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Posts from the ‘Rurban Financial Corp (RBNF)’ Category

Summing up Earnings: Impac Mortgage, Rurban Financial, PremierWest Bancorp

In the next few posts I will summarize my thoughts on the quarterly earnings reports released so far for the companies I own.   In this post I am going to look at Impac Mortgage, Rurban Financial, and PremierWest Bancorp.  I will follow that up shortly with another post that looks at Radian Group, PVF Capital and Community Bankers Trust.

Impac Mortgage

In my post last week on Impac Mortgage, I noted the following concern:

In my opinion, the biggest short term risk is that the third quarter GAAP number disappoints. This could easily happen as a result of further charges to the repurchase reserve or mark to market changes to the trusts that overwhelm the profitability of the operating business. Given the run-up in the stock, a low GAAP number could cause some of the short term holders that haven’t looked closely at the businesses to run for the exits.

As it turned out my fear of a poor GAAP number was realized, but the strength of the underlying mortgage origination business was impossible to ignore, and the stock shot up higher anyways.

I was pleasantly surprised with the results.  The mortgage origination segment outperformed even my most optimistic expectations.  Lending volumes increased 33% quarter over quarter.  Earnings from the segment increased an astonishing 100% quarter over quarter.  Further, the company said on the conference call that October volumes were $290 million, which, if extrapolated for the entire quarter, would be another 22% quarter over quarter rise in the fourth quarter from the $709 million originated in Q3. Read more

Falling NIMs, Rising Mortgage Banking and two new bank stocks: Monarch Financial and PVF Capital Corp

One consequence of the quantitative easing campaign that was initiated by the Federal Reserve is that is caused a rise in mortgage backed securities, and a corresponding drop in interest rates for those securities.  To illustrate, below is the 30 year Fannie Mae.

This drop in rates is bad for holders of MBS debt who depend on the yield that it returns.  As a consequence many mREITs have been under pressure.

To varying degrees banks are in same boat.  You saw this with the release of results on Friday from JP Morgan and Wells Fargo.  The subject was discussed here in the Financial Times.

But I think you have to be careful before painting all banks with a broad brush.  The extent of the damage depends on the percentage of assets that each bank has in securities in general and in mortgage backed securities in particular.  This can vary quite a bit, especially among the smaller community banks.

I have looked at each of the banks I own.  Most are not overly exposed to mortgage backed securities or to securities in general.  The table below shows the total investment security exposure vs. loan exposure for each bank, and then breaks down the investment securities by type. Read more

Three Community Banks worth keeping an eye on: Part I

For those of you new to this blog, I have been investing in community banks since early 2011.  I described my foray into the sector in this post,  almost a year ago today.  To reiterate:

I got introduced to the idea of buying regional banks stocks about 6 months ago.  Two separate catalysts piqued my interest in the idea:

  1. Last summer I read the David Einhorn book, “You Can Fool Some of the People All of the Time”.  In that book, which is about a fraudulent business development company called Allied Capital, Einhorn spends a chapter outlining his investment philosophies.  One of the ideas he puts forth is investing in mutual holding companies.   Seth Klaman has been another proponent of investing in MHC’s.
  2. Tim Melvin’s trade of the decade.  Melvin, a fairly well known value investor, believes that the small regional bank stocks have been beaten up well beyond what is justified and that their recovery represents the trade of the decade.

I’ve had some good luck investing in community banks over the last year.   Some have turned out extremely well (Rurban Financial (RBNF) and Community Bankers Trust (BTC) have been more than doubles).  Others have been less prolific (Oneida Financial (ONFC),  Home Federal Bancorp of Louisiana (HFBL), Shore Bancshares (SHBI), Atlantic Coast Financial (ACFC)) but generally I have gotten out of with either a small loss or a small gain.  One of my biggest mistakes has been a lack of patience; indeed if I had held onto Oneida and Home Federal, I would have seen 20% gains from my purchases last year.

