Banking On It

It's been a while since I reported on the status of Sterling bank, one of our two local banks.  For the past few months, it really looked as if it were about to join the company of the 110 or so banks that have failed in 2010, its deposits to be taken over by some other bank or made good by the FDIC.  Although there was some rescue work reported, that effort seemed to have come a cropper.  Sterling's stock price continued to fall, its volume sales were erratic, the private equity firm that was apparently going to provide some of the capital it needed seemed to be joined by no one else able to make a sufficient increase in the bank's capital.

And then this week, a turnaround.  Of course, the turnaround in Sterling Financial's fortunes came at the expense of someone: in this case, its current share holders and then also the rest of us taxpayers.  Two private equity firms plus a few dozen smaller investors came up with over 700 million dollars and the bank returned to them about four billion shares of stock.  Which means that the current stock holders proportionate share of the company's value/earning was significantly lowered. 


And also, the U.S. Treasury Department had a little of the action.  Back in the grim Fall/Winter of 2008, Sterling got a bundle of money ($300 million plus) from the government which was converted to preferred shares.  This week, the agreement with the feds was to convert those preferred shares into common stock, now worth much less.  The Treasury, i.e. to say the taxpayers, took a $227 million dollar loss in this agreement. Of course, it would have been a bigger loss if the bank had failed and the FDIC had had to take on the costs of converting the bank PLUS the Treasury to lose all its investment in Sterling from the TARP program.  Sterling may well be rescued now, although it remains a penny stock, its current price around sixty cents per share.

I guess I can safely renew my check supply, though.

Strange Days in Banking

Banner Bank is our second bank in Point Roberts.  I follow it the same way that I follow Sterling Savings Bank as its fortunes ebb and flow (currently more ebbing than flowing), but Banner has been rather more stable.  Banner Bank took the same big initial hit last fall and winter, but then has just been moving along in a relatively steady path.  It's a smaller bank than Sterling; it’s still paying a dividend on its common stock, even though it’s only 1 cent per share in each of the last couple of quarters.  I’ve seen no mention of it in relation to TARP funds.  All of which makes it seem like it's doing okay in this very difficult environment.

Clearly, Banner wasn’t on an upswing.  This past week, it announced $8+ million in losses, but they weren’t as large as expected--analysts had expected losses of twice that much.  And then, yesterday morning,  Banner's stock took off during the first part of the trading day, gaining almost 75 cents--which, if you are selling at less than $3.00 per share, is a very big increase.  And then, during the rest of the day, it lost all that gain and closed back at about $3.00.  

Banner normally has sales volume of about 220,000 shares per day; yesterday, the sales volume was up in the millions.  A big day for somebody, but not as a result of anything specific to Banner in the financial news that I could find.  Well, other than Obama’s interest in saving community banks that, it turns out, may be too small to fail.  Today, Banner lost another $.19, but with only regular volume.  Maybe just some strange clutch of events that have not yet been reported in the business news?  Maybe a misalignment of the stars?

Sterling’s troubles continue.  Yesterday, it announced enormous 3rd quarter losses, almost a $1/2 billion.  And today, on very high volume, it lost another 25% of its stock price, closing at 86 cents.  Even a quixotic purchase on my part seems dubious right now.

NOTE:  These banking issues reflect problems for the stock/shareholders, not for those who simply have accounts or loans at these banks.

Timing the Market

Much talk in the news about glimmers of improvement and the green shoots to be seen here and there. My plan for starting my future investment career was to buy 1,000 shares of our local Sterling Bank if it ever got to a dollar or below/share. And, although it did get very close to that--$1.03, I think, was the bottom so far—it did not meet my timing requirement and so I did not invest in bank shares. Alas, had I done so in early March when it got down very near a dollar, I would now have quadrupled my investment. Of course, because I was going to buy only 1,000 shares, I would have profited only $3,000. I think getting rich probably requires something more than penny stocks, $1,000, and a quixotic timing strategy. By contrast, many have recently found that losing a lot of money doesn’t require much of anything at all by way of strategy.

Sterling (and, to a lesser extent, Banner bank) continue to interest me, though. Sterling was around $9 in January, and now it is $4.33. About a month ago, it surged ahead of Citibank, and has managed to stay ahead, and everybody says that Citibank is insolvent. So the market seems to know that Sterling is better off than Citibank/Citigroup, but then that’s not saying much.

In any case, it may still be too early to give up my dreams of penny stocks. According to the academic economics blog ‘Calculated Risk’ (May 19) ‘Commercial real-estate loans’ (which are the real problem for small banks) “could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy's woes deepen, according to an analysis by The Wall Street Journal. . . ..Total losses at those banks could surpass $200 billion over that period “

And today, according to the same source, “the FDIC released the Q1 Quarterly Banking Profile today. The FDIC listed 305 banks with $220.0 billion in assets as “problem” banks in Q1, up from 252 and $159.4 billion in assets in Q4.” That’s 305 banks out of the ‘900 small and midsize U.S. banks.’ And to add to Sterling Financial’s woes: the Fitch Rating Service downgraded the corporation ten days ago: Outlook, Negative.

