value.

Now if you follow Tim on Real Money, you will notice that he writes about a few of these banks, but always mentions that most of the small banks he invests in are too small to mention (he can't mention any below a market cap of $100 million). He's definitely right because of the 50 banks that meet his criteria only 12 are above $100 million. He gets emails all the time asking which banks he is talking about, but he cannot disclose them. If you buy this sheet you can now have access to all of them!

Looking over this list of 50 banks there are some absolute gems. There is a bank that recently converted from a mutual bank, has a market cap of 5 million, is selling at 52% of tangible book value, has a tangible equity to assets ratio of over 21%, and literally has 0 non-performing loans. It also only has one bank branch and is in the heart of the Midwest. How can this bank not be taken over? Even at tangible book value you would double your money, and it would likely be bought much higher than tangible book value.

If you are interested in this excel sheet you can email me at .

Full disclosure: I have invested in 53 of these banks, all of which have been personally approved by Tim Melvin. I've highlighted all of these on this spreadsheet so you can see them.

A recent article by Tim Melvin - "Focusing On Small Banks" - 8/31/2012

"I was lounging around Chez Melvin this week contemplating the Orioles' playoff chances when the Voo-Doo Professor sent me a spreadsheet of small banks with less than a billion dollars in assets, one of his latest projects. Dr. Mark McNabb, assistant director of the MS Finance Program at the University of Texas at Dallas, has apparently been looking at the same set of facts that I used to establish my Trade of the Decade thesis. Increased compliance costs are going to make it difficult for these banks going forward, so they are going to have to seek merger partners soon.

"With the writers of Dodd-Frank favoring the same industry leaders that required a bailout," McNabb said, "the small banks will become targets as they will find it easier to sell out than comply with the weight of regulatory excess and loss of business discretion and judgment to pursue opportunities in the marketplace."

I also spoke to the good folks at FJ Capital on this subject. The firm runs a hedge fund focused on community bank stocks, and they view the market the same way. Managing Director Scott Cottrell told me that many shareholders of community banks with a billion dollars in assets or less will likely get better returns on their money from a sale of the bank. In many cases, he said, the returns that these banks post on equity will be in the single digits or worse, which for many investors is insufficient for the risk they take as equity investors. Returns, he continued, are going to be lower because many banks are being squeezed from all angles: higher regulatory costs and higher capital requirements, compressed net interest margins, slow loan growth, still-elevated credit costs, and regulatory opposition to higher fee income.

"While there is definitely a group of smaller banks that will be able to reinvent themselves or survive due to lack of competition or a unique business niche, many smaller banks will be faced with the choice of delivering high returns to shareholders through a sale or paltry-to-dismal returns to shareholders by remaining independent," Cottrell said.

There is another solid reason to focus on the smaller banks. Earlier this week, many of the same concerns led the board of Hudson City Bancorp (NASDAQ:HCBK) to approve a takeover by M&T Bank (NYSE:MTB) at a price below tangible book value. The deal should work out in the long term because it is a good fit for both banks. As a shareholder, however, I made pennies where I should have made dollars. The directors and officers, as well as members of the local community, of the smaller banks tend to have a significant portion of their net worth invested in their banks and are less likely to accept a take-under offer. These small deals should be done at a multiple of tangible book value, not at a fraction.

Comparing the Voo-Doo Prof's list of little banks of safe and cheap banks to mine, I found many shared names. One of the more intriguing names is Berkshire Bancorp (BERK). The bank has 11 branches in the New York Metropolitan area and about $880 million of assets. Insiders own 80% of the outstanding shares so no deal that doesn't fit their objectives will ever get done. The bank is incredibly healthy, with an equity-to-assets ratio north of 14 and a nonperforming assets ratio of just 0.06% -- one of the lowest I have seen since the banking crisis began. There will be interest in acquiring the bank, but insiders will want a premium. It is very well run, so it may be one of those smaller institutions able to grow its way into dealing with higher costs and increased regulations. Either way, with the stock trading at just 88% of tangible book value the shareholder should be rewarded with a much higher price over time.

Most of the banks that meet my selection criteria and have less than $1 billion in assets are too small to mention on Real Money. As part of constructing portfolios for the Trade of the Decade, I have been buying community banks with market caps of as little as $10 million. The average capitalization of our merged list looks to be less than $50 million.

Your best research is best done at the local Chamber of Commerce's happy hour, not on Wall Street. You can also use the information available at to check the latest financials and ratios for small banks. Community banks may not be the most exciting investment, but they may be the most profitable over time."