Thursday, August 09, 2007

A Closer Look at Exchange Bank

I wanted to show you what really caught my eye with Exchange Bank of Santa Rosa. And, I also wanted to practice using Excel. Below is the resulting chart I made:

Note first that some fields are obviously missing because I was unable to ge that data. Also, the Net loan losses for 2Q07 is an annualized number. Delinquent refers to 30+ days late loans, while non-performing is 90+ days late loans plus non accrual. Also note my excellent Excel skills. A few things stand out about these numbers.

One, their overall loan underwriting is superb. As a comparison, a look at Countrywide's servicing portfolio in the 2nd quarter showed 5.02% delinquencies, and 1.74% non-performing, and their portfolio is heavily adjustable. Second, they are also simultaneously very conservatively reserved. Most other banks I have looked up have a ratio of allowance to non-performing of 100 to 150 percent. Exchange Bank hasn't been under 300% for ages. (Countrywide is under 50%)

So despite my belief in a credit bubble, I am willing to invest in this bank because of their allowance cushion and their strict underwriting. This goes along with the other many qualitative aspects: Their number 1 county market share, low cost deposits, and a Return on Assets averaging 1.5% in an industry where 1% is considered good. (Countrywide is at 1.06%, and theyre also origination 460 billion in loans each year on only 14 billion in equity. I didn't intend to pick on Countrywide, but its just too easy. Fairfax does also own CDS's against their debt.) And to top it off, it is at 10x earnings. Now, due to the company's structure it can not get bought out, and there is a chance it might ride the financial momentum downward in price, but it would be an opportunity to add to a longer term holding.

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