Slow and Steady Wins the Race

Last Thursday was a brutal day for the market, and especially for financial stocks. However, there were a couple of banks that were up on Thursday after reporting earnings for the quarter. Neither of these banks are well known, or covered by analysts, or could care less.

One is a cult bank stock that happens to be located in the fulcrum of foreclosure land - Southern California. The other is located in North Carolina and consists of one branch office. Both are Bulletin Board stocks that trade by "appointment" only.

Farmers & Merchants Bank of Long Beach has been in business for 100 years and operates 22 branches in Southern California. It has been controlled ever since by the Walker Family. It traded 2 shares yesterday at $6,575 per share, up 2.65%. Ninety percent of its loan portfolio is tied to real estate, mostly commercial, but the bank did not report any charge offs during the quarter, nor any losses on its investment portfolio. And in case you are worried about insolvency, you should know that its total capital to risk weighted assets is an astounding 39.22% at the end of 2006. A bank is considered well capitalized if that ratio is in excess of 10%.

The bank web site is here.

Wakeforest Bancshares Inc. is a micro cap Savings and Loan located in Wake Forest, North Carolina. It reported earnings for the quarter that were down year over year from 9/06, and full year earnings were up $0.02 from 9/06. The stock traded up 8.55% to $22 a share. So how did they do it? Very simple - "the Company does not make sub-prime loans," according to the press release. Or to put it a little more colloquially - we don't do stupid things like make bad loans to people just to satisfy Wall Street's insatiable need to grow. We don't care if you laugh at us every year at the annual Bankers convention because who's laughing now. The web site is here.

I don't own either of these stocks. I did look into Wakeforest Bancshares Inc. a few months ago and passed because it wasn't "liquid" enough. It occurred to me that liquidity isn't always a good thing since it allows investors to react emotionally without regard to reason or rationality.