Community banks are simple businesses.  It makes them easy to compare and evaluate, and relatively straightforward to project into the future.  A community bank income statement generally looks like this:

Banks earn interest on the loans they make and the securities they buy.  The extent to which the interest earned exceeds the interest paid on funding (for community banks the vast majority of funding is deposits) is the banks margin, called the net interest margin.  With only a few other wrinkles, such as revenues received from originating and servicing mortgages, or in some cases from running insurance or investment wings, the degree to which the net interest margin exceeds the expenses associated with running a bank (called non-interest expense) is the profit of the bank.

How I’ve made money on the banks

There are plenty of solid banking franchises  trading at reasonably cheap prices.  You can probably make 10-15% per year by buying well run banks with low levels of nonperforming assets and reasonable return on assets and equity, and socking them away.

This was how I started with my own banking investments.  The first three banks I bought were Oritani Financial Corp (ORIT) Oneida Financial (ONFC), Home Federal Bancorp of Louisiana (HFBL).  Each is a solid franchise, each has a low level of loan losses, and each trades at or near tangible book value with decent returns on assets and equity.  I’m sure each will continue to go higher over the long run.

But I am always in the pursuit of the best returns and those are usually found a little further up the risk ladder.   One of the basic premises of my investing strategy is that while the price of risk is ultimately assigned by the market, the perceived quantity of risk involved varies, and can be reduced by research, critical thinking and sweat.

Going further up the risk ladder meant looking at banks that most investors would shun.  I studied the banks that had been hit the hardest by the financial crisis.  While a bank with non-performing loans above 3% is generally considered of questionable quality, I started looking at banks with 8-10% non-performing assets.  While banks with return on assets of 1% and return on equity of 10% might be thought to be worth considering, I looked at banks with negative returns, shrinking assets and dwindling equity.

This tact has proven to be fruitful.  Three stocks that I have bought have resulted in above average returns.  Two of them, Rurban Financial (RBNF) and Community Bankers Trust (BTC) have been in the neighborhood of a double so far.  The third, Bank of Commerce Holdings (BOCH) returned a quick 30% before I took the position off, though I am looking at adding it back at the right level.

My one regret has been not to have taken more positions in banks.  To give a couple of examples of banks I looked at but just couldn’t get comfortable with, First Financial Northwest (FFNW) has doubled from $4 to $8 in the last year and a half, while Heartland Financial (HTLF) has nearly doubled since last fall.

But even with some of the moves we’ve seen I think there is still more to come.  As the economy recovers banks should see improvements to their loan book and strengthening margins on the securities they buy.  And I continue to believe that the banks most likely to outperform will be those that were hit hard during the recession but that managed to survive.

3 Banks I’m Looking at

I have my eye on a number of banks that meet these criteria.   There are 3 in particular that I have been looking at this weekend.  While I am not quite ready to pull the trigger on any of the three, I am getting close, and I think the ultimate upside once they work through their books of problem loans is a multiple of the current share price.  I am going to look at each one individually in the upcoming 3 posts.

  1. Shore Bancshares (SHBI)
  2. Premierwest Bancorp (PRWT)
  3. United Community Bancorp (UCBI)

Next up will be a post on Shore Bancshares shortly.

Regional bank earnings round-up

Over the course of last week four of the five regional banks in my portfolio reported first quarter earnings.  Since that time I have been busy reviewing those earnings and drawing conclusions on whether the stocks should remain owned, or be punted out for other opportunities.  Below I will go through my analysis and thoughts on each of these banks.

Rurban Financial (Ticker: RBNF)

Rurban Financial reported earnings last Tuesday.  Rurban does not have a particularly troubling loan book, and while they do have some non-banking related problems (such a legacy data processing business that does not appear to be doing very well) they are mostly set to generate strong earnings going forward.  So when I look at Rurban’s results, I focus on what they were able to earn.

Earnings per share came in at 20 cents.  Because Rurban has a  large mortgage servicing portfolio they are subject to big swings in earnings due to the GAAP valuation adjustments that they have to take on their portfolio of mortgage servicing rights.  While these adjustments are GAAP requirements, they tell us nothing about the business and tend to obscure the true earnings of the business.  Thus, I like to look at a “core” earnings number that eliminates the valuation adjustments as well as any other one time charges and the loan loss provisions.  Core earnings came in at 19 cents.  Core earnings for the past 5 quarters are shown below:

I’m not too worried about the decline in earnings quarter over quarter because a lot of it is seasonal.  Rurban sold a lot less mortgages in Q1 2012 than it did in Q4 2011 and that is just the seasonal nature of that business.  For some reason a lot of markets in the US experience high mortgage demand in Q4, and low demand in Q1.  In most Canadian markets it is the opposite of that, with Q4 being the slowest of the four quarters.

