Two Closures and a Shotgun Marriage

Last Friday the closures of Temecula Valley Bank and Vineyard National Bank were announced. These two Southern California, specifically the Inland Empire, area banks had long been on the radar screen of the regulators. Also over the weekend a “merger” of 1st Pacific Bank of San Diego and 1st Business Bank, also in the San Diego area, was announced. 1st Pacific had been run into the ground by loan losses, was pressed for capital and was out of options. The redundancy of closures and mergers of necessity in the banking sector has become an unwelcome mantra.
As investors we can observe that the common thread manifest in the problem banks was that they lent out money to entities and individuals who couldn’t pay it back— Simple as that— In all this turmoil there are still community banks that have no loan losses or non-performing loans like American Business Bank in Los Angeles. The difference between closures and success is MANAGEMENT. Good management is consistent in its philosophy and practice and produces good results through thick and thin. As investors we need to look for that consistency in the numbers.

More on Earnings Season

B of A, Citi Group and GE all reported earnings. In each case the numbers appeared good on the surface. However, the loan portfolios of all three showed signs of deterioration.
I think this will also be the modal postings for Community Banks. Earnings will be O. K. but upon inspection the loan portfolio may well be getting a little rough around the edges. For investors I think that it is not a major concern as further loan problems surfacing are to be expected in a recession. Each institution must be judged on its own particulars for conclusions to be reached. I think the major take away on this trend is that in no circumstances should we as investors chase a stock. We must stick to our Value orientation and make buys on our pricing terms. As a matter of fact it seems likely that the overall stock markets are due for a pullback from current levels.

Look Carefully

Today it was leaked/revealed that B of A is operating under a memorandum of Understanding with the regulators. The teeth in the MOU is the reality that the regulators are in charge! Who knows what other less than visible “arrangements” manifest in the financial sector. J. P. Morgan announced earnings that well exceeded Wall Street expectations. HOWEVER, in the copy of the report it is learned that credits in the loan portfolio deteriorated. One may conclude from these two samplings that the economy and the financial sector in particular have a long way to go before all can breath more easily.

Economic Note

It is apparent that investors are best served to adopt an expectation for a long term run in the current recessionary environment. An article in the WSJ today points out that 7.2 million jobs have been lost since the start of the recession. This loss is equal to the total job gains accomplished over the last nine years. This statistic is pointed out not to put fear and despair into the hearts of bank investors— but rather to emphasize the point that patience is not only a virtue but a requirement. We are value investors and must have a Long Term time horizon. Remember history shows that the share price markets will improve long before it is evident in the economic statistics.

Goldman Earnings Jump

Trading profits accounted for 73% of Goldman Sachs’ latest quarterly earnings report. That is up significantly from the 50% to 60% range that has been the mode. Bottom line –analysts wonder if we haven’t seen the best of this years results. Bank investors are not well served if they infer sector strength from this report.

Analyst changes tune

This morning a WSJ article states that a Wall Street bank analyst has offered an opinion that B of A is a value. The basis for the recommendation is that BAC is a Value based on its price to book ratio.
Here is a flash—- Community Banks are on the average selling well below stated tangible book values. There are values in the group. One interpretation of the change of stance of the analyst is that the perceived value of the Assets of BAC is more stable. Many Community Banks shares that are now trading at a discount to Book Value are there because the investing public has not trusted the stated values. Perhaps that attitude is changing in the market place and pricing dynamics may be improving. Now is the time to carefully search for values and if found buy for a long term hold.

Stimulus Plan and Financials

With only 5% 0f the funds applied the stimulus plan funds are being allocated to pot hole repair in Iowa and boat house upgrades in Hawaii. Let’s hope some of the money will actually find its way to where it is needed in the financial sector including Community Banks.

Bank Closures

Today it was announced that a small bank in Wyoming was closed by the regulators—- the first one there since 1991. Stay tuned more to come throughout the country. Here’s the simple logic as to why: The recession is continuing and is proving to be more sustained than many economists expected. The longer it persists the more businesses and individuals will financially fail.
But it is now all gloom and doom as there are many success stories some of which will be featured here in future postings.