Beyond Ks and Qs: Finding the hidden value in bank regulatory data

By Anthony Hodson

For good reason, SEC filings are often of primary interest to bank investors.?However, there is a massive amount of bank regulatory disclosure that is often overlooked. Call Report and UBPR data, which is publicly available and free, provides detailed, portfolio-level insights across the entire banking sector (including thousands of private banks); however, it can often be difficult to decipher to compare across time periods and peers. No other segment of the economy can offer investor stakeholders such a window into company level data and competitive intelligence.

Analysts are increasingly using this information to look beyond security analysis toward identifying operational anomalies in bank business models. By augmenting their traditional performance metrics with an understanding of peer outliers, analysts can identify critical issues worthy of further research.

As the tide recedes, some boats fall faster than others.

The value in this type of analysis has been featured in recent news. It’s now common knowledge that Silicon Valley Bank’s balance sheet included a significant amount of Held-To-Maturity investments.?

For the uninitiated – HTM securities are typically not “marked to market” so the volatility of their value is not always accurately represented on a quarterly balance sheet.?Unfortunately for SVB, bond rates have increased significantly and the value of their HTM assets has steadily decreased as a result.?Any sale of these assets for the sake of generating cash (like to satisfy a massive demand from depositors) would simultaneously require the booking of a large loss on the investment.?

In hindsight, most would agree that this is not a sustainable investment model.?But technically there was nothing “wrong” with SVB’s investment positions. For many investors, in the years prior to the bank’s collapse, this was just a wonky accounting treatment that was not inherently “good” or “bad.” But by ignoring any objective judgements and looking purely from a relative perspective (position relative to peers), the chart below suggests that the bank’s approach to HTM was a significant anomaly.

Further, as the next chart indicates, this position wasn’t a recent development. Relative to peers, the bank was consistently in the 95th percentile for the better part of the last decade.?No bank ranked higher.?

Putting aside their reasonable capitalization levels, high yielding loans, strong credit quality, and other similarly “good” performance measures, this type of analysis pulls the thread on a different set of questions – Why does SVB handle their HTM investments so differently from peers? What is the prevailing wisdom that SVB seems to be avoiding? Is this reasonable?

Finding Signal in the Noise

By focusing on the anomalies within the business model, analysts can more rapidly identify the potential underlying risks and opportunities which may not be as apparent solely from SEC filings. With the vast majority of banks being privately held, Ks and Qs simply can’t provide a complete view of the sector for benchmarking and peer analysis purposes.

With the help of third-party data providers, analysts are finding value using alternative regulatory data for anomaly analysis that looks beyond the security level toward a greater insight into bank operation models. Since 2014, Qaravan has offered convenient, modern interfaces to FDIC, Fed, and OCC bank data through our suite of web applications and API interfaces.

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To learn more about Qaravan, visit https://www.otcmarkets.com/market-data/qaravan-bank-data.

For more of our insights on Market Data, visit https://blog.otcmarkets.com/category/market-data/.