Another contributor to lower earnings was reduced revenues from the RDSI data processing subsidiary.  RDSI provides data processing services for banks across the Midwest. RDSI lost $1.4M in 2011 and doesn’t appear to be doing any better in 2012.  Its a strange situation because the big cause of the loss in Q1 were writedowns related to Rurban’s own bank deciding not to use RDSI for their banking related data processing needs.  Clearly they are cutting ties (winding down?) and maybe that will be for the best in the long run.  Below are revenues from RDSI less intercompany over the last 5 quarters.  Its become small enough that going forward it should cease to be the drag on earnings that it has been.  And that’s a good thing.

Mortgage revenue at Rurban continued to be strong; Rurban generated $1.2M in origination volumes in Q1 versus $420K in the same quarter last year.   As I already mentioned originations are always down in Q1 versus Q4, so that number was a decline from $1.5M in the previous quarter.   The year over year growth in origination led to further growth in their servicing business, which was up by another $20MM in terms of unpaid balance sequentially.  Nonaccrual assets continue to fall, down to $6.5M from $8M in the fourth quarter of last year.  And the company continues to rein in cost, witness by another drop in non-interest expense.   Negatives for the quarter were pretty much the same as those I saw elsewhere in the banking sector.  They are getting squeezed on interest margins (down from 4.07% to 3.64%), and loan growth was pretty flat quarter on quarter.

Overall Rurban announced pretty solid results and they are continuing to move towards their potential $1 per share of earnings.  There is still work to be been, ROA remained poor at 0.60%, but that is why the stock trades at only 2/3 of book value, and why the opportunity for further price appreciation remains.  I have been very happy to see the shares move up as they have over the last week.

Shore Bancshares (Ticker: SHBI)

Shore had a tough quarter.  While I had been hoping  that the company’s loan book was on the mend, the first quarter results showed that there is still some work to be done.

The loan book deteriorated over the quarter.  The company had to put aside provisions for credit losses of $8.4M, which was way up from $4M in Q4 and $6.4M in Q1 2011. Nonperforming assets rose to 8.1%.  I had been hoping that nonperforming assets had peaked in Q3 and would continue to roll over in Q1.  Unfortunately not.

The company said that the rise in nonperforming loans resulted mainly from one relationship. 50% of the $9.1M in charge-offs were related to a single large real estate borrower.

If you can get past the loan book (and I wish they could get past their loan book), there were some positives for the quarter.  While deposits increased 4.2% on a year-over-year basis and, notably, core noninterest-bearing deposits were up 17.4% year-over-year, so the company’s borrowing base continues to move towards lower cost loans.

If you look at Shore’s eventual earnings poential, if they could stop taking massive writedowns every quarter, it remains strong.  Earnings ignoring the provisions were $0.39 per share.  Over the previous twleve months Shore has put together earnings of $1.50 per share if you ex out the loan losses.  So the potential is certainly there.  Unfortunately loan book stabilization appears to be a bit further off then I had anticipated.

I’m not sure what to do with Shore.  I am tempted to cut it and run.  I originally got the idea from Tim Melvin of Real Money.   He described the investment as a 5 year hold and a 3 to 5 bagger.  Given that the bank trades at about 1/2 of tangible book value and that it used to be a $25 stock before the collapse of 2008, and you can see where he is coming from.  However I am not quite as patient as Mr Melvin.  I like stories that are in the process of turning it around, not just with the potential to turn things around at some point.  I haven’t sold out of the stock yet, but I have an itchy trigger finger.

