There are banks on and off the Doo Doo 32 list that are under-reserving for losses
July 19, 2008 – 10:00 amBeing stingy in your loss provisioning is unethical policy, at least in my opinion, and a generally bad business practice. I believe a few of the Doo Doo 32 banks are guilty of this. The following is an interesting email that I recently received from a BoomBustBlogger:
AS you know, I’m very negative (and short) on California banks and have taken a beating these last 2 days. PACW is my largest short and is up 30% in those 2 days. They released their earnings today and buried deep in their financials I found something very interesting. At the end of last qtr. their allowance for credit losses was $68.8 million with $38 million in non-performing assets. Today their non-performing assets have doubled to $74 million. Their allowance for credit losses went DOWN to $67.4 million. Their allowance for losses now stands at 91% of their non-performing assets. This compares to 181.2% at the end of March and 242% and the end of 2007. Had they provided reserves for just the increase of $36 million in non-performing assets this quarter it would have swung them from a profit of $12.8 million (.47/share) to a loss of $23.2 million (-.82/share). Now I’m no banker, but I do know how to read income statements and balance sheets. How common is it to have allowances reserved for less than your actual non-performing assets? This to me smells like a complete blowup coming down the road. I don’t think that California real estate is going to heal itself in the next six months. Somebody enlighten me about where I am wrong. Their non-performing assets in commercial real estate, construction, and land were up 300% since Mar.31.
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