ALL BUSINESS: Investors’ tools to understand banks

NEW YORK — Confused about the state of the banking crisis? About whether good banks are back, or bad banks are multiplying?

You aren’t alone. Even Wall Street analysts dedicated to analyzing bank finances can’t seem to figure it all out. That’s only adding to the volatility in financial stocks, which had climbed nearly 50 percent in the last three months but have given back some of those gains in the last two weeks.

Investors aren’t powerless, however, and there are several things they can do on their own to help them understand what’s going on.

That advice comes from Aaron James Deer, the Sandler O’Neill & Partners bank analyst who admirably agreed to be interviewed even after he found himself on the wrong side of a stock recommendation this month.

The company involved is Pacific Capital Bancorp, a bank holding company headquartered on the central coast of California. Its shares had been cut in half over in recent months to under $4 each, and some analysts including Deer thought that price level was unwarranted.

So Deer — as well as Keefe, Bruyette & Woods’ analyst Julianna Balicka — upgraded the stock during the week of June 15. Deer’s rationale was that the bank had capital strength and reorganized its operations to bring in fresh talent. He also cited evidence that Pacific Capital’s commercial real estate portfolio was performing well.

Deer also had met with Pacific Capital’s management a week before issuing his upgrade.

Wall Street analysts don’t change their stock ratings often. So imagine Deer’s surprise when bad news hit days later. Pacific Capital announced on June 22 that it had suspended all dividend payments to common and preferred shareholders. The latter group includes the U.S. government, which extended a loan to the bank under the Troubled Asset Relief Program’s Capital Purchase Plan.

The timing of the announcement was tied to the fact that the interest payments on certain types of its preferred securities were due and the bank needed to notify the people who held them that it was deferring the payments and couldn’t pay any dividends, according to Pacific Capital spokeswoman Debbie Whiteley.

That will save the bank about $8 million per quarter, Deer said, but investors weren’t impressed. The stock has fallen more than 25 percent since the dividend suspension was announced to around $2.50 a share.

Deer acknowledged in an interview that his upgrade was the wrong call. But in doing so, he also reminded himself of a regulatory rule he should have been watching: Bank dividends are imperiled if the payouts are more than the banks have cumulatively earned over the last two years.

Deer estimates Pacific Coast lost about $19 million between the third quarter of 2007 and the second quarter of this year. He forecasts Pacific Capital’s losses for all of this year will total $25.75 million in 2009, on top of a loss of $23.84 million in 2008.

“Honestly, I had not reviewed the earnings progression and considered how that would affect their ability to pay dividends,” Deer said.

That’s an easy metric for investors to follow. Taxpayers should watch that, too, since billions of their dollars are wrapped up in the nation’s banks through the TARP program.

Already 17 participants receiving TARP funds have not declared or paid dividends of approximately $6.6 million owed to the government on the TARP loans through June 12, according to new report from the Government Accountability Office.

The GAO said 13 of those companies informed the Treasury that state or federal banking regulations or policies restricted them from declaring dividends. One indicated concerns about its profitability and three didn’t provide an explanation. The GAO report didn’t name the financial institutions.

One of them likely was Seacoast Banking Corp. of Florida, which announced May 19 that it was suspending all dividends on common and preferred shares.

In making that announcement, the Stuart, Fla.-based company said in a statement that while it is “well capitalized,” the decision was in part a result of “recently adopted Federal Reserve policies related to dividend and other payments in light of stressed market conditions.” Seacoast did not respond to a request for additional comment.

Seacoast operates in the heart of the housing crisis, with offices in south and central Florida. Ben Claremon, an analyst at Right Wall Capital, said Seacoast has been aggressive in writing down the value of its troubled loans.

But he points to something else investors should watch — at Seacoast, and beyond.

He likes to monitor the number of loans where borrowers are delinquent in their payments and the bank anticipates that eventual collection of principal is uncertain. These are what’s know as nonaccrual loans, and when they are rising, that could be bad news for the bank going forward, he said.

At Seacoast, for instance, one out of five construction and land development loans are nonaccrual as of March 31, according to data on the Web site of the Federal Deposit Insurance Corp. In the same period a year ago, less than one in 10 were in that same spot. About a third of family construction and development loans — which are mortgages — are nonaccrual, up from 15 percent at the end of March 2008.

“These represent the kind of shoe that still will drop,” said Claremon, who also writes the financial blog, Inoculated Investor.

These tips don’t involve complicated spreadsheets; they’re simple math. It’s the least investors could do to get ahead of the market on the state of the banking crisis.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org