Stock forum

HCBK should be looked at for their quality of management alone.

When it comes to financials, I'm like Jae: they ain't my thing or in my mental wheelhouse, but that being said I have a small position in HCBK because of the prudence their management has shown. They basically do rich people's mortgages and have resisted the insantiy that other banks entered in the past 10 years. Their dividend will probably be cut soon in order to keep the payout ratio at 50%, but they are boring and stable (and beaten down)

I stay away from most financials especially the banks given  the accounting gimmickery they use like goodwill in tangible book value, off balance sheet items with their toxic CDOs and how they account for bad debt reserves to hide their problems. If you are an investor you better know its loan portfolio intimately because you have to remember once a bank has a negative book value it is insolvent. It can't reorganize and declare chapter 11 bankruptcy.

My uncle worked for the RTC in the 90s as the head accounting specialist for the Midwest region and informed me of the tricks they play.

I think a financial model like Visa/ Mastercard or the pawn shop brokers is easier to gauge if you want exposure to financials in a portfolio. Problem is the stocks in those particular areas aren't cheap right now.

This link may provide some assistance: http://www.investorquestionspo…..value.html

Jae Jun said:I'm bad with banks so how would you start checking the quality of loans? Do you have a method of analyzing banks before valuation?

I only look at savings and loans bank. No large banks with complex derivative will be looked at.

In each bank's 10-K and 10-Q, there will be a section for qualify of assets that discloses info about non-performing loans. That is the most important part of all, I believe. In December I called bank of Florida's IR and a kind hearted lady told me that for valuation of banks. She told me to look at two things. First is non-performing loans. Second is capitalization ratio, which is a new regulation imposed by the government. Be aware of any banks that are not well-capitalized. That is also in the statement that you can directly get.

Each bank's net cash is huge, but compared with the size of the loan, often it is like 1:10. So think about it like this: if the bank's loan quality is high, then no worry. We are buying the bank's shares with a deep discount compared with its net cash. Suppose the cash is 1 and loan is 10, then if 10% of the loans are non-performing, after foreclosure, the bank may only be able to sell these forecloused properties at half the principle. Therefore the bank loses 0.5, so now the cash and loan ratio because 0.5:9.5, a huge decrease.

So we can think about the simple S/L bank's financial structure like a margin account that uses 1:10 ratios for example. Net cash per share is one major factor to consider buying, but loan quality is equaly important.

Just my two cents. I think this year there are still lots of S/L banks worth buying, because banks are so notorious for investors during the crisis. Other sectors have mostly recovered and investing opportunities are becoming harder to find.

These banks are much easier to valuate compared with investment banks that involves tons of derivatives. I think the core focus should be the quality of the loan products. Suppose we check their provisions of loan losses, and it seems to be a good quality, then shall we just use DCF to valuate the shares?