Tuesday, March 25, 2008

Weak Local Banks Retreating

Earlier HingeFire articles outlined the financial pressures facing weaker local banks as commercial real estate loans have soured. By no means is the crisis over, in fact the action over the past month is simply the start of the slide.

Building on a earlier article (see Local Banks: Time to Short) which outlined the threats facing these local institutions; the “Just how bad is the situation with local banks?” article presented a list of potential candidates to short. The difficulty in trading many of these stocks is that most are thinly traded and listed on the OTC.

Now that a month has passed, it is time to quickly re-visit these selections and evaluate their performance over the past four weeks.

Bank and one month performance (%)
------------------------------------------------------------
Friendly Hills Bank (FHLB.OB) -3.4%
Fresno First Bank (FSNF.OB) 0%
Folsom Lake Bank (FOLB.OB) 0%
Fremont General Corporation (FMT) -77%
Focus Business Bank (FCSB.OB) -14.3%
Discovery Bancorp (DVBC.OB) -23.3%
Desert Commercial Bank (DCBC.OB) -13.0%
Coronado First Bank (CDFB.OB) -0.5%
Cornerstone Commercial Bank (CRSB.OB) -2.7%
Commerce Bank Folsom (CBFM.OB) -10.0%
Bank of Santa Clarita (BSCA.OB) -2.7%
Charter Oak Bank (CHOB.OB) -10.5%
Bank of Napa (BNNP.OB) 14.3%
Atlantic Pacific Bank (APFB.OB) -13.5%
Americas United Bank (AUNB.OB) 4.3%
Marco Community Bank (MCBN.OB) -1.1%
Old Harbor Bank (OHBK.OB) -6.1%
Gold Canyon Bank (GCYO.OB) -0.8%

As a group these local banks have dropped an average of 8.9% in price over the past month; a time period in which the S&P500 has dropped 1.7% and the KBW Bank Index has declined 2.8%. This is a signficant under-performance for a set of stocks that are not normally volatile and is an example of generating excess alpha from proper stock selection on the short side of the market.

Some of the local banks suffered significant drops; long-suffering Fremont is down over 77% and Discovery Bancorp stock lost nearly a quarter of its value. Only two of the eighteen stocks rose in value.

In the opinion of most local banking analysts the pressure from faltering commercial real estate loans is only going to increase. The drop over the last month is probably just the starting point for the stock price demise for many financially weak banks.

2 comments:

Anonymous said...

Interesting picks for shorts. I doubt you could have shorted any of these, no volume, no borrow, wide bid ask spread...

GregB said...

The lack of liquidity is one of the difficult points in shorting these stocks. The short size would have the be small, and you are likely to be treated poorly with the bid/ask slippage. A good number of people shorted FMT however, which is more actively traded than the other banks.

As a next step it may be better to look at regional banks with safety ratings below B which have large commercial real estate exposure as possible short candidates. An investor would want bank stocks that trade with higher volume, and have not already experienced declines greatly in excess of the banking index over the past few months.