Those green shoots now…where were they spotted?

Banks, Again

Following the plight of community banks, the Seattle Times reports that “Washington Banks Are Under Stress.” (Blogpost hyperlinks still not working:  http://seattletimes.nwsource.com/html/businesstechnology/2008941813_banks29.html)  This is not because they are deeply involved in home mortgages but because they are deeply involved in real estate development loans.  In the recent stock market rally (of sorts), Banner and Sterling have both been rising in share price.  This morning, Banner is up to $3.02 and Sterling up to $2.02. (Banner still outpacing Citigroup!)  Neither of our local banks is mentioned in the newspaper account, but what is true of other local Washington banks is doubtless true of them as well.  All deposits FDIC insured, of course.

Looking for Bright Spots

One thing that writing the blog has made me do is focus on the stock prices of banks; not only the local ones but the big ones. And what I can’t for the life of me figure out is why there is all this concern about the shareholders being wiped out. At the current prices for all the banks, the shareholders have been almost entirely wiped out already and, presumably, they will not be much more disadvantaged by the next 5% loss. Well, I guess the thing is that they won’t be around to participate in the amazing rise in bank prices that we will be expecting once we’ve actually gone through all this. Whenever that time might come. Doesn’t look like it will be any time soon.

Anyway, by now, for those of you who are interested in following this with me, Sterling Bank is down to $1.43 (from a one-year high of $16.63, and today’s Sterling sales volume is almost 2 million shares, way above their average volume of sales, but below yesterday’s peak volume of 6 million); Banner Bank to $3.02 (from a one-year peak of $24.50, and a current volume of about twice its average); Citigroup to $2.88 (from a one-year high of $26.81, and with about half its average sales volume today; and Bank of America to $4.58 (from a one-year high of 42.45, and with only a slightly above-average sales volume today).

What that suggests is that the lack of confidence in the banks continues to deepen. However, Banner Bank gained a few cents today, rather than losing value. By contrast, both Citigroup and Bank of America were taking price percentage losses larger than Sterling’s. All three, however, were losing much more percentage-wise than the Dow or the S&P 500.

And outdoors, here on the beautiful Sunshine Coast of B.C., it is a very sunny day, but there are still, still, still considerable areas of snow leftover from the December snowstorm. But there are also, in our yard, little patches of crocuses smiling up, opening their little petals to the sun. Unlike the banks, these are bright spots in our lives. (The crocuses are a very small variety, barely 3 inches from ground to the tip of the bud.)

Odds and Ends

1. Today is Candlemas Day (40 days after Christmas), but it’s a day more celebrated in books than in life, I suspect. It’s also Groundhog Day, and my understanding is that the groundhog in Pennsylvania did indeed see his shadow this morning, prognosticating another six weeks of winter. Originally, in Germany, it was a badger who made this prediction, but when German settlers came to the coal mines of Pennsylvania, they found no badgers, so they had to rely on groundhogs for information. And now, we have the Internet! Up here in Point Roberts, we have neither badgers nor groundhogs as far as I know, but we have lots and lots of voles, and voles were not seeing their shadows this morning, so maybe Pennsylvania gets six weeks of winter and Point Roberts gets spring right away. I’m okay with that; and last Saturday made spring seem like a reasonable prospect.

2. For the past six months, reading the events of the world, I have pondered from time to time whether Point Roberts is a good place to sit out the arriving/already here bad times. I can’t say that I’ve progressed too far in my thoughts. It doesn’t seem like Cormac McCarthy’s The Road is going to be much of a guide to action, but Point Roberts does seem like as good a place as any if you don’t have a lot of debt and do have a little ground in which to grow vegetables. However, last week’s New Yorker (January 26, 2009) has a fascinating article on ‘The Dystopians,’ describing the 'forward thinking' (as the financial types speak of predictions) of various non-religious types’ apocalyptic visions. Unfortunately, the full text isn’t available on the Net, but there is a summary of the article here. These are all people who are getting licenses for pistols, I note, are living on boats, or cataloguing their gold acquisitions. All pretty interesting if you’re not someone who is too susceptible of imagination. In any case, it made me think Point Roberts might be a good place with respect to lack of weapons: a nice gated community and with the gate operated by Homeland Security. Oh, we could end up being grateful to the border agents just as we could end up being grateful to the bulk mailers. We’re not done with irony yet, I guess.

3. With respect to on-going bad times, I find myself checking the status of Sterling and Banner Banks each day as demonstrated by their stock prices. Both have continued to plunge, and at $1.53 (Sterling), plunging much more could be very painful. Banner dropped too, but not quite as hard; now at $2.99. I have no idea what happens when a stock has no value at all.

Banner Obscure

Banner Bank (said to be the oldest savings and loan in Washington state) has its Point Roberts branch office in an office inside our grocery store, the International Market. And Banner Bank also has a little TARP money, but they are less forthcoming than Sterling was about what they’re doing with it and indeed what and how they’re doing more generally. I was surprised at how accessible the Sterling press release was, and then surprised again at how difficult it was to understand the Banner Bank press release; as if they'd discovered a new way to talk. For example, what is a 'loan loss provision’? Is that a loss on a non-performing loan? Or is Banner providing something? Sterling, by contrast, says, ‘here’s what we lost on our non-performing assets.’

