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Monthly Archive for October, 2009

Atlantic Southern Financial Stock Continues Death Spiral

Today, Atlantic Southern Financial, a bank located in my hometown of Macon, Georgia, reported third quarter earnings. I’ve repeated before that odds favor this bank failing within a year or so barring any sort of capital raising. Here’s the opening paragraphs of the press release:

MACON, Ga., Oct. 30, 2009 (GLOBE NEWSWIRE) — Atlantic Southern Financial Group (Nasdaq:ASFN) today reported a net operating loss of $8.3 million, or $1.97 per diluted share, for the third quarter of 2009 compared to net loss of $347 thousand, or $0.08 per share, in the third quarter of 2008. The net operating loss was primarily driven by elevated credit costs including an $11.4 million provision in the allowance for loan losses.

Atlantic Southern’s net operating loss for the first nine months of 2009 was $11.8 million, or $2.80 per share. Including the non-recurring charge for goodwill impairment from the second quarter of 2009, the net loss for the first nine months of 2009 was $31.3 million, or $7.44 per share compared to net earnings of $1.6 million, or $.35 per share, for the first nine months of 2008.

“We continue our strategy of aggressively addressing problem credits,” stated Mark Stevens, President and Chief Executive Officer of Atlantic Southern Financial Group. “During the third quarter of 2009, we saw an increase in non-performing assets. Unusually high levels of loan loss provision have been necessary as management addresses asset quality deterioration associated with the real estate downturn.”

Yep, you read that right. A loss of 7.44 per share for the first nine months of this year, or just a loss of 2.80 per share if you don’t count the non-recurring charge. And really, is a goodwill impairment really nonrecurring in this case? Aren’t there always going to be recessions and aren’t banks always going to write down loans or good will during these times?

Anyways, net interest margin declined again as well as the allowance for loan losses/non-performing loans ratio and shareholder’s equity. I can’t wait to see the data they filed with the FDIC as I would like see how their loan portfolio has deteriorated. If I had any money above the insured limit at Atlantic Southern, I would be pulling that portion out of there.

Also, if I had the time, I would like to be interviewing some of these executives and employees of these supposedly safe and conservative small community banks in order to find out just what exactly they were thinking when they were sowing the seeds of destruction for their shareholders. I would turn it into some sort of short story or allegory… Or hey, why the hell doesn’t the local paper do this? Some sort of 5-part investigatory series detailing what has happened to the local financial institutions and how management and boards of directors ran their companies into the ground? I think the locals public would eat this up. I don’t think this is rocket science, but I guess most of the paper’s staff has been laid off, so maybe they just can’t pull this off?

Bank Stock Shareholders: Beware of Scammers and Inadequate Capital

Here’s a recent post from GreenBank’s website:

October 27, 2009:   Recently several GreenBank customers have received an e-mail appearing to be from the FDIC which is absolutely fraudulent in nature.  GreenBank HAS NOT been named as a “failed bank” by the FDIC.  If you are a recipient of this fraudulent email DO NOT open the link.

I have a feeling that scams like this have been proliferating so that some short sellers can benefit illegally from people’s uncertainty regarding the financial health of their local banks.

Well, not coincidentally, GreenBank stock has not been doing well. Mr. Niswonger, a wealthy individual, has even filed a 13D with the SEC declaring his ownership of 9.94% of outstanding shares. Here is a large excerpt from his well-written letter to the bank’s board of directors:

In this context, I am writing to request that you as a Board consider a proposal to bolster the capital of the Bank and, thereby attempt to resolve any market and regulatory concerns related to future credit deterioration. Additional capital would also provide an opportunity to position the Bank as a viable candidate for any asset dispositions that may become available as other institutions in our service area are resolved through the regulatory process. I am particularly concerned about the underlying and ongoing deterioration in asset quality due to the relative concentration in real estate lending. This deterioration, combined with recently announced management changes presents the Bank with a significant challenge going forward. However, there are many positive attributes of the Bank which I am convinced make it a viable player in the Tennessee market. I would like to help the Bank through this difficult period by identifying and participating in a material injection of additional capital – possibly $25 to $40 million. With additional capital and a proactive approach to the real estate exposure I believe the Bank can prosper once again given its established deposit franchise and branch network.

