Community Bank Stocks
Why community bank stocks and how do they fit with what we do, in a broader context?
The reality is that early in my career I developed an expertise in this little corner of the investment world. After leaving the University of Chicago I worked for time as a commercial and corporate banker in Chicago. When I launched my career in the investment industry, it was as a specialist in the stocks of publicly traded small banks. I joined The Chicago Corporation (since acquired) in their Bank Equities Sales group. At Chicago Corp, I sat on a trading desk and worked closely with traders who traded bank stocks over-the-counter. I also worked closely with investment bankers and research analysts who specialized in the industry.
So, investing in community banks is somewhat of a legacy business for me. It's in my blood, in a way. Many of my clients are or were bank executives, board members, or simply individuals or families with major holdings in the community banking industry.
What makes community banks attractive, from an investment standpoint?
The banking sector in the United States has been, historically, much more fragmented than the banking sectors of other nations, for example our neighbor Canada to the north. In fact, most major western nations have banking industries that are more concentrated than that of the United States.
The reason for this is that, over many decades, U.S. laws prohibited banks from branching across state lines: thus creating an industry composed of thousands of locally owned and operated banks. These laws were repealed in the early 1990’s, and an era of consolidation began as banks endeavored to grow earnings, and take advantage of economies of scale, by acquiring other banks.
Banking is, by its nature, a slow-growing industry. Therefore, banks seeking growth often look to acquire other banks, subsequently merging systems and technology and reducing costs in the acquired bank. This merger activity is a major theme and a major opportunity for those investing in the community banking industry. It is not the ONLY reason to invest in banks, but it is definitely what provides the ‘sizzle’ and the opportunity to earn attractive returns.
We believe that the ongoing consolidation in the community banking industry in the United States will continue to create investment opportunities. Depending on your situation, we may be able to integrate bank stocks as a part of your portfolio.