Not only obscure, but also unavailable. This morning, the Banner executives had a telephone conference with investors and the public, just as Sterling had the day previously. Sterling posted a transcript of that conference call that anyone could read on their website; Banner wouldn’t let you listen to their teleconference unless you registered (and registering required you to have a business, a title, and various other bona fides). And the replay is available to registrees only briefly; and there is no transcript. [UPDATE: the transcript is available here, thanks to Seeking Alpha.]

In any case, here’s Banner’s story in the TARP adventure. They got $124 million from the U.S. Treasury. In exchange, they issued 124 million shares of Banner preferred stock to the Treasury. This preferred stock will pay 5% for 5 years and, if Banner hasn’t paid the treasury back for these shares within 5 years, the interest rate will rise to 9%. Also, there’s a warrant for the Treasury to purchase 1.7 million shares of Banner common stock at $10.89/share any time in the next ten years. Of course, if Banner goes bust, that warrant won’t be of much use. Indeed, if Banner's stock doesn't rise by about 300%, it won't be of much use.

And what has Banner done with their $124 million? Don’t you worry your little head about that. They’ll be using it to ‘enhance [their] capacity…to support communities…and…expanded lending activities.’ (Probably no redecorating at the International Market.) They’ll also be paying a dividend on common stock shares of 5 cents per share. The issue of executive bonuses was not mentioned. Maybe in the phone conference I couldn’t get to.

Overall, they’re announcing a net loss of $128.5 million for 2008, including $62.4 million in loan losses. Their share price has gone from $27.19 to $4.84 over the past year. Yesterday’s market close, just before Banner issued their 2008 earnings report, was $5.69. Today, the stock lost another third of its value closing at $3.78, so one has to conclude that investors were not heartened by yesterday’s report. The trade volume today was almost a million shares, whereas the average daily volume is 170,000 shares. But then, there were buyers as well as sellers, so somebody still thinks it’s a good deal.

[Note: in the course of gathering us this information, I had occasion to read many pages of the actual legislation that authorizes the TARP program . As a former English teacher, I feel obliged to point out that the word ‘includable’ is used many times and is consistently misspelled in the bill. The U.S. Congress, it appears, prefers to think of things being ‘includible.' Does their computer not have a spelling program?]

We Buy Banks!

Well, our Sterling Savings Bank’s parent company, Sterling Financial Corporation, did indeed issue its 4th quarter report as it said it would, and indeed, it is losing a lot of money as it said it was, and it has a lot of ‘non-performing loans,’ as we suspected it would. Which explains the fact that all U.S. citizens are now the proud and joint owners via the Treasury Department of 303,000 shares of Preferred Stock (and warrants to buy 6.5 million shares of common stock) of the Sterling Bank Corp at the price of only $303 million. Although Sterling Bank is no longer paying dividends on its common shares of stock, it will be paying 5% interest on preferred shares, so the U.S. Treasury will be getting a little check now and then for our investment.

The report had some other news. The Board has decided to eschew bonuses this year for its executive team. I think the financial companies would all be better advised to phrase that news a little differently. Something like “Of course there will be no bonuses paid to bank executives this year because we wouldn’t even think of paying bonuses to people who are presiding over a company whose stock has gone from $19.72 to $2.44 in the space of a year. We at Bank of Whatever believe that bonuses go to executives who perform, not to executives who pass the time in their offices and do not perform.” But instead, they keep saying they’ve decided not to pay their executives any bonuses, as if a lot of midnight oil had been burned over that difficult decision. The non-peforming assets (ie, loans in trouble) are almost all (79%) construction loans (as opposed to loans to individuals for housing), and mostly residential construction although commercial construction loans are also increasingly going non-performing.

It is pretty strange to have the TARP money so close to home. I tend to imagine all those TARP dollars sheltering and insulating, so to speak, buildings in the big cities, the big financial centers. But here is little Sterling, with its headquarters in Spokane, getting a piece of the action. We can go down to the branch office and see if there’s any redecorating going on as an indication of what they’re doing with our $303 million. They say that they’ve put it in municipal bonds and government guaranteed loans “initially,” but they don’t say where it is right this minute. My guess is municipal bonds and government guaranteed loans which are paying them slightly over 5% in order to repay that preferred stock 5% dividend. But redecoration has proved to be an alternative explanation other places. Not going to new loans, in any case. Well, when Congressman Grayson is next carrying on about where the Treasury is sending all that money, I can give him a call to tell him where at least $303 million of it is.

On Tuesday, Sterling Bank’s stock closed at $2.44 on a volume of 1.5 million shares, and that was before it released its 4th quarter report. On Wednesday, it closed at $2.29, on a volume of 2.6 million shares. The ‘tangible book value,’ the company says, is $11.41. Sounds like a bargain, but then what doesn’t, these days?

Tomorrow, we look at Banner Bank, Point Roberts’ other bank.