While reported results may not indicate a current need for capital, I do not believe that we can dismiss the trends in real estate values and the impact that trend has had to the Bank and its peers. As the recent earnings and guidance from SunTrust demonstrate (reporting a nearly $400 million dollar after tax quarterly loan loss provisions), it is premature for banks to declare a “bottom” for real estate asset values. I fear the Bank’s concentration of real estate lending will result in additional loan write-downs and will have a negative impact on the capital account. As leading stakeholders we have a duty to the shareholders and employees to obtain additional insight into that exposure and the potential impact to the Bank. I would anticipate a confidential third-party review of the loan portfolio to provide me with that insight prior to making any investment.
An infusion of capital will reduce the Company’s risk profile in these uncertain times, allowing the Bank to reassert itself as one of Tennessee’s leading financial institutions, and improving the lot of all stakeholders and the communities served by the Bank. Additional capital will allow the Bank to execute an organic expansion plan and to make opportunistic acquisitions, steps that will likely improve shareholder value. Many industry experts have opined that the current industry conditions represent a generational opportunity for healthy, well capitalized regional and community banks. Additional capital would permit management and the Board to consider acquisition of failed/failing banks, and take advantage of loss-share transactions that seems compelling. Additionally, I believe more capital will help improve conditions for the Bank employees. Capital should foster growth and growth in turn should foster career opportunities and attract new management candidates as the Bank addresses the announced departure of Mr. Puckett.
Because the Bank’s charter contains a provision that limits the rights of shareholders that acquire in excess of 10% of the outstanding shares without your consent, I am formally asking that you waive these limitations. Waiver of these limitations can be qualified, and is provided for by Tennessee law. Your consent at this stage in no way limits your ability as a Board to negotiate the terms of any future capital infusion, or to consider if a capital infusion is in the best interest of the Bank and all of its shareholders. My hope is that you will consider this proposal as a positive opportunity to advance the Bank’s best interests.
I think there are still a lot of banks out there that will eventually fail if they do not receive a letter like this from a person with a large stake in their business and if they do not take prompt action to raise additional capital.

Tickerspy Portfolio Update

So its been about a year and a half since I started my Tickerspy portfolio. Since inception it has returned 39.6% and has beaten the S&P by 62.4 percentage points.


At the beginning of the week I made several changes to the portfolio. I got rid of my Autonation holding which had a return of over 100% and replaced it with a pair trade of long Walmart and short Nordstrom’s. The portfolio already had a slight hedge via SH, an ETF that is short the S&P500. The portfolio is also short both ERX and ERY, the triple-leveraged energy ETFs.

Thus, as it stands the portfolio still has 7 long positions and 4 short positions. Or, to be more accurate, two pair trades, a short position, and six long positions. I look forward continuing to outperform the S&P500 via Tickerspy.

Simoleon Sense Interviews Author of Greenbackd

Miguel Barbosa, the author of Simolen Sense, interviews the author of the Greenbackd, a blog focused on identifying stocks trading at deep discounts. It’s a great interview and you will definitely learn a thing or two.

The Cash for Clunkers Bump

Much like the effect of a “Colbert Bump,” light vehicle sales experienced the effect of the cash for clunkers bump over this year’s summer. (click for larger image)


Notice how quickly vehicle sales returned to historic low levels.

Choosing a Discount Rate for Cash Flow Projections Like Buffett

A few weeks ago I had to do some thinking on how to go about choosing the right discount rate for discounting a series of cash flows. After doing some research, I found an excellent article published by the Acton Foundation for Entrepreneurial Excellence entitled Warren Buffett and His 9% Discount Rate. The article is not too long at five pages and it discusses several methods of choosing a discount rate before explaining the brilliance of sticking with a 9% discount rate regardless of how the risk free rate of return changes.

The first method discussed is the capital asset pricing model (CAPM) which uses the past instability of the prices of a publicly traded stock as a proxy for future risk. This was interesting, but ultimately unattractive for me as a value investor. High volatility or price instability does not necessarily mean a stock is riskier. I actually think such an assumption is quite dumb as high volatility can actually provide attractive entry points for a stock that make the purchase extremely low-risk.

Next is the venture capital method which does not really apply to me.

Finally, the article discusses the 9% discount rate and how it allows an investor to avoid speculative booms and take advantage of the inevitable speculative busts that follow. I highly recommend reading this article if you are an investor or if you ever are discounting future cash flows to determine if you should purchase or sell a business.

Eight Secrets to Success

Thanks to TPC for sharing this great 3-minute video. All eight are good, but I think persistence is last for a reason.

Can You Add Some Color To That?

So I’ve already listened to more than a couple of quarterly conference calls in the past two weeks. I’ve come to dread the question and answer session at the end of the call for a few reasons.

First, the only people who are asking questions are the sell-side analysts whose only concern is getting the detailed, nitty-gritty information so they can tweak their model to produce a more accurate estimate of the earnings for next quarter. And their model is only going to be accurate by a couple of pennies at most it seems. If you want to get the perspective of someone who is not interested in owning a stock like they own a business, just listen to a sell-side analyst’s questions. It can get boring as hell listening to this part of the conference call because the sell-side rarely adds to your understanding of the company and of the business or industry.

Finally, nearly every sell-sider is asking if management can add some color to some aspect of the press release or quarterly report. Can you add some color to that? What they really are asking is if you can add some detail, but what actually is happening is torture by cliché.

Colbert: Dow 10,000 Arouses the Media

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Is the top in? Is the bear market rally top in?

It seems to me that a lot of investors and traders have been asking this question for the past four or five months. (click for larger picture)


Is the the rally over? Is it a V-shaped recovery? Are we in the middle of a W-shaped recovery? If most people think we’re in a huge bear market rally, is that a contrarian indicator that we’re not in a bear market rally?

Who the heck knows? All I knows is—I’m purposefully affecting a New York accent here—that there ain’t as many deals as there used to be.