By James R. Miller

Recent stock market activity, current industry trends, and ongoing professional experiences are the catalysts for this piece. The following discussion outlines some of the attitudes and practices I have observed in successful small bank investors and the potential opportunities that may now be evolving.

Before getting into the main thrust of this discussion let's first define the key elements involved. A community bank is an institution serving a defined geographic and demographic locale, and maintains assets totaling less than $5 billion. An investor is a person who looks at long-term goals, usually with a minimum 3-year time horizon. Studies vary, but 10% is often cited as a reasonable expectation for long-term equity investors. A successful community bank investor may be defined as one who seeks to accrue a rate of return between 10% and 15% annually. This equates with the fundamental return on equity produced by a successfully managed community bank. However, it must be noted that as an investor in a community bank one is holding stock in a small to micro cap company. As such the potential for periodic extreme price volatility exists. This is part of the risk a community bank investor assumes. The market volatility does not necessarily equate to the fluctuations in the basic business of the bank. The stock market is the market. It most certainly fluctuates. A successful investor must be able to endure these potential price swings both up and down.

As stated, recent market volatility has motivated the production of this piece. I recall, during the Dot.com/internet market peak, feeling like I was driving a Plymouth in the slow lane as everyone else in the world was whizzing by me in Ferraris. However, the market does have a way of "regressing to the mean;" i.e. normalization of rates of return does occur through market activity. Simply stated, the tortoise wins the race. Successful community bank investors have reasonable expectations. The good news in the current market environment is that the investment is in a bank. In roaring market times, the bad news is the investment is in a bank. The savvy investor invests in the business of the bank, not the stock. This means that the patient investor puts his money on people. He looks to the management of the bank to make the business a success, rather than focusing on stock and dollar amounts. That takes a reasonable amount of time. Short-term market fluctuations in the share price do not affect the basic business of the bank. The investment has been made with expectations in line with what a bank can reasonably produce. The risk assumed is the shared business risk involved in the operations of a bank (loan quality, general business cycle status, interest rate fluctuations etc.)

Knowledge is king. Successful bank investors typically have a firm grasp of the fundamentals of the company. They acquire this information themselves, or more typically, with the aid of a professional; a broker or analyst who can give them insight into interpretation of the financial data. (i.e. ebankstocks.com). Additionally, the ability to size up management with good old horse sense is common to achieving investment goals. After all, it's the people who make the numbers.

The successful investor is well ensconced in his "comfort zone," meaning the portion of his portfolio devoted to investing in community banks fits well within the overall investment plan. The investments do not distort the overall risk/reward process of the total portfolio. It has been my observation that the successful bank investor is, in the majority of cases, of significant net worth. They carry with them the principles of fundamental value when investing in the community bank sector. Those principles are, in most cases, manifested in the basic risk/reward formula: Does the potential reward warrant a commitment assuming the perceived risk? Here again the assistance of a qualified professional may prove helpful. Not only for assistance in analyzing numbers, but for industry savvy to detect those situations where a bank may be a likely candidate as a takeover target by a larger institution. The possibility of a takeover/merger should never be the reason for investing in a bank, but in the context of analysis it could, at some point, provide a boost to investment returns.

My most salient observation of successful investments is of one common element: PATIENCE. Patience to stick to an investment plan where fundamental progress is permitted to manifest. Patience to see through market gyrations and cycles of extreme. Patience to succeed.

While all investment involves risk with absolutely no guarantees, I believe the current market cycle presents opportunities for community bank investors. There appear to be potential situations where the application of strong professional due diligence and sound investor principles could produce profitable results. I invite inquires from interested parties to ebankstocks.com for further discussions.

For more information, contact James R. Miller at jmiller@ebankstocks.com or 760.918.9740.