CoBiz (COBZ) Plans To Redeem TARP In Late 2010; Read On For A Senior Banking Analysts Viewpoint
March 11, 2010 - The Wall Street Transcript has just published Pacific & Southwest Regional Banks Report offering a timely review of the Banking sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Edward Timmons joined Sterne, Agee & Leach in May 2008 as a Senior Research Analyst covering mid-cap banks. Prior to joining the firm, he was an Associate Analyst at Stifel, Nicolaus & Co., for which he covered regional banks and thrifts. Mr. Timmons has also held various positions with JPMorgan Chase and Putnam Investments. He received his undergraduate degree in finance from West Virginia University and earned his MBA from the College of William & Mary.
TWST: What happens among small banks with TARP? For example, as I understand, Zions still has TARP capital.
Mr. Timmons: Zions (ZION), to pay back TARP in the near term, would require a significant capital raise; my estimate is at least 700 million just to pay back TARP. Without significant regulatory pressure to pay it back, I don't see that coming. I think they would rather wait for their return to profitability at some point in 2011, then start to monetize the excess reserves that they have. And then at some point down the road, perhaps raise a number much less than that 700 million estimate and redeem TARP at that point. There is another couple of years of 5% dividend, so at this point I wouldn't say it's necessarily cheap capital, but it's not expensive at this point. I think they would really like to have it off the books before it ticks up to a 9% dividend rate.
But without a significant capital raise, I can't see TARP being redeemed at Zions. For the most part, a lot of the other banks out West have either paid back TARP or made progress on paying back TARP. A number of banks in my coverage have already redeemed it. CVBF (CVBF) paid it back last year, as did Westamerica (WABC) and Silicon Valley (SIVB). City National (CYN) has redeemed half of it; CoBiz (COBZ) has plans to hopefully redeem it later in 2010. So I think a lot of these banks are making strides or at least are looking at an exit strategy for TARP if they have the capital to do it.
TWST: What's your outlook for the industry and for Western regional banks specifically?
Mr. Timmons: I think 2010 will be a difficult year. I think credit costs will remain somewhat elevated. My expectation of interest rates is it may be a fourth-quarter event when we get the first turn. So I think you're going to see the top line - without any kind of benefit to the margin and very little loan growth - I think you'll see the top line remain depressed, perhaps falling at a lot of these banks. And as I mentioned, credit costs will remain high. Bottom line: You're not going to see a whole lot of earnings growth in 2010, although you are coming off a pretty weak 2009. So year-over-year, you will probably see a modest move up. Longer term, I think profitability coming out of the cycle will be much less than it was coming into the cycle. I mentioned you're going to have higher capital levels, higher reserve levels, higher FDIC premiums, a number of negative headwinds.
TWST: Where are you pointing investors now? Do you see any good stories out there?
Mr. Timmons: I do. I think there are a number of good stories. PacWest (PACW) has been one of my favorite names. I upgraded that last fall. I continue to think that they will be an active consolidator through the FDIC. They have a ton of capital and strong pre-provision earnings power, so they give me the comfort level that they will get through this current cycle and continue to build a franchise through these FDIC deals. On a normalized earnings basis, I think the valuation looks pretty attractive here. CoBiz, out in Colorado, in 2009 they were very aggressive in addressing a lot of their credit issues, took the lumps, built reserves to a point where I think they hit an inflection point in credit much earlier than many other banks.
So I think 2011 could be a kind of return to normalcy for those guys. And on a normalized earnings basis, I think they look attractive.There are a number of banks at the right price; I like them longer term. But at this point, just given the run we've had year to date, I'm just not comfortable jumping in. Lastly, Silicon Valley - if you're looking for a pure-play on a turn in the economy and increasing rates - given their lack of real state exposure, I really like that bank. They have significant earnings leverage once rates turn and move up a couple of hundred basis points. But my expectation is that's fourth quarter 2010 or maybe an early 2011 event.
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