In our recent Western Banks Report we spoke with Aaron James Deer of Sandler O’Neill + Partners, LP  where he gave us his opinion on the state of Western banks

“The banks’ loan books tend to be shrinking, and so you’re seeing much stronger liquidity on banks’ balance sheets. Loan to deposit ratios are coming down, they’re paying down their borrowings, and they’re letting higher cost, brokered CDs run off. So they’re doing all the things that they need to do, which you’d expect to see at this point in the cycle, and I think that they’re on the road to recovery barring any kind of big step down in the economy.”

Mr. Deer did have some positive things to say about Nara Bancorp:

“Nara Bancorp is a small Korean bank down in Los Angeles that in my view is arguably one of the best Korean banks operating, and they’ve got good solid capital levels. They’ve got some exposure to retail and hospitality in their commercial real estate book, but I think that the problems are manageable, and they’ve got a good management team that’s been very transparent in how they’re dealing with their challenges.”

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Our recent Western Banks Report points to low investors interest in community banks but Tim Coffey of FIG Partners, LLC in our recent Western Banks roundtable points to some companies to be positive on:

“We like Pacific Continental out of Oregon, we like American River Bankshares out of Sacramento and we like Bank of Marin. These are not heavily discounted names, these are not trading below tangible book, but they all have a pretax pre-provision ROA greater than 2%, which is kind of the defining line in this market right now, about whether or not a bank has sufficient earnings power to build capital and get prepared for what they might not see right now.”

Community bank investing for the long term remains attractive but in the near term we have to work through the poor economic environment and further credit quality issues, particularly in the CRE and C&I segments of bank loan portfolios. Banks that survive these problems will have plenty of opportunities to pick up market share in terms of deposits, staff and business relationships from troubled banks. The survivors will be the most transaction-based banks that are making the transition from real estate dependency to a more relationship-based focus. The banks are very cheap right now but investors should make sure that they are rightsizing their cost structure and adding low-cost deposits.

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Speaking with analyst Joseph Gladue of B. Riley & Co. this week- as part of our special focus on Banks- he gave us a pretty bleak picture of the space. That being said, he has also had two recommendations for banks to watch in this space:

1.  Center Financial (CLFC): ”They’ve maintained fairly good asset quality throughout most of this declining economy, although they’ve had some increases in NPAs the last quarter or two. They’ve got very strong management, strong capital levels, very strong reserves. They have built their reserves to loans up to almost 3%, and their tangible common ratio is 7.5%. I think Center Financial is a pretty good bank that’s trading at, as of yesterday, around 30% of tangible book value.”
2. Central Pacific Financial (CPF): ”I actually just initiated coverage on  yesterday out of Hawaii on them with a buy rating. That’s a bank that had expanded to the mainland out of its core Hawaii market in order to reduce its concentration in Hawaii and diversify its risk. Unfortunately they started that around 2003, moving to the mainland. They opened some loan production offices in California and Washington and they ended up getting hurt by residential construction loans, as did many a bank in California. They sold off a big chunk of the construction loans in the second quarter of last year, and they’ve written off or reserved for most of the rest.”

For the complete Western Banks report, including the full interview with Mr. Gladue, a roundtable panel, and interviews with top CEOs in the space, click here. 

A timely roundtable panel on Midwestern Banks this week.   As Tom Mitchell of Miller Tabak points out – they are playing the hand they’ve been dealt and doing the best they can to build reserves.

TWST: As you listened to the banks in their first quarter reports, what was your general reaction?

Mr. Mitchell: Everybody was pleased with themselves. They thought they themselves had done very well. They had run into some adverse conditions that  they were handling very appropriately, but in general, most banks end up having to — in a sense that geography is your franchise, and who your customers are is really the hand that you’ve been dealt — pretty much play that hand. It’s not like you can magically transform your franchise from primarily business to primarily a consumer franchise or you can turn around and say that you’ll never do any construction lending again because you have so many great customers who don’t really need you to loan them the money. In reality, almost everybody is stuck with the hand that they have to play and many of them seem to be taking very constructive steps as managements.

As part of our panel this week on Midwest Banks, we spoke with analysts Eileen Rooney of Keefe Bruyette & Woods. Given the shaky nature of the sector in the current economic climate, asked her a little bit about where investor interest stands now:

Ms. Rooney: I’m starting to hear some interest. I think investors are being selective though. After the run that we’ve seen in the stocks, a lot of the higher quality names are trading at pretty material premiums to the group, making them a little bit less attractive, and some of the less attractive banks are trading at really large premiums now also. Right now, investors want to move into the stocks but everything has had such a run that people are sort of scratching their heads, saying, “Maybe I’ll wait until these things pull back a little bit.” But people are definitely talking about it more, whereas over the last couple of quarters there was limited interest.