Community Bankers Trust (Ticker: BTC)

BTC’s earnings are always obscured by the effect of the indemnification asset that the company carries as a result of an agreement to take over a failing bank, SFSB, back in 2009.  The indemnification asset is an accounting tool that accounts for the FDIC guarantee that BTC received when they took over the SFSB loan portfolio.  Unfortunately, the accounting of the asset it such that when there is better than expected performance in the SFSB portfolio, the company has to amortize the indemnification asset on their income statement.  The size of these amortizations is extremely large relative to earnings.  In Q1 the amortization was $1.9M versus net income of $0.9M.

I always ex-out the effect of the indemnification asset when I look at BTC’s earnings.  The asset says nothing about their cash generation and earnings ability.  In fact it actually works in reverse to that underlying ability.

Ignoring the indemnification asset and a few other small one time gains and losses, BTC earned 13 cents in the quarter.  On this core earnings metric BTC has earned 52 cents over the prior twleve month, which means it remains an incredibly cheap stock trading at a little over 4x earnings.  Looking at the same sort of “core” earnings number that I did for Rurban, you can see that the bank is consistently been pulling in 10-15 cents of earnings a quarter for the last 4 quarters.

BTC has done an excellent job of pulling itself back from the brink of bad loan losses, and this continued in Q1.  Nonperforming loans on its non-covered portfolio (non-covered refers to loans not covered by the FDIC loss sharing agreement) decreased 13% or $4M quarter over quarter.  Nonperforming assets have fallen from a high of 9.7% of total assets in the second quarter of last year to 6.9% of assets in the most recent quarter.

Meanwhile the company grew its loan book marginally in Q1, which is traditionally a slow time of the year for loan growth for the company and a quarter where their loan book shrank last year.   It is also interesting to note that unlike most of their competitors, BTC managed to maintain a flat net interest margin in the quarter, at 4%.

I really like the turnaround that is taking place at BTC.  Having bought the stock at a little over a $1, I am sitting on a double already.  Yet I have no plans to sell.  BTC was a $3.50 stock as recently as the beginning of 2010 and was a $7 stock before the financial crisis hit in 2008.  I don’t see any reason why they can’t return to a level somewhere between those two numbers.

Bank of Commerce Holdings (Ticker: BOCH)

I learned about Bank of Commerce Holdings from a BNN Market Call with Benj Gallander, the Contrarian Investor guy.  He had BOCH as a top pick and I was looking for regional banks at the time so I took a look at the stock and bought some at $3.25.  Watching Market Call is a hit and miss time investment, you can sit there and watch episode after episode and get nothing out of it, but every once in a while there will be a gem.  BOCH was one of those gems.

Bank of Commerce Holdings is steady as she goes.  I’m not quite sure how they have done it, but BOCH has managed to keep nonperforming assets at reasonable levels (2.45% in Q1 which was down from 2.68% in Q4 2011) while operating in one of the hardest hit real estate markets (Sacramento).  To be fair they also operate in a second market, Redding California, which didn’t have quite as bad of a housing decline.

The company has been consistently reporting return on assets (ROA) of 1% and return on equity (ROE) of 8-9% for the last 3 quarters.

Much like Rurban, the first quarter seasonally has lower mortgage banking revenues than does the fourth quarter so I am not concerned about the decline in ROE and ROA sequentially.  Mortgage banking is a big part of Bank of Commerce Holdings banking business so they are subject to these seasonal effects.  What is more relevant is the trend in mortgage banking revenues.  They have climbed substantially from $2.5M in Q1 2011 to $5M in Q1 2012.

Bank of Commerce Holdings earned 35 cents per share in 2011 and 31 cents per share in 2010.  I would expect them to earn over 40 cents per share in 2012.  BOCH is not going to be a shooting star type of a performer.  Its not going to double in a year.  But the company is consistently profitable and consistently adding to shareholder value.  There is also the chance for them to raise ROE above 10% and ROA above 1% by increasing their operational efficiencies.  I hope to see this occur over the next year as the economy improves and opportunities present themselves.   I think it is reasonable to expect the stock to trade to the $5.50 range by the end of 2012.  That is good enough for me.

A look at the Rurban Financial Annual Report

Rurban Financial is quickly becoming my favorite regional banking investment.

Under the retail name of State Bank and Trust Company, Rurban operates 20 branches in Northwest Ohio, servicing the mostly rural communities of Allen, Defiance, Fulton, Lucas, Paulding, Wood and Williams.

