05.04.09 

DROPPING RESEARCH COVERAGE
We are dropping research coverage of the following companies as the analysts are no longer with the firm: Blackbaud, Inc. (BLKB), Morningstar Inc. (MORN), Clean Energy Fuels Corp. (CLNE), NetSuite(N), Peet's Coffee & Tea (PEET), Dover Saddlery, Inc. (DOVR), Rackspace Hosting, Inc (RAX). Contact Us for Full Report - PDF

10.17.08 

TARP PROPOSAL PROVIDES POTENTIALLY LARGE LIQUIDITY BOOST TO COMMUNITY BANKS
The most recent iteration of the Treasury Department's plan to unfreeze the credit markets includes the community banking sector along with all of the larger money center institutions. Utilizing the $250 billion first tranche monies provided under the TARP program, Treasury has announced that it will invest directly into the banking system. Under plans that are summarized on the following page, Treasury will purchase preferred stock in participating banks, with a minimum issuance amount per institution of 1% of risk-weighted assets, and a maximum of the lesser of $25 billion or 3% of risk-weighted assets. Nine of the nation's largest financial institutions have already agreed to participate in the program, which will use $125 billion or of the earmarked funds. Excluding the participating investment banks, we estimate that these commercial banks will issue preferred stock equal to 1.5% of their total assets. Interestingly, or more likely by design, we believe that Treasury has enough funds to buy preferred stock equal to approximately 1.5% of total assets of all the remaining banks in the banking system. These monies represent a huge liquidity boost for the financial system in our assessment. Given that many community banks that are in need of capital have largely been unable to raise cost effective funds, these monies come at a most opportune moment. Additionally, we have spoken with several opportunistic banks that believe that the potential ROI being created by the dislocated residential mortgage market may justify the potential dilution created by borrowing from the TARP program. We believe that Treasury has fashioned the program to encourage widespread use by the banking sector. A less-than-robust turnout poses a potential threat to Secretary Paulson?s plans. Needless to say, the entire sector remains very fluid and it remains unclear how many banks will actually participate in the program. In our assessment, these steps were required and signal a move in the right direction to ending the credit crisis. Contact Us for Full Report - PDF

09.23.08 

WILD WEEKS FOR BANKS, CAPPED BY STRONG ABSOLUTE AND RELATIVE PERFORMANCE OF MID-SIZED REGIONAL BANKS
Financial stocks have generally rallied over the past few weeks in an immensely volatile trading environment. Mid-sized regional banks, as represented by the KBW regional bank index, were one of the strongest performing financial sub-sectors. The KBW, which is comprised of banks with assets of between $4 billion and $60 billion and has an average market capitalization of $2.1 billion, posted an astounding 24% absolute return over the past two weeks. This is in contrast to the XLF index comprised of larger banks and brokers, which posted a -3% return over the past two weeks. The XLF however, remains 11% above a low posted last week following the bankruptcy of Lehman and the bailout of AIG. As for the WR Hambrecht + Co Community Banking Index, it also underperformed the KBW, posting a 5% gain over the past two weeks. While not keeping up with its larger regional banking brethren, our community banks have also been much less volatile than the XLF. With conversations about the future of Wall Street and banking circulating, we feel that our investment thesis on smaller community banks remains sound. More specifically, that reversion to the mean for these banks is a powerful trend that is much easier to analyze given the general simplicity of their balance sheets and businesses relative to the larger banks and brokers. Clearly some of this thinking has come into play in the aggressive bidding of KBW shares relative to the XLF. Put another way, we believe that a portfolio of banks that do not need a federal bailout should ultimately outperform banks that need help from Washington. The relative obscurity of the smaller community banks, with only limited or likely non-existent analyst coverage likely comes into play in the timing of a potential rebound in shares. Contact Us for Full Report - PDF

09.09.08 

CURRENT BANKING CRISIS CREATES BUYING OPPORTUNITY IN THE COMMUNITY BANKING SECTOR
The banking sector is facing its most challenging environment in decades. Despite this severe test, we believe that the financial crisis has created an attractive buying opportunity for investors who are able to carefully sift through the noise. Our investment thesis is underpinned by two key points. First, U.S. bank valuations have reached their lowest levels since the mid-1990s, and we expect that they will ultimately revert to their mean levels. Second, the overall climate in the U.S. banking sector has reduced valuations across the entire banking sector, not necessarily specific to the balance sheet risk of the banks themselves. As a result, banks with relatively strong capital levels that have avoided or managed housing risk have seen their valuations reduced in tandem with the entire sector. Contact Us for Full Report - PDF

07.08.08 

CRISIS IN THE BANKING SECTOR
The US banking system is in the midst of a perfect storm, with deteriorating credit from lax lending standards over the past several years leading to record levels of charge-offs. Further complicating the situation is the dislocation in the credit markets along with the economic malaise in the US economy, which we believe will make recovery long and difficult for large swaths of the sector. While it seems that the US banking sector experiences a downturn every several years, at the risk of sounding clich , this one is different. We in fact have to go back to the throes of the S&L crisis in the late 1980's and recession of the early 1990's to find asset performance and subsequent reserve levels as weak as those presently being reported. Therefore, we expect that banks will continue to need to bolster their balance sheets from a combination of capital raises and asset sales, which depending on situations can be very dilutive to existing shareholders. Contact Us for Full Report - PDF