Friday, April 10, 2009

Enabling Behavior

Here is a discussion of Enabling Behavior. Now think of this behavior in the context of enabling massive amounts of debt rather than in the context of enabling someone addicted to drugs or alcohol.

Kudos to the Californian for keeping an eye on these financial clowns.

Here is a .pdf of the Federal Reserve Bank enforcement action against SJ Bank.

San Joaquin Bank, lender for many of the Central Valley's vacant strip malls, appears to have caught the attention of regulators. I have been wondering about these guys for quite a while now. Actually I have been wondering for a couple of years, but only started this blog and posted about it in January.

To provide timely information to blog readers here is an interesting chart of SJ Bancorp, courtesy of Yahoo Finance: Please note the chart does not indicate recent action. Shares are trading at $4.20, so we are actually off the bottom of this chart by two bucks.

And now... Courtesy of the Californian:

Federal crackdown causes local bank's stock to fall
CFO says actions are intended to 'maintain already sound ' status
Courtenay Edelhart Thursday, Apr 09 2009 07:26 PM

State and federal regulators cracked down on Bakersfield’s San Joaquin Bank Thursday, demanding tougher oversight, improved risk management and set urgent
deadlines for cleaning up troubled loans.

The new expectations were laid out in a 15-page written agreement released by the Federal Reserve Board of San Francisco that puts teeth behind an oral agreement made in November. Spooked investors dumped San Joaquin stock Thursday while the rest of the banking sector rallied.

San Joaquin’s price fell 36 percent to $4.20 a share in over-the-counter trading. Trading volume surged to 66,410 shares, more than 40 times the average daily amount.
The Fed did not respond to repeated requests for an interview. The board usually does not comment on individual enforcement actions.

San Joaquin officials insist their bank is strong and that such written agreements are not unusual. “It’s not to rectify or improve our financial soundness, but it’s to maintain the already sound status of the bank,” chief financial officer Steve Annis said. “And we agree. In the environment in which we find ourselves, we want to do everything we possibly can to protect our customers and our shareholders.”

The Fed agreement gives San Joaquin two months to implement most reforms. Some changes, though, must happen sooner. The bank has only 10 days either to charge off or collect problem loans that have not previously been classified as troubled, for instance.

The time frame won’t be a problem, chief executive Bart Hill said, because the bank has been addressing the issues raised since late last year. “Because of the way the government works, it’s taken this amount of time for them to make all this
information public,” he said. “But we’ve been talking about all this for months,
and the vast majority of the things they have asked for are either things that have been done for months or are almost completed.”

The bank has a new credit risk manager who just started last week, Hill said. Another person was hired to work in credit administration about six weeks ago, he said. The agreement prohibits San Joaquin from extending or otherwise modifying problem loans and bans the institution from taking on more debt. San Joaquin said it doesn’t generally borrow much anyway.

Nearly $90 million worth of troubled loans were on the bank’s books at the end of last year, with $43 million put into so-called “impaired” status during the fourth quarter alone, according to documents filed by the bank to the Securities and Exchange Commission.

Many borrowers secured loans with property, and that property is worth less since the real estate bubble burst. “We’re working through our loan portfolio,” Hill said. “We’ve already collected $12 million since Dec. 1. We’re making collections every month.” The Fed also asked San Joaquin to “review and revise” its allowance for loan and lease losses, a rainy day fund that can be drawn upon if loans go bad. Bank officials say they put money into the rainy day fund every year and wanted to set aside more during the real estate boom, but accounting rules prevented that. Those practices are “counter-cyclical,” Hill said. Banks ought to be able to set aside more when times are good, but regulations call for just the opposite.

The California Department of Financial Institutions, which is also listed on the enforcement action along with the Fed, said it doesn’t comment on active banks or regulatory orders, but could address general banking questions. “Raising capital helps provide a cushion during the housing market downturn and current economy, so it’s not uncommon for regulators to tell banks to increase their capital levels to help cushion any losses going forward,” department spokeswoman Alana Golden said in an e-mail.

The holding company of the bank, San Joaquin Bancorp, was profitable last year despite a spike in troubled loans during the fourth quarter, an annual report filed with federal regulators showed.