One Bank Pick Stumbles, the Other Soars

The net loss is quite a whopper for a $4.9 billion holding company. The loss represented $10.05 per diluted common share. The company's book value dropped from $40.65 at the end of 2007 to $30.49 as of March 31. The holding company stated that the writeoff was "in response to the recent volatility in the banking industry and the effect such volatility has had on the market prices of banking stocks, including First Community Bancorp's."

So much for our confidence in that book value number. After the writeoff, First Community still had $528 million in intangible assets on its balance sheet, so maybe there are more goodwill writeoffs in store. The holding company pointed out that this was a non-cash event and didn't affect First Community's capital ratios or reserve coverage. However, the presence of goodwill and writeoffs like this can alarm the market and lead to serious consequences for investors.

In a recent column on the BankStocks.com Web site, Vernon Hill, the former chairman and CEO of Commerce Bancorp (since acquired by Toronto-Dominion Bank(TD - Cramer's Take - Stockpickr)) called goodwill an "accounting fiction," saying it "distorts our understanding of bank financials." He also pointed out that several large banks, such as Bank of America (BAC - Cramer's Take - Stockpickr), Capital One (COF - Cramer's Take - Stockpickr), Sovereign(SOV - Cramer's Take - Stockpickr) and Wachovia (WB - Cramer's Take - Stockpickr), have 50% or more of their capital comprised of goodwill.

Acquiring banks net-out the goodwill and report returns on what they call "tangible" assets and equity, thus showing higher returns than they would if their figures reflected the premiums paid for acquisitions.

Getting back to First Community, If we exclude the writedown, the company's operating earnings also tanked, with net operating income of just $2.3 million, compared to $17.1 million last quarter and $28.5 million in the first quarter of 2007. This was mainly the result of a $26 million provision for loan loss reserves, up from $2.8 million last quarter and zero in the first quarter of 2007.