VALUE: After Hours (S07 E42): The Only Numbers That Matter in Banking: Capital, NPAs & Book Value

During their recent episode, Taylor, Carlisle, and Tim Melvin discussed The Only Numbers That Matter in Banking: Capital, NPAs & Book Value. Here’s an excerpt from the episode:

Tim: Hit us with the numbers. Real easy. Capital levels, okay? We want to look at equity to assets, we want to look at CET risk-based capital. The higher that number is, the better. I’m addicted to converted thrifts. So, over 15 and 20, I will just own that stock and not part company with it, because there’s– At that point, there’s the cockroaches, Keith Richards, and that bank left after the apocalypse.

[laughter]

Tim: So, you want to have that buffer against anything that can go wrong, because something’s going to go wrong. Then the other is non-performing assets. What you’re looking for here is you’re just looking for bad loans, foreclosures that they can’t get rid of. You want that number to be as low as possible.

I use a cutoff of 2%, which in today’s environment might sound a little high, because we’ve gotten spoiled, because they’ve been so low. But I choose a hard percent cutoff. God could be running the bank. If He’s got an over 2% NPA, I’m out. I told that to John Allison one time, who does think he’s got of the banking industry. I said, “John, if you ever go 2%, I have to sell you stock.” Johnny’s a good old Arkansas boy. He says, “Well, Tim, I don’t expect we’ll ever get there.” I said, “Okay, well good, then I’ll just–” [Jake laughs]

Those are the two key fundamental numbers that we’re always going to take a peek at the amount of uninsured deposits. Just paying attention to that number kept you out of Silicon Valley Bank, okay? So, we’re going to take a peek at that particular number. But then, the only other number that we’re really caring about– If we’ve got a great loan portfolio and we’ve got lots of capital, most of this stuff in between doesn’t matter that much. It matters if you’re a professor or you want to pontificate.

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VALUE: After Hours (S07 E42): The Only Numbers That Matter in Banking: Capital, NPAs & Book Value

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