Savings & Loan Primer?

Financials are the one industry I do not have a lot of experience with. Despite that, I am supposed to meet with a S&L bank on Wednesday to interview / learn about their company and what that may imply for the stock. Pretty clueless here. Any recommended primers or sources I can use to move up the curve quickly? Clearly there are some sources on Google but I was wondering if anyone could recommend somethign concise and accessible. Thanks!

This question was asked and I suggested the KBW Bank and Insurance primer. The one I have is called “It’s all about risk and reward” from May 2010. I think they do one every year. It will not make you an expert by any means, but it’s a very, very good high-level overview of the business and terminology. If you’ve got a contact there, hit them up for a recent edition. It’s about 100 pages with lots of examples, charts, etc - you could read the whole thing in an hour or so.

I asked about insurance before, guilty. I don’t get KBW unfortunately (and forgot that your suggestion was both bank and insurance). I will hit Google later today to dig something up. Thanks for response supersad.

Are you in NYC? If so, hit me up at supersadface {at} gmail dot com. I can loan you mine.

SF, might be a trek. I can always call some sell side dude and have him explain it to me, they love that LOL!

came across this one, might be helpful.

www.worldbank.org/nbfi

Super sad face, will you e-mail me said article. Sounds like an interesting read for a very nerdy individual (read: me). Thanks!

Thanks guys. I pulled some stuff off google and found that I knew most of it already, but it was good to review and remind myself that I still don’t really know what’s on the balance sheet or whether I should trust the company’s financial reporting. How do people get comfortable making investments in banks?

I work in the banking sector in the United States. I see you are based in Afghanistan – so I assume you are aware how banking generally is very different country from country (unless its a huge international bank). For example, I’m under the impression banks in Muslim countries don’t charge interest, but rather lend less money than they are set to recieve at the end. Spanish banks work as sort of non-profits which are buit to reinvest the earnings in the community. Banks in the United States are very regional, depending where they are located. Are these American banks you are looking at? And what asset size?

If it is in the US, thrifts now have to report Call Reports. So I’d look up their UBPR on the FFIEC website.

obviously he is not from/in afghanistan…

Not an article I can e-mail, unfortunately. It is a physical book, printed and bound. If you’ve got a relationship with KBW, mention it to them and they can probably get you a copy.

LOL best reply ever. Thanks for rec on call reports. As Frank noted, I am not, in fact, in Afghanistan. Right now I’m actually somewhere in Ohio.

I wrote a reply on what financial metrics on the UBPR/Call Report are generally indicative of Asset Quality, Earnings, Management, Capital, Liquidity, and Interest Rate Risk. But my browser refreshed and I lost it – I’ll try to reply later when I have time.

If you look up the Call Report Instructions and read the glossary (Starts with A-1 at the back), that explains everything you need to know about the accounting of banking. If you look up the UBPR User definitions, it will explain the ratios and how they are calculated.

What are you looking to learn about S&L’s specfically? I spent about 2 years regulating those institutions when I was with the OTS. Generally speaking, these places are heavily focused on mortages and lending to the local community. Some smaller shops started getting into some dicey business lines (e.g, focusing more originating and selling auto loans to i-banks for securitzation) but we usually kept a close eye on capital levels and controls. But overall, the earnings stream for an S&L is fairly consistent compared to a commercial bank or one of those supermarket type commercial/investment banks. A lot of these institutions are small and privately owned, but there are quite a few that have issued stock and could be a possible small/microcap opportunity. As a personal rule, I stay out of banks altogether when I invest.

Thanks, I think I got what I needed. I wanted to understand the accounting and generally how a bank works beyond the most basics (they shuffle money around and extract the largest spread / fee-structure possible, the same as the rest of finance). I found some decent primers online that covered it and then just spent some time noodling the accounting. I couldn’t fully wrap my head around the balance sheet but I guess that is standard with banks, “Well, they SAY it is okay, so I’m going to take the plunge (or not).” I think I will stick to operating companies that have at least mostly transparent accounting. Personally, I love industrials and service companies for longs and healthcare and cheese-tech for shorts.

Best quote during the meeting (with the CFO of this bank): “Yes, the financial crisis was mostly caused by the government. What people don’t talk about is that under Bush, banks were heavily pressured to expand their mortgage origination activity to marginal buyers – home ownership increased from 63% of the population to about 70%, which is too high. Not everyone needs to own a home. Basically, the American Dream is bullshit.”

Yes, he actually said, basically, the American Dream is bullshit. I had a good laugh about that.

Second choice quote of the trip so far was meeting with another non-bank company. I asked basically when they could leverage their cost structure. CEO: “You tell me. It depends on the macroeconomy. Who the fuck knows?” And then we had a good laugh about that, too.

I think I will stick to operating companies that have at least mostly transparent accounting.

What do you mean by the above?

I mean that I don’t trust bank balance sheets. There are much fewer ways that an operating company can lie to you and they are usually more obvious.

i trust certain banks, but you still need to use your discretion…when it comes to banks, management matters even more due to this factor of “trust”…

My experience is that most management teams lie to shareholders both on and off the record most of the time. It’s sort of their job to lie, actually. The unfortunate reality is that equities are a call option on the future, and no one benefits from painting a less rosy picture of the future. If they can lie and keep the stock up, that may help their incentive plans, and it often helps the company overall in the market with customers / suppliers / creditors / etc. “Equity guys” are pretty widely loathed I’ve found. And frankly, if you’re looking at leveraged equities, the incentive is to lie through your teeth if you’re management, because the stock price is highly relevant for refinancing options (which gets into Soro’s reflexivity concept), and because if you’re wrong and the equity goes to zero, you get a change of ownership structure anyway and the people you lied to simply disappear. So all in, I’m sort of uncomfortable if I can’t figure out how management is lying to me or where the soft spots are – I might still take the risk, but only if I feel I understand the lie(s). I’d love to see the SEC or someone bust out the big stick and start hitting lying management teams in the balls with it (repeatedly) to clean up some of the deception (much of which often happens in writing or in taped conversations such as conference calls). Probably wishful thinking but it would be nice.

From my understanding, theoeretically in banks, management is supposed to be held accountable by the regulators. At each exam, the team takes a statistically significant sample of the loans (assets) and deems if they were good or not. If they aren’t, they incur a provision expense for the doubtful assets. Now if it always works like that, not quite sure. But I understand what you mean now, you really never know what those assets are comprised of. They could all be 200% loan to value ha ha