Investors Still Leery of Small Banks, Despite Solid Earnings Reports : Finance: BSD Bancorp, among others, has watched helplessly as stock value has fallen amid rising profits.
To borrow from Charles Dickens, these are the best of times and the worst of times for BSD Bancorp, the parent company of Bank of San Diego, Coast Bank and American Valley Bank.
The bank holding company recently reported its third consecutive quarter of record profits; non-performing loans at BSD’s banks are a respectable 1.9% of total loans, and Findley Reports, a Brea-based bank consulting firm, recently described BSD’s banks as “premiere performers.”
But BSD executives and their counterparts at most other local financial institutions have watched helplessly in recent months as their stocks have plummeted in value. Those drops have occurred despite reports of solid quarterly earnings and no real evidence of increased problem loans, according to Irving Katz, director of research for Thomas Green/San Diego Securities.
* BSD Bancorp, which hit a 1990 high of $10 early in the year, closed Monday at $5, up from its yearly low of $4.50.
* First National Corp., which hit a high of $21.50 early in the year, closed Monday at $11.875, near its yearly low of $11.
* SDN Bancorp, which owns San Diego National Bank, matched its yearly low by closing at $7.25 on Monday, below its yearly high of $12.
* Only SD Financial, the parent company of San Diego Trust & Savings, which is San Diego’s largest independent bank, has shown upward movement. The stock is trading at $250, up from $235 on Dec. 31.
Investors are wary of smaller financial institutions because “they have a smaller base to take the risk against,” Katz said. “Look at Rancho Bernardo Savings Bank (which was seized late last month by federal regulators). . . . One bad loan can wipe small institutions out.”
“It doesn’t seem to matter what (bankers) say, nobody believes them,” said Campbell K. Chaney, a San Francisco-based financial industry analyst with Sutro & Co. “What the stock market seems to be saying is that, ok, you have fantastic earnings, but you’re only postponing some big loss until later on.”
During a speech last month at a national bankers convention, U.S. Comptroller of the Currency Robert Clarke said bankers have done “too little and have been too late in acknowledging their losses.” That lapse leaves the industry with an image that is “more tarnished today than it has been in a half a century,” he said.
BSD and other small, local banks face an uphill battle, Katz said.
“There’s no market for small-capitalization stocks in general, not just the banks,” he said. “NASDAQ volumes are at a three-year low, and the Value Line Composite is at a five-year low.”
Smaller-capitalization banks such as Bank of San Diego might still be reporting profits, but investors have been blinded by poor earnings reports turned in recently by the nation’s larger banks, said BSD Bancorp President Vito J. Guarino Jr.
“They compare us to Wells Fargo, which is down 50%, when our earnings are actually up 34%,” Guarino said. “We should be doing better (in the market), we shouldn’t be marked down” because of problems at bigger banks.
BSD’s stock has also been hurt by a three-paragraph story in the Oct. 29 issue of Forbes magazine that described BSD as one of 13 potentially “unlucky” California banks where construction, development and land loans represent 19% or more of total assets. In the article, Gerard Cassidy, a banking analyst for Tucker, Anthony in Portland, Me., suggested that the 13 banks could be swamped by problem loans if California’s economy stalls. Investor reaction to the article was swift and unkind to BSD, where development-related loans accounted for 27% of total assets on June 30.
“We lost 20% of our market capitalization” in the days after the article appeared, Guarino said. “We were pummeled in the marketplace following the article . . . despite just having had three record quarters and an increased dividend.”
Guarino acknowledged that BSD has a relatively heavy dependence on real estate-related loans. But he said that dependence is tempered by the fact that BSD’s banks have “zero exposure” in the state’s overbuilt office-building segment.
BSD instead has stuck to entry-level single-family and multiple-family housing. And it has stuck largely to making loans in San Bernardino and Riverside counties, which are generally thought to be the most recession-resistant counties in Southern California, Guarino said.
“Everyone’s entitled to his own opinion,” he said of the Forbes article.
“But what (the article’s author) did was silly and childish. . . . He doesn’t understand what’s going on around here. . . . California is not New England.”
C. Donald Allen, chairman of Cupertino National Bancorp, a Cupertino-based institution that also was included on the Forbes list, argued that the article was simplistic because it failed to distinguish among banks with different kinds of real estate loans.
“Our real estate loans are all residential,” Allen said. “We’ve got none of the commercial ones that are giving Northeastern banks fits. . . . We have no delinquent real estate, our capital (ratio) is at 9.5% . . . and we’ve never lost a dime.”
Cupertino National, with $120 million in assets, recently began a local advertising campaign that explains “why we’re different” from troubled S&Ls; and the larger banks, Allen said. Next year, it will for the first time use a “dog-and-pony show” that will carry the institution’s message to banking industry analysts.
Guarino acknowledged that BSD has little choice but to continue pressing its case to stock analysts in the East.
“We think we’re being terribly misperceived at this stage of the game,” he said. “People back East are being totally irrational. Their egos are giving them problems. . . . They don’t want you to confuse them with facts.”
