Cambrian Capitalist's  Instablog

Let me caveat my comments by saying that I do not know alot about analyzing banks. The accounting and financial presentation of these companies is significantly different than most other industries I have covered. That having been said, I have invested in banks and other financial institutions in the past, so I know enough to be conversant in the financials, or--from a different perspective-- enough to be dangerous.

 

This little bank was lucky enough to find itself in one of the most defensible places during the financial debacle--Texas. They did not get involved in residential lending (i.e. subprime mortgages), and stayed focused on secured commercial lending in a state whose economy has been largely unaffected by the collapsing national economy, due to the energy industry. It's a 'good-ole-boy' bank, as senior management came from EDS and other local successful companies, and they use their local ties and relationships to get business.

 

However, they were not completely immune to the bad economy, as their ROA and ROE have declined notably in the past 12 to 18 months and they have had increases in non-performing loans and net charge-offs. In the quarter just reported, their non-performing loans have continued to creep up (roughly 2% from 1% 18 months ago), and they are under-reserved for these loans. So things have not notably improved, despite a notably improved economy in 3Q. That's probably why the stock sold off after it announced earnings the other day.

 

Plus, the stock is not cheap--it has like a 20x P/E and it trades like 1.5x book value. I think you can find cheaper regional bank stocks with improving fundamentals. If you want to make a bet on a recovering Texas, that is a way to go but I wouldn't expect any meaningful appreciation until early Spring next year.