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Five analysts and top management from ten sector firms examine the banking sector in this special 71-page South & SouthEastern Regional Banks issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info449.htm

TWST: Jeff Davis, what’s your thinking?

Mr. Davis: One is that we concur that the play a year ago was to buy these stocks — particularly the small caps. They were cheap, and the Fed had to cut, given an inverted yield curve. Short-term rate reductions would help margins, which would in turn allow banks to absorb higher credit costs. That trade in the bank stocks has run its course, however. Not every bank benefits from further cuts today —- although all of their borrowers will. Those that are more dependent on wholesale funding, CD funding and/or have a large 1-4 mortgage component in their portfolios will be the best positioned to benefit from further short-term rate reductions. For many community and some mid-sized banks that are mostly funded with low cost core deposits, they cannot lower the rates on their core deposits much further, while prime and LIBOR-based loans will reprice down.

TWST: Jeff Davis, how attractive are mergers and acquisitions, given the current valuations?

Mr. Davis: It depends upon the expectations. At the end of the day, M&A is a give-and-get ratio between the buyer and the seller. Absolute valuation levels are important. But what is really important are valuation levels between public market multiples and seller expectations because stock has been the currency of choice in the M&A market. Overall deal stats are still showing acquisition p/e multiples in the high teens, while the price to book numbers have come down, indicating that profitability is going down. Public market multiples are about 30% lower at 14 times earnings — a gap that is not hugely conducive to activity right now. But this is an industry like any other slow-growing industry with a lot of players in it. It’s going to see substantial consolidation that will ebb and flow over the next 10 or 15 years. When pricing gets attractive it will pick up, and when it’s rich it will slow down. I’m of the opinion that while this downturn is worse than advertised, a lot of weak players will be forced to get out as they were 10 years ago. We’ll see the well-run small, mid-sized and large companies, which generate a lot of excess capital — whether they have grown much or not during the past few years — roll up the weak players once the economy begins to recover and it is safer to take on someone else’s loan portfolio. M&A will continue to be an important investment consideration for investors in the small and mid-cap banks.

TWST: Jeff Davis, what are the two or three stocks that you particularly like at this time?

Mr. Davis: We cover one that we particularly like, and actually it’s my partner, Brett Rabatin, who covers it now. It’s Alabama National. Jefferson mentioned its great fee business attributes. It also has great markets, with most of the footprint in metro markets in Alabama, Atlanta, and Florida. It has another attribute that we also like, which is the board owns a lot of the stock. One family has 15%-18%, which increases to 25% with all of the board. Management is expected to run it to produce consistent returns. We tend to dislike smaller cap stocks where the board does not own much. No one has ownership, and you may get an OPM mentality, other-people’s-money syndrome. The one that we are turning positive on, even though the valuation is still a little rich, is The South Financial Group (Nasdaq:TSFG), which has been an underperformer for numerous reasons I won’t go into here. Like many things that revert to the mean, we think it is going to come back. It’s going to meet its peers. As the industry’s profitability comes down, TSFG is going to be working its way up. Plus, it has a little bit of takeover speculation that will periodically flare up.

This special issue includes:

1) South & SouthEastern Regional Banks - In an in-depth (14,000 words) Analyst Roundtable, Jeff Davis, Analyst covering regional banks at Midwest Research, Inc., Charles N. Ernst, Vice President at Putnam Lovell Securities, Inc., Jefferson L. Harralson, Vice President at SunTrust Robinson Humphrey Capital Markets and Christopher M. Mutascio, Principal at Legg Mason Wood Walker, Inc., examine the outlook for the sector including investment approach, credit quality and share specific stock recommendations.

2) Regional Bank Stocks - In an in-depth (3,300 words) Analyst Interview, Gary B. Townsend, Senior Analyst at Friedman, Billings, Ramsey & Co., examines the outlook for the sector and shares specific stock recommendations.

3) The TWST confidential Off-The-Record survey of management performance at thirteen sector firms asked market insiders about the ability of management teams to create shareholder value.

4) CEO interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.