I’ve already discussed Rurban in a small amount of detail here.

The company is generating an improving return on equity, improving earnings, and has a reasonably low amount of non-performing assets.

I just finished reading through the Rurban Financial Annual Report that arrived in my mail box a few days ago.  There were a few highlights that I thought were worth noting.

The Ohio Economy

In the CEO Letter to Shareholders, Mark Klein pointed to improvement in the Northwest Ohio economy.  He noted that the downturn in the Midwest economy occured later than in other parts of the country and so the recovery has been likewise delayed, but that signs of recovery are appearing.

Klein also pointed out that Ohio has risen to number one in job creation in the Midwest, and is up to ninth nationwide from 48th a year ago.

As part of a section of the Annual Report titled “Commitments to our Communities” Rurban profiled two farm lending relationships that they have cultivated, as well a tractor parts dealer.  Rurban’s primary clientele is rural Ohio residents and business.  I feel quite confident that grain prices will remain at profitable levels and that opportunities to service these folks will only continue to grow.

The loan book

In 2011 loans outstanding grew by a small amount, from $428M to $443M.  Unfortunately agricultural loans decreased from $40.8M to $38.4M but I would expectt this to pick up in the next year as another year of strong grain prices is under the belts of farmers.

I was pleased to see that the company has no land loans and no contruction loans.

Non-performing assets make up a fairly small 1.77% of total assets.  This is down from 2.87% at the end of 2010.

Increasing exposure to mortgage banking and mortgage servicing

Mortgage banking activity is seen as “exceptionally strong”. One of the attributes of Rurban that I like is that they hold onto the servicing rights of the mortgages they originate.  While these mortgage servicing rights (MSR’s) are not being valued very highly by the market, I expect that to change.

I was surprised to learn that Rurban will not revalue the MSR’s upward if (when) rates begin to rise or defaults begin to fall and, as a result, the valuation model used to put a value to the MSR begins to show increasing value.  As part of Note 1 to the financial statements the company wrote that “the valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment… Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.”

Rurban took a beat down because of the valuation adjustment that they had to make to the MSRs that they hold.  The valuation adjustment for the full year 2011 was $1,119,000.  That works out to 0.22 per share of before tax earnings.  Rurban reports the MSR adjumstent within its “core earnings” calculation, so it does not get ignored as is the case for some of the other mortgage servicers like PHH.  I’m not sure why they don’t “ex” it out of core earnings.  Its a somewhat bogus accounting requirement in my opinion.  If an asset can be adjusted up or down 25% in a single year is than you have to question the valuation period.

There has certainly been a move by the company to increase its MSR portfolio.  Below is a graph of the unpaid balance held by Rurban over the past 5 quarters.

Core earnings are increasing and not reflected in the stock price

If you ignore the effect of the valuation adjustment that Rurban has had to take on its MSR portfolio, and you look strictly at the company’s recurring core earnings, you quickly realize that the company’s stock price is not pricing in the full extent of its earnings generation or its earnings growth.

To come up with core earnings I have taken GAAP earnings and made the following adjustments:

  • OREO impairments
  • Goodwill impairments
  • Provisions for loan losses
  • Gains on securities
  • MSR valuation adjustments

Earnings have been improving both because of loan and mortgage business growth as well as because of prudent management of costs.  Looking at the income statement I was struck by the degree of cost cutting that the company has done in the past 3 years.  Looking at salaries and employee benefits, they were reduced from $21M in 2009 to $18M in 2010 and to $14M in 2011.   Similarly, professional fees fell from almost $3M to less than $2M.  Even postage and delivery expenses fell, from $2.1M to $1.1M.

Going forward in 2012, Rurban is going to focus on growth in revenues.  I expect loan totals to increase along with originations.  I expect further increases to mortgage banking activity.  Both of these should drive further improvements in earnings.

Improving return on equity

In the chart below I am looking at core earnings return on equity, which ignores one time charges and MSR valuation adjustments.

Why doesn’t the market care?

It seems kind of crazy to me that a bank with a solid loan book, decent growth and with earnings that look set to top $1/share in 2012 can be trading at less than $4.  But I guess that is why the regional banking sector remains the trade of the decade.

