Mr. Rabatin: In the Pacific Northwest, it's an area of the country where the economy is still pretty weak. There is a lot of expectation the area may lag into a recovery. So the investment ideas the past few quarters have been predicated more on FDIC-assisted transactions and the potential benefit of those. We're still early in the innings of FDIC receivership and bank failures, particularly in Washington State. But it's a changing environment where investors have to be a little more guarded about how they think these transactions will transpire, particularly as it relates to asset discounts on assisted transactions. At one point, the discounts were good enough to maybe help at least partially fund the transactions. Now they're just a lot cheaper than your typical M&A transaction. We're seeing a few deals, particularly for the core-funded banks, where there is a 4% to 6% discount on assets. I think that level may continue to even get more competitive. We may see some goodwill booked on a few of these. Nevertheless, the opportunity for consolidators and for banks, like Umpqua, which is "neutral"-rated, and Washington Federal, which is "buy"-rated, is to increase their market share and to get back to more normalized EPS sometime - if not in late 2011, during 2012 - with lower credit costs.
TWST: As you move down to California and into the Southwest, is it the same type of situation there?
Mr. Rabatin: Yes, it's an economy that's not very good right now. California obviously has a big economy, and when it does improve, you can certainly put your bet on the state. You have seen some improved trends in housing, even land lots in better areas, beginning to be sold again. I would say the current trends are not something that gets the bankers excited, but I think there is going to be, particularly as it gets to 2011, hopefully better economic trends. So you can even start now to make investments based more on how some institutions will be able to operate in a better economy. The area of the country that I continue to be the most ebullient on is Texas. Some of the banks there have done very well through the downturn and their prospects are solid. Many of them are even asset sensitive and poised well for higher interest rates. So Texas is probably the area of the country I remain the most comfortable with. And the state has the potential to lead economically in a recovery. There are some very good banks in that state, particularly names like Cullen/Frost, which is "buy"-rated. And the other name I have "buy"-rated is Texas Capital. It's the only one in the state that's really been growing their loan portfolio, so they've been taking market share from some other larger competitors. There are some very good names that are not inexpensive; their valuations, I think, are fairly robust. But names like Prosperity, which is "neutral-rated," and First Financial, which is also "neutral"-rated, both those companies have excellent fundamentals.
Tickers included in this excerpt: BOH, CFR, CMA, EWBC, FFIN, PRSP, TCBI, UMPQ, WFSL
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