The Garrett, Watts Report (January 29, 2010)

To Our Clients, Colleagues and Friends,

Lots of mortgage bankers talk about buying a bank, but aside from this writer, very few have ever done it. So a huge round of applause to Rob Hirt , owner of RPM Mortgage, for closing on his purchase of Darien Rowayton Bank in Darien, Ct. We advised RPM on his acquisition plans in the very beginning of the process, but we take very little credit. It was all a result of Rob Hirt’s persistence, doggedness and total focus. Way to go, Rob.

No way were actors better in the old days. Johnny Depp is one of the current greats, and one of his most obscure movies, Cry Baby, showed that he’s more than just a great actor. Watch these clips to see what a great singer and dancer he is. And equally fun is this one, also showing his great talent as a singer and stage performer Like all Johnny Depp movies, this one takes place in good old Baltimore . And like all John Waters movies, this one features Patty Hearst in a cameo role. Yes, that Patty Hearst. Now shouldn’t you get back to selling your loans or hedging or something?

Lots of us have kids who’ll be getting college acceptance letters soon, and they’ll soon go off to bucolic campuses where they’ll broaden their horizons, attend a variety of cultural events, and meet interesting people they’ll become lifelong friends with.

And making it even worse if it’s private, it’ll cost you $55,000 a year! For you Animal House fans, the screenplay was written by a member of the Dartmouth class of 1960, reflecting his experiences there, and the movie was actually filmed in Eugene at the University of Oregon campus.

Do you eat breakfast with your spouse? Winston Churchill was asked if he did, and his response was “My wife and I tried it once about 40 years ago, and it was so awful that we haven’t tried it since.”

It looks like Viewpoint Bank (FPFG) is going to fully demutualize, and this is one that actually merits investing in. So many mutuals don’t have a real growth strategy and few use the capital for new lending growth. The new capital raised will be good for their warehouse customers.
We were just driving past the Cal campus, and living in a college town is weird. Every year you grow a year older, but they, the college students, never get old. They are forever 18-22. It’s just kind of interesting. Like living in a town filed with Peter Pans.
Isn’t it just perfect when two historical trends intersect at the exact same time? The Wednesday WSJ showed that movie-rental chain Movie Gallery will file for bankruptcy and close 1,200 of their 1,800 stores. The very same day, Netflix reported that they now have 12.3 million subscribers, up by 31% in the last year, and that they generated revenues for the quarter of $445 million. What a perfect example of what Schumpeter called the Capitalist Storm of Creative Destruction.

Texas Capital had an outstanding quarter. Non performing loans stabilized, and they had loan growth + expansion of their net interest margin. Kind of a trifecta.
From a client, regarding outsourcing our prisons: “ England outsourced their prisoners in the past. It’s called Australia .”

Probably no one would find this of interest, but we were looking at the year-end numbers for Fair Isaac, and they’re sitting with $382 million of cash and cash equivalents + equity of $586 million.

At our last bank, we used to routinely originate SBA loans and sell them at 109-110, servicing retained, and no, that 9-10 point gain is not a typo. Prices dropped dramatically when the financial crisis hit, but they’re recovering, and we hear that sellers are getting 108. Unlike the mortgage banking business which gives away too much to the loan officer, SBA loan officers almost never get a percentage of the total premium. The typical commission is a flat 50 bps of the loan amount. None of this 60-40 or 70-30 stuff.
Doing a $1 million SBA loan and selling it at 108 is very cool. That’s an $80,000 gain on that one loan and you’ll get ongoing servicing revenue each month,
Michigan is a tough state to lend in. Capitol Bancorp (CBC) has only 32% of its loan portfolio in Michigan , but 47% of their Non Performing Loans are there.
Speaking of commission splits, we studied compensation among our client data base a few years back. Our conclusion was that higher commission splits seemed to have an initially positive impact on overall revenue as more loan officers joined the company, but once the higher commission splits had become the norm, it appeared to have a negative impact on overall profitability. Commission structures need to reward the company and not just the loan officer.
Baseball’s Opening Day is still 61 days away, but it’s never out of season to read Ricky Henderson quotes. We’ve met and talked to Ricky a number of times over the years, and he’s not only the greatest lead-off hitter of all time, he’s also an American original. Ask us sometime about his views on banks, bank failures, and CD’s. But read (or re-read) his quotes. It’ll be the best thing you’ll read all week.
We’re speaking next month at the Seattle Mortgage Bankers Association dinner, and if you have nothing better to do on February 23^rd, this is a pretty sharp group.
Remember that photo last week of the guy getting married? We guessed that he might be wondering what his wife’s sister looked like naked, but one client wrote that he was obviously wondering what Ben Bernanke would do with interest rates. No way. We contacted the fellow and he told us that he was wondering what Bernanke looked like naked. Speaking of which, who would you least like to see naked:
(a) Nancy Pelosi, (b) Barney Frank, (c) Joe Biden, (d) Hank Paulson, (e) Richard Nixon (when he was alive) or (f) Allan Greenberg.
We were just listening to Tony Bennett, and we know this sounds blasphemous, but have you every thought that maybe he was a better singer than Sinatra? On the other hand, when it came to that slow dance, the one at the end of the evening, you always wanted a Sinatra song. And even if Tony Bennett had a better voice, it was always Sinatra you went for when you were making out, or hoping to. Speaking of which, what do today’s teenagers listen to when making out? Nine Inch Nails? Snoop dog?
A legend passed away Wednesday. J.D. Salinger (1919-2010) wrote Catcher in the Rye in 1945, and this wonderful novel went on to sell 60 million copies and is still used in high school classes everywhere. When you first read it at 14, it’s hilarious. When you read it in your 20’s, there’s a sadness to it, and in your 30’s you read it again and realize it’s the tragic story of a young boy’s life spiraling out of control. On the last page, ‘”That’s all I’m going to tell about. I’m sorry I told so many people. About all I know is, I sort of miss everybody I told you about. Don’t ever tell anybody anything. If you do, you start missing everyone.” Goodnight Mr. Salinger. Goodnight Holden. You were America ’s first teenager, and while the writer who created you has died, you’ll live on forever.

We’ve run out of things to write about, so as Arnold said in the Terminator, hasta la vista, baby. And when the Terminator came back from the future, isn’t it weird that he’d have an Austrian accent? By the way, we wrote the attached article 5-6 years old but it’s every bit as relevant today as it was then. It’s the Seven Deadly Sins of Mortgage Bankers.

Garrett, Watts & Co.

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