The Garrett, Watts Report (January 21, 2011)

January 22nd, 2011 · No Comments




To Our Clients, Colleagues and Friends,

  • Smart Directors of failing banks should take copies of certain bank documents with them prior to the bank being seized. If they get sued by the FDIC, their attorneys will need them as part of their defense, but now, FDIC General Counsel, Mike Krimminger, says no, you can’t take them:  “These documents are not theirs.  These are bank records that belong to the bank. The director has no personal right to hold the records, period.  Once we take over the bank as receiver, we have complete rights to take the records as receiver.” Gulp.   
    What if the FDIC accuses you of having approved a bad loan or a bad policy 5-6 years ago? How can you remember the details without referring to Board minutes, committee minutes, loan write-ups, or perhaps memos in the file?  The FDIC’s position sounds logical, but overriding that is the American sense of fair play and the right to a fair trial.  Quite frankly, it sounds like we’d have Stalinist show trials unless the FDIC finds some sort of compromise.  (Check this out FDIC vs. Officers and Directors)
  • How are the banks in Iowa and other farm states doing? Maybe this chart answers the question.
    If you believe in diversifying the risk profile in your loan portfolio, maybe the smart move a few years ago would have been to buy participations in farm loans. Most of the banks we’ve seen which bought participations bought them in commercial real estate loans where they already seemed to have a concentration.
  • Congratulations to Comerica Bank for their pending acquisition of Sterling Bank (TX). It would be easy to fault Comerica for not doing more acquisitions, but you have to hand it to them for avoiding bad deals.  They paid a pretty hefty price, but it will establish them as a leading Texas bank.
  • Sterling Savings Bank ($10 billion, WA) wants to buy newly originated 3-4, 5-1 and 7-1 jumbos to $1.5 million. They’re looking in California , Washington , Oregon , Idaho and Montana , and they’re going to hold these in their portfolio.  If interested, contact Mat Mullet ([email protected]) at 425-712-4236.
  • Remember when you were a kid eating breakfast with your parents and your dad would look at the paper and announce with great fanfare that some movie star from the 1940’s had died and you rolled your eyes and thought “Who cares?” Do you find yourself doing this to your own kids now? You can now do to your kids what your dad did to you, as David Nelson of Ozzie and Harriet died last week. The only difference will be their thinking “Like who cares?” instead of simply “Who cares?”   And while we’re on the subject, who was it that started the concept of putting the word “Like” in front of every sentence?

For those of you too young to remember the show, it was one of a number of shows about really happy TV families that were guaranteed to make your family look totally dysfunctional.
Strangely, while your dad went to work everyday, Ozzie, the “perfect” 1950’s dad, was running some financial scam or something, as he never went to work and didn’t seem to even have a job.  Every once in awhile, he’d mention something about going down to “the malt shop,” but for all we know, it may have been a front for a meth lab or something.

  • Fun facts about Wikipedia:  Over 400 million people use it each month, and it has 17 million articles in 270 languages. When the owners of the Encyclopedia Britannica were editing the section on Schumpeter’s theory of the Creative Destruction of Capitalism, maybe they should have read it a bit more carefully.
  • When you look at the list of the community banks with the highest return on average equity (American Banker showed the top 150 last Friday), there were 107 banks with an ROE of 25% or better and 53 banks with a return of 30% or more.  Before getting too excited, remember that a bunch of them are probably S-Corps. which pay no taxes.
  • For all you baseball fans:
  • A-Rod was paid $33 million last year, and he got 522 at bats. This is a meaningless statistic, but it does mean that he was paid $63,000 every time he came to bat.  The late Kirby Puckett said he loved the game so much he’d have played it for free.
  • The attached PDF is a typical lawsuit by the FDIC against bank officers and directors.  If your bank is doing well, don’t bother reading it.  If your bank is doing poorly, as in you’re worried it might fail, you might want to read it, but definitely take 2-3 sleeping pills before going to bed tonight.
  • The Heritage Foundation does an annual Index of Economic Freedom, ranking 179 countries according to ten variables (labor freedom, property rights, rule of law, freedom from corruption etc.). Here are ten countries with the most economic freedom (yellow) and the ten with the least (brown).

1.  Hong Kong  (the best)

170.  Turkmenistan

2.  Singapore

171.  Iran

3.  Australia

172.  Congo

4.  New Zealand

173.  Libya

5.  Switzerland

174.  Burma

6.  Canada

175.  Venezuela

7.  Ireland

176.  Eritrea

8.  Denmark

177.  Cuba 

9.  United States

178.  Zimbabwe

10. Bahrain

179.  North Korea (the worst)

A few others are the United Kingdom (#16), Japan (#20), Germany (#23), Israel (#43), Mexico (#48), South Africa (#74), Pakistan (#123), China (#135), and Russia (#143), with Iraq , Afghanistan and Sudan unranked.  What we find interesting is that economic freedom and political freedom are so closely linked and that free minds and free markets go hand in hand.  Of the ten least economically free, not one is a democracy.

