03/21/2010 05:12 am ET Updated May 25, 2011

A Tale of Two Banks: Florence Mutual Savings and JPMorgan Chase

The Civil War, in short, ended the separation of the federal government from banking, and brought the two institutions together in an increasingly close and permanent symbiosis. In that way, the Republican Party, which inherited the Whig admiration for paper money and governmental control and sponsorship of inflationary banking, was able to implant the soft-money tradition permanently in the American System. ~ Murray Newton Rothbard

Just three weeks past the quarter close, Q4 2009 bank CALL reports are flowing into the FDIC and being posted on the public portion of the Central Data Repository. Users of the professional version of The IRA Bank Monitor can see the preliminary Bank Stress Index ratings for Q4 for these bank units in the pink box at the right of the Quicksheet displays in the Pro Bank Monitor. We have also created a list sorted by total assets of all preliminary ratings calculated so far.

The largest institution to file and have its data released to the public after supervisory review is the $1.1 billion total asset Florence Mutual Savings Bank of Florence, 85 Main Street, Florence, MA, 01062 (FDIC CERT#23293). In recognition of this bank's excellent performance and also the timeliness of its public disclosure, we feature Florence this week as the IRA Bank Profile.

IRA Bank Stress Index Rating - Florence Mutual Savings Bank - Q3 2009

The first thing to notice about this bank is the low overall Stress Index score, 0.8 vs. 4.4 for the entire industry. That means that even with the average bank's financial stress level more than four times the benchmark year (1995=1), Florence Mutual Savings Bank is still exhibiting stress below the benchmark year. And don't forget that there are thousands of smaller banks in the US with similar operating profiles.

Just now some of you may be thinking: Chris, Dennis, you're making my head hurt. What the hell is the benchmark year? And why did you pick 1995 for the base year in your stress index presentation of US bank performance?

Well, in simple terms 1995 was a year that was close to the centerline of experience for all banks over the three decades of data we use in The IRA Bank Monitor. It was not a good year, but not a bad year in terms of the five factors we have behind the Bank Stress Index - ROE, Charge-Offs, Capital, Lending Capacity and Efficiency. When you're seeking objectivity, simple is good.

Looking at the latest disclosure in The IRA Bank Monitor, Florence also has excellent results. Indeed, in Q4 2009 the overall Stress Index results improved in ROE, but degraded in terms of charge-offs, suggesting that Florence is done building reserves but is now in the loss recognition phase of the credit cycle. Notice that the index score for charge-offs rose to 0.3 from 0.1 in Q3 2009, while the score for ROE fell to 0.4 in Q4 2009 from 1.1 in Q3 2009.

Florence Mutual Savings Bank as of 1/15/2010
Florence, MA 01062-0700
0.8 | 0.4 | 0.3 | 0.9 | 0.7 | 1.6

The Stress Index scores above are in the same order as the Q3 display with the aggregate Stress Index score shown first in bold, followed by ROE, Defaults, Capital, etc. The preliminary results show that in general Florence continues to outperform its peers by a significant margin. The one notable exception is Efficiency, the last index score shown above, which rose from 1.0 in Q3 2009 to 1.6 in Q4 2009. Efficiency is an operating cost measure for the bank and essentially tells you the cost of a dollar of net revenue.

Florence historically had an efficiency ratio around 70% and was at that level in Q3 2009, but like many smaller banks operating costs are rising, often in relation to servicing and other credit expenses. If you follow the performance of Florence, keep an eye on efficiency over the coming year.

If you search for Florence's zip code on the Move Your Money web site, you'll find the Amherst, MA, branch of the bank: Click Here. Keep up the good work Florence!

Meanwhile further south, last week we had the results of JPMorgan Chase (JPM), the $2 trillion total asset money center. The bank units of JPM were rated "C" by The IRA Bank Monitor as of Q3 2009.

IRA Bank Stress Index Rating - JPMorgan Chase - Q3 2009

Overall, JPM's bank units were performing better than the industry average as of the end of the third quarter, but not in areas such as loan defaults and capital. The strong ROE has helped the overall Stress Index score dramatically, but the JPM earnings for Q4 suggest a higher stress score when the bank unit data is released. There is no preliminary Q4 2009 data available for JPM's bank units as of today.

JPM beat market expectations regarding Q4 earnings, but came in a little light on revenues. We believe that "revenue lite" is going to be the story for the entire banking industry in 2010 in part because that is how bank customers are faring. The other theme is continued and perhaps sustained high loss rates. We'll remind one and all again that the industry lingered at peak loss rates for six quarters in the 1991-1992 credit trough. We also lingered at zero default rates for years during the great land rush of 2004-2007, another nagging factoid which bothers us more than ususal.

Now you understand that the Street was surprised by JPM's results. The concept of weak revenue somehow does not square with 40% EPS growth in 2010. That's where the Street is on JPM even now and even though it is pretty clear from management statements that the end of the pain is still ahead. We almost felt sad for the analysts who were actually hoping for a dividend increase.

Ever hopeful, during the JPM call our colleague Meredith Whitney asked JPM CEO Jamie Dimon several times if there would not be some relief from Washington on those HELOC and other exposures, call it "HAMP II." Dimon denied any more knowledge than the analyst rat pack when it comes to future largess from Washington. We think it will be tough for the banks to engineer a bailout while they are repaying the cost of TARP -- and also filing in the hole in the Deposit Insurance Fund at FDIC. Call the new tax load 15bp on net assets, with an even higher vig for the top 50 banks.

BTW, do you think that anybody at the Treasury has noticed that the FDIC changed methodology for assessing deposit insurance premiums from domestic deposits to total assets less capital? The TARP repayment proposal is to levy 15bp on non-deposit liabilities, thinking this will keep Treasury clear of double-taxing deposits that already pay FDIC premiums. But our guess is that FDIC is going to retain the new net assets approach for assessments, so perhaps somebody at Treasury needs to sit down with FDIC and develop a coherent, unified strategy? Just a suggestion.

But meanwhile the real economy burns. The fact that you hear the servile scoundrels who inhabit the Federal Reserve Board talking about "helping housing" - as though anything the Fed has done this year has helped anyone but the largest banks - suggests that the full scope of the housing market debacle is coming into focus in Washington. But fear not. The Housing Industrial Complex will continue to grow on the books of the central bank and the housing GSEs despite calls for reforming Fannie Mae and Freddie Mac.

We began today's IRA with a quote from Murray Rothbard's classic history of money in America. The soft-money disease that affects America and fueled the last housing bubble and is fueling the next speculative event, this time in structured finance, starts and ends with the Fed. Ask not why JPM's revenue was so week in Q4 2009, but why nobody on the Sell Side saw the obvious writing on the wall, namely that the real economy always must confirm the financial world, even with and despite the best efforts of a compliant central bank to avoid that reconciliation.