Listening to the financial news for the last couple of weeks, I am starting to hear some positive comments made about the large money centre banks.  I think this is the first step in the healing process of investor sentiment towards the banking industry.  It may take some time yet, but at some point solid regional and community banks like Rurban are going to benefit from that change in sentiment.

Rurban trades at 4x core earnings and at about 60% of a tangible book value that is valuing their MSR portfolio at an extremely low level.  That just doesn’t seem sustainable to me.  As the cycle turns I would expect to see the company trade at a premium to book value and at a double digit earnings multiple. Both would suggest a share price over $10 per share.

 

 

Letter 31: Bank earnings and more bank earnings, lightening up on gold stocks (again) and a soon to come Canaco Magambazi resource

Portfolio Performance:

Portfolio Composition:

Waiting on Magambazi…

I have been working most of the week on an evaluation of Canaco’s Magambazi deposit in Tanzania. I was hoping to be finished the work by today but its carrying on and I don’t have a lot of time to finish it today (what with the superbowl and all) so this will be a rather short update, but with a longer, hopefully rigorous analysis of the Magambazi deposit will follow shortly tomorrow or the next day.

Outperformance of the US

Now that is something that I haven’t said in a few years.

While it was another good week for the S&P and a decent week for my portfolio it was not a great week for the TSX.  Again.  This is becoming a pattern.  Its striking how badly the TSX is underperforming so far this year.  The S&P is up almost 6%, the TSX is up hardly at all.

I have tried to increase my positions in the US-sensitive stocks I own to take advantage of this American out-performance with a particular emphasis on leverage to the mortgage industry.  Most recently, in the last week I added to my positions in Community Bankers Trust, PHH Corporation and I introduced a new position in Rurban Financial Corp.

Rurban Financial Corp

Rurban was  recommended in a comment (by Robert) to my post last week.  I did a quick look at the company, which released 4th quarter earnings on Monday, and they do indeed look cheap.  And while I haven’t had a chance to take a close look at their prospects, I’d liked what I saw on the surface, so I bought a small starter position.

The company produced earnings ex a one time merger charge and ex OREO losses of 23 cents per share in the 4th quarter.

Now I admit I have not dug into Rurban to the point that I need to (this Canaco resource estimate has been all consuming of my spare time).  I plan to do that in the next week.  I’d like to put together a comparison of Rurban and Community Bankers Trust and perhaps Bank of Commerce Holdings (both of which I will touch on below) side by side to better evaluate Robert’s legitimate skepticism in BTC.

Community Bankers Trust 4th Quarter Earnings

And speak of the devil, they released 4th quarter earnings on Tuesday.  I thought the numbers looked pretty good. The quarter was summed up by the following statement from CEO Rex L. Smith III:

“Our goals for 2011 were to make major improvements in our problem assets and to rebuild the fundamentals of the core bank, and I am pleased to report that we accomplished our goals. Both nonaccrual loans and net charge-offs saw continual and substantial declines throughout the year. At year-end our ratio of nonperforming assets to loans and other real estate was at its lowest level since the first quarter of 2010. Additionally, the fourth quarter showed a strong increase in new loan production in our targeted growth areas. All of this occurred while we lowered noninterest expense for the year by 21%.

Let’s step through some of the key metrics and update the graphs I showed last week with the 4th quarter numbers.

Pro-forma earnings (that is earnings before the FDIC amortization and before any one time hits to investments and real estate owned) were strong in the fourth quarter, coming in at 14 cents per share.  Again I think the bank has a lot of earnings power going forward once (if) it is able to bury its past misdeeds.

Equally important, nonperforming loans were down again in Q4.

The only negative I saw for the quarter was something I have seen a lot of with the banks reporting fourth quarter results thus far.  Net interest margin is on its way down.

Banks are struggling with the headwind of low interest rates.  Basically,  purchasing non-risky securities (ie. Treasuries and government backed MBS) means accepting extremely low returns.  As older securities mature and roll off the books they are being replaced by low yielding new securities.  Of course this is exactly what Bernanke is looking for to try to get the banks lending again.  That seems to be working in the case of BTC, as loans originated was up in Q4.