For the complete Midwest Banks Panel, including the full discussion of the space with Ms. Rooney and analyst Thomas Mitchell of Miller Tabak, click here. 

This week The Wall Street Transcript has released a new report on the The Financial Crisis in the Banking Sector.  This unique 742-page document tracks the thinking and perspective on the major sectors of finance, from 2000 through to 2009, with particular emphasis on the period from 2003 to 2006 when the seeds of today’s crisis were sewn.

The following is a excerpt for the report:

07/19/2004  A. Scott Keys – Executive Vice President and Chief Financial Officer – IndyMac Bancorp, Inc. (NDE)

Mr. Keys: I think the big fear for all mortgage companies is it’s fairly clear that interest rates are going to rise. If they rise very precipitously, it is possible that the housing market could slow down. As I said before, I don’t see an overall reduction in real estate values, but certainly, if rates were to go up 2%-3% from here, that would have a dampening effect on home sales and consumers’ willingness to take additional equity out of their homes. That’s probably the number one thing for us.  We have found though that in those types of environments, when rates are rising and the mortgage market is falling in terms of overall mortgages being originated, then our company tends to gain market share. In fact, if you look back to the first quarter of 2003, and compare it to the first quarter of 2004, we were one of, I think, three of the top 50 lenders in the United States that actually had our production grow year over year. And I think we’ll see that trend continue for us. This is because of our focus on the mortgage broker business and the Alt-A business, these are businesses that are a little bit less influenced by the refinancing cycles, and tend to be more focused on purchase business. So that’s a strategy that has been very good for us, and as rates rise going forward, will allow us to differentiate ourselves from some of the other players that are much more dependent on refinancing.

This is a record of in-depth verbatim interviews conducted and published at the time, probably the only long-form, first-hand account of what exactly people were thinking as the crisis unfolded.

This week The Wall Street Transcript has released a new report on the The Financial Crisis in the Banking Sector.  This unique 742-page document tracks the thinking and perspective on the major sectors of finance, from 2000 through to 2009, with particular emphasis on the period from 2003 to 2006 when the seeds of today’s crisis were sewn.

The following is a excerpt for the report:

03/20/00 – Analyst Interview:  Financial Services: A Legislative & Regulatory Outlook: Stephen Blumenthal – Schwab Washington Research Group

“You have conflicting messages being sent by the government. On one hand, we have the regulators who are trying to protect the FDIC Fund and the taxpayers. They’re saying they have concerns about the decline in credit quality. They are uncomfortable with banks making loans to people with less than perfect credit histories or on riskier business propositions. On the other hand, recently the Department of Housing and Urban Development put out a report that said Fannie Mae and Freddie Mac are not lending enough to minorities.”

This is a record of in-depth verbatim interviews conducted and published at the time, probably the only long-form, first-hand account of what exactly people were thinking as the crisis unfolded.

In the most recent issue of TWST, we spoke with analyst Michael Kim of Sandler O’Neil & Partners. He talked to us a little bit about the Asset Management space and the stocks that he’s concerned about there. Here’s what he had to say:

 Mr. Kim: One that I would highlight is T. Rowe Price (TROW), which has historically commanded a premium multiple, and rightly so. But I think the very reasons why TROW has historically traded at a premium multiple are rapidly evaporating, the first being the consistency of their organic growth over time. A lot of that has been on the back of their skew toward retirement accounts, or 401(k) plans and IRAs. We’ve already started to see many investors slow contributions and, in many cases, stop contributions altogether. I don’t think it’s unreasonable that we see the next step, or a meaningful step up in withdrawals from retirement accounts. So now, the very driver behind TROW’s organic growth advantage could ultimately turn into an incremental risk for that
franchise.

For the complete Financial Services report,  including a roundtable discussion of the space and interviews with top CEOs, click here. 

In one of our featured interviews this week Benny Aboud, CEO, and Michael W. Wallace, SVP & CFO, of Saveology.com  discuss Saveology.com and its current market position;

“The Saveology.com core services include satellite, cable, broadband, Internet, telecommunications, home security and utility services. We currently offer over 30 products and reach over 95% of the households in the United States. Consumers will spend over $3 trillion on these home services by 2010 and Saveology.com is uniquely positioned to take advantage of this market opportunity.”

Saveology.com launched SaveologyMoving and SaveologyFinance – Additions to Service Offerings Reaching over 2 Million Monthly Visitors

In one of our featured Interviews this week Marty Becker of Max Capital discusses the growth and changes to the company;

“Max is a traditional underwriter of specialty insurance and reinsurance. It has successfully transitioned from its origins as a Bermuda reinsurance company with a structured and alternative risk underwriting portfolio and an investment strategy that included a relatively high proportion of hedge funds and other alternative investments. We’ve successfully executed a 180-degree turn over the past 10 years, and today we believe Max has a really strong traditional underwriting operation. And we run a fairly similar investment portfolio to the other major global writers.”