Nearly all publicly traded financial services companies have seen their stocks pummeled in the last year, but a case could be made that many community banks are being unfairly punished. Well-run banks with strong capital levels that resisted the temptation to load up on construction loans or brokered deposits have been inappropriately devalued because the market, the media and the general public tend to lump all banks together these days.
So how do you recognize if a bank is undervalued? One characteristic of an undervalued bank is that the bank is still profitable even if it has increased its loan-loss provision in recent quarters. However, loan losses must have remained a small percentage of total loans.