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Don’t Buy A Small Bank Stock Until You Do This

By Motley Fool Staff – Mar 21, 2016 at 8:24AM

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You think you want to invest in a community bank stock. Don’t do it without checking out this factor first.

Small bank stocks are in many ways not all that different from the larger banks you hear about on the news or in the financial media. They all report their financials publicly through the SEC, FDIC, or both. They all make loans and accept deposits. They all try to keep costs low, find smart ways to grow, and provide a decent return to shareholders.

But, as the Motley Fool's Gaby Lapera and Tim Hanson explain in the video below, there is one major difference between large and small banks, and understanding it can dramatically improve your odds of investing success. Yes, the financial check boxes matter. Yes, a bank's geography, loan portfolio, and niche matter. But nothing matters more than this one thing. To find out what it is, click play below. 

A transcript follows the video.

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This podcast was recorded on March 14, 2016. 

Gaby Lapera: What is the single most important consideration for you when you are investing in a small bank? If you had to choose one, which is hard.

Tim Hanson: Picking one, ultimately if you check the box and all the sort of financial criteria and all the geographic criteria ... This is true probably for banks and other companies. You want to get a sense of management and make sure that they're honest people who consider all stakeholders when making strategic decisions. Whether it's a small bank or a tech company or what have you. If you fundamentally have ignorant or dishonest management, the wheels are going to come off at some point. In the world of small community banking, where loyalty and honesty are still important factors, the quality of the management team is pretty critical. They've got to keep an eye on their deposit base; they've got to make sure their underwriting standards remain high, they've got to keep costs down; and they've got to maintain a strong presence in their community.

Like I said earlier, if you're interested, probably start with your local bank. Look around and say, "Hey, who's my community bank?" They're probably public, and if they're not public, you can even access their filings via the FDIC. Take a look, study them, give management a call, see if they'll talk to you. I think that's a great way to get started.

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