  • There’s been lots of talk about servicing fees being lowered, and here’s our modest proposal.  (1) Let’s start with the premise that all compensation should be based on encouraging people to do what you want them to do. (2) If you believe this, then why pay all servicers the exact same fee? 
    Why not reward superior servicers with a somewhat higher fee?  Why should all GNMA servicers get the exact same 44 bps? This is simplistic, but maybe someone can up with a workable formula.
  • From a friend who manages the loan loss reserve for re-purchases at a major bank,  writing on the Bank of America settlements with the GSEs:  “The media portrayal of this as a “back door bailout” might have some teeth, as a “thank you” from the government for taking on Countrywide in the first place.  The rates of loss for both active demands (the Fannie settlement) and future risk (Freddie) are well below what has otherwise been experienced to date….and knowing the issues with the originator of these loans (Countrywide), it’s fair to expect that the defect rates on these populations are likely higher than the industry.  It does seem to be a sweet deal for B of A, to help them sweep Countrywide legacy risks under the rug.”
  • Here’s some good news:  U.S. exports to China hit a record $9.5 billion last month.  The bad news is that our imports from China rose to $35 billion, giving us a $25.5 billion trade deficit with China that one month.  By the way, about 26% of all our exports to China are soybeans and oil seeds like sunflower and cottonseed.
  • I just spent half an hour looking at the highlights of Walter Payton, Jim Brown, Emmitt Smith, Gale Sayers, O.J. Simpson, Marshall Faulk, and Barry Sanders. All of them were great runners, but I’d have to say that Payton was the best. His moves made it hard to tackle him and his strength made it hard to bring him down.  
    All of them seemed to be good at running at full speed and suddenly slowing down for half a second to throw off a would-be tackler.  The one slight exception was O.J. who seemed to be at full speed the whole time he had the ball. Here’s a link to Payton’s highlights video.
  • Having seen Ricky Henderson play football in high school, I think he could have been another Walter Payton if his mother had let him go to college to play the sport.
  • Here’s the temperature at a few of our past or current clients.  As you can imagine, we love Pacific Rim Bank.  Especially at this time of year.

78   Pacific Rim Bank ( Hawaii )

31   American Bank ( Bethesda , MD )

73   Guild Mortgage   ( San Diego )

30   Stifel Bank ( St. Louis )

72   Pacific Premier Bank ( Orange County )

28   Residential Funding ( Columbus )

50   NexBank  (Dallas)

25   CapWest ( Overland Park , KS )

44   First Security Bank  ( Seattle )

19   Gold Star ( Ann Arbor )

32   Academy Mortgage ( Salt Lake City )

18   Idaho First Bank (McCall)

32   Liberty Bank  (Cleveland)

9   Summit Mortgage ( Minneapolis )

  • Have you noticed that since the beginning of the financial crisis, only two of the twenty biggest banks have maintained their dividends?  Only Northern Trust and M&T Bank have not cut their dividend since 2008.
  • Have you ever noticed how casual lots of people are about buying stocks?  They’ll spend hours online researching what kind of dog food to buy, but they’ll buy a stock because of some article they read or a tip from a friend.  Even if the basic 10-Q is too difficult, you learn a lot about a company by simply reading its annual report.
  • Doesn’t the Robert De Niro character in Taxi Driver remind you a bit of the Tucson psycho who shot Congresswoman Gabrielle Giffords? 
    This photo is from a scene where a politician is giving an outdoor speech and De Niro reaches for his pistol to shoot him.
    Gun control advocates have consistently failed in their efforts, and the Supreme Court has now ruled against most gun control legislation.  How about everyone, including the NRA, changing strategies to controlling who can buy guns, with the aim of keeping them out of the hands of crazies like the guy in Tucson?
  • The Tale of Two Stocks: If you’re not from the Bay Area, you’ve probably never heard of Westamerica Bank (WAC), but their Q4 numbers were pretty amazing:  An efficiency ratio of 44%, ROA of 1.8%, cost of funds of 44 bps, and a net interest margin of 5.37%.  The sort-of bad news is that the stock trades at a whopping 4.0X tangible book.  The stock is actually down 8% in the past year, but so what?  People pay too much attention to stock prices and not enough to the company itself. You own a great bank like Westamerica knowing that someday, somehow you’ll make money on it.
  • Another good one is Pacific Premier Bank (PPBI). It’s tightly managed and it trades slightly below book value. It’s up about 90% the past year, so (a) you might buy it if you’re one of those people( who sees a trend there, or (b) you might avoid it because it’s had such a good run. Neither makes any sense.  You buy this stock, like Westamerica, because it’s very well managed, because they have an excellent risk profile, a superior credit culture, and because management cares about their shareholders.

You’d be crazy to take our advice on stocks, (i.e. do your own research) but we point out these two banks because both have had interesting stock performance of late. One really skyrocketed and the other languished, but both are good investments because of the underlying company.  People need to look at companies more and stock prices less. I’ve owned Westamerica forever, and Pacific Premier for maybe nine months, and I rarely look at their stock prices, maybe once or twice a month.

The internet can be dangerous to your financial health because it allows you to check on stock prices 5-6 times a day. Unless you had a seat on an exchange and were a full-time trader, why would you possibly want to?  Seeing prices constantly fluctuating on your screen might tempt you to do something, and most investors would probably do better if they simply did nothing.
Why don’t some of you start a Rip Van Winkle Bank Fund that would simply buy and hold stocks in good banks like these two, and then do virtually nothing for ten years?  You could go to sleep, wake up in ten years, and you’d probably do much better than all your friends who are constantly buying and selling.
Maybe when we write out wills to leave things to our kids, there should be a clause that says they can’t buy or sell any securities without reading the annual report or the 10-K or 10-Q. They’d hate it, but they’d get the idea.
                                              *  *

Last week and the next has us in Grand Rapids , Houston , Dallas, Orange County , Milwaukee and Richmond, Virginia .  See you in  a week or so.  Stay warm.
Helping lenders increase revenues, control costs, and better manage risk.

Joe Garrett (510-469-8633)   Corky Watts (408-395-5504)   Mike McAuley   (281-250-2536)

Tags: Commentary · Garrett Watts · Mortgage Market

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