Bank of Commerce Holdings 4th Quarter Earnings

I wrote a short piece ofter my purchase of Bank of Commerce Holdings about two months ago.  Since that time the stock has risen about 15%, so its been an okay purchase but nothing exceptional.

I have yet to really evaluate the stock in the kind of depth I need to.  I hope to get to that in the next week.  In the mean time I have been compiling the basic statistics to do that evaluation.  The company came out with another data point on Tuesday when they released their 4th quarter earnings.  I would call it a mixed bag.  On the bright side the company showed another strong earnings per share number when you ex-out the one time hits, and ROE and ROA also showed strength on a proforma basis.

Note that my estimates of ROE and ROA exclude provisions from loan losses, losses on real estate owned and one time investment gains so they are somewhat higher than the posted numbers in the news release.

On the negative side the company struggled in much the same way as Community Bankers, posting a lower Net Interest Margin quarter over quarter.

Perhaps more worrying is that nonperforming loans are rising.

I’m not sure about Bank of Commerce Holdings.  I don’t have a large position in the stock.  I don’t love where the bank is based (around Sacramento California) and I don’t like how non-performing loans are rising at all. As CalculatedRisk pointed out recently, there aren’t any signs of things improving in Sacramento yet.

The percent of distressed sales in Sacramento was unchanged in November compared to October. In November 2011, 64.1% of all resales (single family homes and condos) were distressed sales. This was down slightly from 66.1% in November 2010.

I’m going to evaluate it closely and turf it if I don’t see a strong story being written that will lead the company back to the $6+ level.

I need to understand gold better

Early in the week the gold stocks and the bullion looked to be breaking out together and there was a hope (at least in my mind) that it was for real.  Then the Friday employment number came out and presumably frightened everyone about the prospects of inflation and the gold price dropped 1.8%.  Some of the gold stocks got hit much harder.  I’m not willing to find out if this is a blip or another true correction; I reduced my trading positions in Aurizon, Canaco, and OceanaGold (though as you will note at the end of the post with respect to my weekly practice account trades, I mistakenly bought rather than sold OGC.  This is something I will have to rectify on Monday).

What I need to do to gain some lasting confidence in my gold stock position is gain a better understanding of the supply/demand dynamic right now.  I’m flailing a bit here and I’m fully aware of it.  But there are a number of headwinds happening here that I don’t want to ignore:

  1. The lack of Indian demand brought on by the strong rupee
  2. An improving US economy will mean higher interest rates eventually
  3. The ETF has become such a big part of demand and I wonder how much of those holders are “weak hands”

The problem is that while I believe in gold in the long term, I also know that a lot can happen in the interim.  Rick Rule was pointing out a few months ago how in the 70’s and early 80’s, when gold rallied from $35 to over $800, it also had a number of corrections, including one of over 50%.

My lack of clarity in understanding just what is driving gold at the moment (and whether in the short term, particularly given that the seasonality effect is about to turn against the metal, it remains sustainable or not) is leading me to these short term in’s and out’s with OceanaGold and to a lessor extent Aurizon.  Gaining back some clarity, and with it hopefully some more certainty in my decisions, is another endeavour I hope to accomplish in the next week.

Speaking more company specifically, Atna remains the strangest bird of the bunch in the gold stock sphere.  It consistently outperforms (even goes up) on days when other gold stocks are going down and then does nothing (or goes down) when all the other gold stocks are up.  I don’t understand the stock for a second, though I am happy that the trend in the stock is, to borrow the phrase from Dennis Gartman, from the lower left to the upper right.

My soon to be complete Canaco Magambazi Estimate

In a next day or so I will be posting my interpretation of the resource estimate at Mogambazi.  I basically have went through the deposit, cross-section by cross-section, and evaluated the resource using a rough block model.  I thought it would be a fun project, and it has been, but its also been a lot of work.  My tools consistent of Visio, Excel and the screen capture tool snip-it, and my main resource to educate myself has been google, so its been a bit of a process.  Still, I’ve learned a lot and have become developed a better understanding of what Magambazi is (both the good and the bad) which I think will allow me to act prudently on it in the future.

So stay tuned for that.

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