To Our Clients, Colleagues and Friends, 

• A total of $204 billion in commercial mortgage loans come due this year, and the problem is that most bank-originated commercial mortgages are written for 5-7 years.  This means is that most of these loans were made back in the go-go days with much higher valuations, so it’s going to be difficult for these people to refinance or pay off these loans.  Uh oh.

• If you’re buying a bank, what do you do?  Buy something so tiny that it’s unlikely to have problem loans?  Or buy something with enough size to really help you, but risk inheriting some problem loans?  The easy answer is that it’s all in the price and how well reserved the bank is.  These days, no bank has a 100% clean portfolio, but we still it’s worth owning a bank for all that it brings to the table.

• Can a small bank make money?  In general, and this is just a rule of thumb, you need to get to around $65-70 million of assets to break even. It’s a lesser size in low-cost areas, but that’s a pretty good number for California banks.
• Wouldn’t it be nice to have a flat tax?  Here are the countries with the lowest tax rates, all of them flat.               

 A flat tax is just that, with one bracket for everyone.  No deductions.  No tax credits.  No difficult rules.  Just a one-page tax return.

• When you’re a bank (and when the yield curve has a positive slope) shipping your loans slowly can actually increase your earnings.  With the wide spread that depositories have on mortgages, holding on to them till the last possible moment means greater interest income.  Matt Mullet at Golf Savings is a master at this.

· We’ve gotten quite a few people asking us how to calculate how many times you turn your warehouse per month.  It’s simple math.  Just take your total fundings for the month and divide by your total warehouse lines.  If you closed $30 million with $10 million in lines, you turned over your warehouse 3.0 times that month.  Anything better than 2-to-1 is very good.· And from Bay Equity in San Francisco :  “We have a strong ops team as well.  For March the average was 6 days on the line, the longest was a loan that sat on the line for 9 days…” and they funded $104 million with $22 million in lines.”  Wow!  That’s turning their line 4.7 times in one month. We know them well, and they’re not making this up.· Isn’t it amazing how ethnic hatred can cause people to be really stupid? Time Magazine reports that 41% of Israel ’s Arab citizens say the Holocaust never happened.· The new FDIC insurance coverage amount of $250,000 runs through 2013. But what if you go and buy a 5-year CD today that matures, obviously, in 2014?  Is your CD only insured to $100,000 the last year?  Anyone?· How could we forget?  Last Saturday was the 65th anniversary of D-Day, a day which shaped the rest of the century.  The first 20-30 minutes of Saving Private Ryan and The Longest Day are two great movies that show the horror of the events that day and the courage our soldiers displayed.  And D-Day by Stephen Ambrose is a terrific book on all that went into that day, the day that saved democracy.· Remember in the early 90’s when people said that every bank in California had a regulatory order of some sort? A Letter Agreement, a Cease and Desist, or an MOU?  That was probably more an urban myth, but doesn’t it seem like we’re headed in that direction again?· With Summer Camp just around the corner for many kids, does anyone know if they still make lanyard key chains at camp?  Did anyone ever actually use one, or was lanyard making just a way to keep the kids busy for awhile so the counselors could go make out in the woods?· Any Yalies out there?  Yale’s endowment was $23 billion a year or so ago, and it’s now down to $17 billion.  Boola boola. A stock market correction will do that.  Harvard’s suffered even more, with their endowment losing $8 billion in value.· An amazing article in the Washington Post on Saturday. Colombian drug lords have now built a fleet of submarines they use to smuggle cocaine into the U.S.   Twenty two of these subs have been apprehended, but no one knows the size of the fleet.  It is known that they intend to expand the fleet by 70 subs this year.  They’re about 60 feet long, carry 5-10 tons of cocaine, and have very sophisticated anti-detection technology.  Doesn’t this seem like something out of a James Bond movie?· In the 1950’s, half of all corporate Directors were insiders, and today, a bit less than 20% are.  But one recent study showed that appointing more independent directors does not predict better corporate performance.  Put another way, why is Tommy Franks on the Board of Bank of America?  He may have been a great General, but does he really understand derivatives and collateralized mortgage obligations?  We’ve attached again an article we recently wrote on corporate Board behavior. (contact Joe and he will send this)· We saw an Oscar Wilde play Saturday, and it reminded of his great quips.  Our favorite was when he came to visit the U.S. and was asked by the customs officials if he had anything to declare.  His response was “Only my genius.”  He was even funny on his deathbed.  He arose from a coma, looked around the hospital room and declared “Those curtains are hideous.  Either they go or I will.”  And then he died.· Nationally, an average of 17% of the assets of banks is invested in securities.  A well-known metric is the loans-to-deposit ratio, and while many banks run at 80-90%, more conservative banks invest more in securities and less in loans, investing the difference in highly liquid securities.  They’ll most likely underperform in a strong economy (securities yield less than loans) but out-perform in a weak economy (fewer losses on securities than on loans).  Getting the right mix is important… and endlessly interesting.  Joe Garrett and Corky Watts  -   Garrett, Watts & Co.   -   510-469-8633   “Helping mortgage lenders increase revenues, control costs, and better manage risk.”