Mortgage Bank Liquidity. Key Metrics and Price to Earnings Ratios

These tech companies have been using their cash on acquisitions and to develop new products.  Mortgage bankers increased their liquidity in big ways last year, but we see very little of that cash being used on acquisitions.

  

   
 
What’s your ratio of Account Execs + loan officers to full-time employees? If you read page six of Flagstar’s latest prospectus, they have 3,411 full-time equivalent employees and 336 AE’s and LO’s for a 10.1-to-1 ratio.  It’s probably not a meaningful metric to compare yourself to unless you’re in the servicing business like Flagstar, but we find all ratios to be of interest. By the way, Flagstar’s prospectus is for their new capital raise of $250 million.

We think very highly of Flagstar’s people and believe, absolutely, that they’re a survivor, but their last three years have been really tough.  Losses were $39 million in 2007, $275 million in 2008. and $513 million in 2009. The Board has adopted a five-part strategy to return the bank to profitability, and we completely agree with the focus and goals of this strategy.

Would you invest in a company laden with huge amounts of debt and moderate growth or a company with high growth and no debt?  What if the choice were between countries with those profiles, one with tons of debt and one with no debt.  You’re given a choice to (a) put all your money into 10-year U.S. Treasuries or (b) 10-year Chinese government bonds.  Which would you invest in? The mere fact that you probably paused for a few seconds says a lot about our economies and its interrelatedness to the out-of-control federal deficit.

Fiscal irresponsibility abounds not just at the federal level but at the state level as well. The Illinois Pension Fund is only 54% funded with a deficit of $54 billion. Considering how crappy things are in California, it’s a surprise that that State Pension fund is 87% funded.  A stunning 46 states are underfunded, but Washington State and Wisconsin are fully funded and Florida and New York are slightly over funded.

San Francisco’s Mayor Gavin Newsom warned the labor unions that they needed to agree to pay cuts to deal with a large deficit. When they refused to negotiate and demanded pay raises, the Mayor exercised his legal authority and sent layoff notices to 17,000 city workers. Those who get re-hired will automatically be given a 6.25% pay cut

Investors tend to look at Price-to-Earnings ratios on big banks and Price-to-Book ratios on small banks. If we look at Price-to-Book ratios for the big banks, we find that many are trading below book value, obviously a reflection of investors’ distrust of what the book value really is when you apply serious mark-to-mark on loans. Anyway, here’s the ratio for a few of them.

The higher number for U.S. Bank is clearly a vote of investor confidence. By the way, there are tons of community banks whose stocks trade at big discounts to book, and many of these will be 10-baggers for investors with patience and strong stomachs.