Thursday, April 17, 2008

All Central Valley financial institutions feeling real estate impact, except one?

Numerous Central Valley financial institutions are hurting. However, there is one that appears to be bucking the trend. Are they really bucking the trend or is something else going on?

Here is a sampling of some recent financial results from Central Valley financial institutions.

Kern Schools FCU (Bakersfield):

Based on the 2007 annual report, which I received today, they are showing a decline in net income (from 2006 to 2007) of 71%. According to their report "This drop was caused by loan losses in 2007 totaling $13.055 million, compared to none in 2006".

That is a serious adjustment in loan losses and loan loss provision. However, I would expect loan losses to continue to go up as we find more homedebtors underwater. Look for 2008 losses to be much higher due to declining real estate values, an increase in unemployment and more foreclosures.

American River Bank (Sacramento):

American River Bankshares (NASDAQ: AMRB) of Sacramento, parent company of American River Bank, says its net income in the first quarter dropped 12.1 percent from year-ago levels to $1,833,000 from $2,086,000 during the first quarter of 2007.

“Clearly, first quarter earnings were negatively impacted by the $4 million increase from year end in our non-performing loans to nearly $12 million,” says David Taber, president and CEO. “We have a seasoned credit administration team in place that is managing our non-performing loans by establishing appropriate reserves and being proactive towards resolution of these credits."

Pacific State Bank (Stockton):

A squeeze on its interest margins helped lower profits at Pacific State Bancorp (NASDAQ: PSBC) of Stockton in the first quarter, according to Steven Rosso, president and C.E.O.

An increase of $45,000 ($210,000 total addition) or 27.3 percent in the provision for loan losses in the first quarter of 2008 over 2007 levels reflects the weakening economic environment within the bank's service areas, which management is actively monitoring and which may indicate the need to record additional provision in the future, it says.

Capital Corp of the West (Merced):

Capital Corp of the West (NASDAQ: CCOW) of Merced, parent company of County Bank, one of the Central Valley’s largest community banks, says it expects to report a net loss for 2007 of about $4 million, once everything is added up.

The bank says it’s “primarily as a result of the rapid decline in real estate values in California's Central Valley in the fourth quarter of 2007.”

It’s telling the Securities and Exchange Commission that it still cannot file the financials for last year because of the number of its loans it has to review “and the inability to obtain timely appraisals and other supporting market information.”

The company says certain of loans require an adverse classification and a substantially greater provision for possible loan losses.

“The company has also concluded that it had material weaknesses in its credit/lending and accounting functions,” it says. “The material weaknesses relate to the proper credit risk classification of loans, establishing the level of its allowance for loan losses, accounting for housing tax partnerships and certain other matters.”

San Joaquin Bank

First let me say I have no stock position in this bank. Also, this is not investment advice, I just find it interesting that one bank can report record profits in this declining market while every other bank is getting hammered with losses related to the housing and credit crises. How did they do it? Great risk management or was it an unjustified adjustment in their loan loss provision?

San Joaquin Bank (Bakersfield):

San Joaquin Bancorp (OTCBB: SJQU) of Bakersfield says its net income after tax was $9.4 million last year, an increase of 11 percent compared to $8.5 million in net income reported for 2006.

Dilute earnings per share in 2007 were $2.54, compared to $2.29 per diluted share reported for 2006, also an increase of 11 percent.

"We are pleased with the company’s performance in 2007 which represents our 24th consecutive year of record profits,” says Bart Hill, company president

From their 10k filing (

We reported record annual net income of $9,418,000 for the year ended December 31, 2007. The majority of the increase in 2007 came from increased net interest income and a reduction in the provision for loan losses.

How can a financial institution justify reducing their loan loss provision in an environment like this? All of the Central Valley institutions listed above are doing the opposite. If you look at the reports from the major financial institutions on Wall Street, they are dramatically increasing their loan loss provisions to the tune of hundreds of billions of dollars.

The Bakersfield Californian did a recent story on the CEO where they asked some tough questions of him.

Q. What is your favorite thing about doing business in Bakersfield and Kern County?

A. The people in Kern County are family oriented, friendly and hard working. That’s a winning combination for business.

Q. What’s a fun fact about you?

A. It’s sort of odd I’m a sailor in Bakersfield. I grew up sailing in the San Francisco Bay. I sail regularly on the coast. When the America’s Cup is on, I’m probably the only one in town watching it.

Based on that interview I guess we will never find out why they lowered their loan loss provision in what has been called the most difficult time for financial institutions since the Great Depression.


OtherSideofBellCurve said...

We do our business banking with San Joaquin Bank, and there is a very simple explanation as to why they have not been effected. The explanation, they don't do home loans and never have.

Bakersfield Bubble said...

They do homes loans with local builders, mainly custom home builders.

otherside- I am not saying their profit is not legit. I am just surprised that every other bank in the valley (I could have posted 10 more bank earnings numbers) took bit hits and they didnt.

Lone Ranger said...

I bank at SJB, and work for them as a vendor.

SJB is a small business bank, and doesn't tend to offer accounts to Joe consumer.

They cater to a diverse range of small businesses.

I can also call the bank president and talk to him personally at any time. How many of the other banks have that kind of service?

Perhaps it's the old fashioned management style that allows old fashioned stability.

OtherSideofBellCurve said...

BB, they do construction loans, which are turned over to another bank once the construction is done. I don't think they financed any tracts or developments, just one house customs. That would limit their exposure considerably.

Also, like another poster has said, they are really a community bank. It would be surprising to see them in cahoots with some of the low life builders we saw spring up.

Idaho_Spud said...

SJV bank appears to be quite heavy into commercial real estate lending, based on the SJV bank sign I frequently see outside of new strip malls in town. Commercial real estate will be the next shoe to drop as the recession hits home.

I very much expect commercial retail space to be highly vacant, as consumer spending dries up. We have enough poodle groomers, tanning salons, juice bars and sandwich shops in strip malls already.

Personally I am stunned that SJV bank is reducing loan loss reserves at the onset of a major housing-related consumer spending slowdown.

But that's the cautious financial streak in me, and as we have learned, banks don't have much of that lately, do they? :)

Idaho_Spud said...

Here's an excellent post with more insight about how SJB might be in trouble:

Bakersfield Bubble said...

Thanks Idaho - I think Mish, as usual, is right on the money. SJB is deep into commercial RE. How many more strip malls do we need? The commerical bust is right on schedule.

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