Wonderful meeting with discussion about analysis

I rarely used the word "wonderful" before I graduated from college because I thought it makes me sound more like a girl, a British girl. (There's no discrimination here since the British accent is my favorite.) But I'd like to use it to describe today's Equity Analyst Team meeting talking about both technical analysis and fundamental financial modeling.

I'm not a tech person. I've been claiming this to everyone who asked me about my opinion regarding technical analysis (TA). I guess that I won't be a fan of it until someone makes a significant STABLE investment income with it. So this is the reason why talking about TA makes today's meeting wonderful when I compare it to what we discussed after that.

Saliq, if you are reading this post, you will notice that you've missed a great time by leaving us earlier. (I know you had to work but I want to make you jealous :) Hussain initiated several interesting topics like how PE firms use ROE and how important the IF function is in modeling the income forecast. Even I knew some of them a while ago, it was still quite joyful to share it and test if my memory is correct.

I hope I took some pictures of everything Hussain wrote on the blackboard today to record this wonderful meeting. Well, maybe next time...

- Soujanya

Some thoughts on Enterprise Financial

Currently, the whole team is working on the analysis reports of six banks across different market cap sizes. I am in charge of analyzing Enterprise Financial Services Corp. (EFSC).

Enterprise is a small regional bank, which only operates in the St. Louis, Kansas City and Phoenix metropolitan areas. Interest and fees on loans is its primary source of revenues, which are $114,041K, $112,548K, and $121,467K in 2010, 2009, and 2008 respectively. The Wealth Management segment includes the state tax credit brokerage activities and the Trust division of the Bank (providing estate planning, investment management, trust administration, and retirement planning as well as consulting on management compensation, strategic planning and management succession issues). However, when comparing to its interest revenue, its Wealth Management revenue is quite a small portion, which is $6,414K, $4,524K, and $5,916 in 2010, 2009, and 2008 respectively.

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest earning and other assets. The amount of net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities.  Net interest income increased $19.2 million, or 27%, from $71.4 million for 2009 to $90.7 million for 2010. Total interest income increased $2.8 million while total interest expense decreased $16.4 million.

Based on the SWOT framework and its MD&A, so far I notice advantages and potential risks for EFCS below:

Advantages:

The growth strategy for EFSC is largely client relationship driven.  Those relationships are maintained, cultivated and expanded over time by banking officers who generally are highly experienced. Besides, comparing with other regional banks, its technological capabilities are also viewed as a competitive advantage (have a systems provide Internet banking, expanded treasury management products, check and document imaging, as well as a 24-hour voice response system).

Potential risks:

Various factors may cause EFSC allowance for loan losses to increase:  it may need be increased if economic conditions continue to deteriorate, or by bank regulatory agencies’ requirement based on a different judgments from those of its management. In addition, if charge-offs in future periods exceed the allowance for loan losses, EFSC will need additional loan loss provisions to increase the allowance for loan losses. (Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income or an increase in net loss and a reduction in capital, and may have a material adverse effect on its financial condition and results of operations.)

The loan portfolio of EFSC is concentrated in certain markets (the St. Louis, Kansas City, and Phoenix metropolitan areas.) which could result in increased credit risk: The regional economic conditions in those areas have an impact on the demand for its products and services as well as the ability of its customers to repay loans, the value of the collateral securing loans and the stability of its deposit funding sources.



The portfolio mix of EFSC, which has a concentration of loans secured by real estate, could result in increased credit risk: A significant portion of its portfolio is secured by real estate and thus EFSC have a high degree of risk from a downturn in the real estate markets. If real estate values continue to decline further in the markets, the value of real estate collateral securing loans could be significantly reduced.

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Lorena

The world on fire

People are dying in Ivory Coast, Bomb blasts in Pakistan, US senate is about to stall as the budget extension comes to expire, there's an oil spill killing the penguins, Libya is on fire, Iraq is still in chaos, UN members are dying in Afghanistan, Japan has drowned and whatever is left of it is now in turmoil over the nuclear disaster... The world is crazy... That doesn't mean we have to be either
It's nice to slow down and look at the world around you instead of following in its fast pace like zombies.
just a thought...

- Hamza

Who is to blame?

Sometimes it makes me wonder, what does "Financial Engineering" really mean? While real engineers build products that in some way adds value to make every day simpler and productive, what lucrative products do the so-called engineers in Finance make that entitles them to so much more wealth? I guess it is probably all an illusion at part or more so our ignorance in understanding the products, primarily because they are very complex instruments to hedge risk. There is math, computing, finance and other permutations and combinations blend with some phd brains, economic perceptions, and more theory.

But again, why did not these complex products hedge risk in the securitization food chain? Although these products may have found ways for growth beyond means, there were no boundaries and that has brought us to the point that we are at today. Housing markets still stagnant, government debt at peaks, quantitative easing and GDP growth leisurely reaching levels that would bring an improvement in unemployment.

In retrospect, I was part of an Engineering project for community service during my undergrad where our group designed a bicycle powered generator for middle school kids to understand and observe the physics beyond the functionality. We were amazed at our creation - we created a product beneficial to a community. Similarly, the creators of these products are genuinely excited at what they make  but I guess  it is for the users of these products to distinguish between "too much" and "just enough."

- Soujanya

Happy Hour on Thursday

Happy hour this Thursday.....

Equity Analyst Team & GMBA

Present….

 Happy Hour Networking Opportunity

At Lebanese Taverna

Thursday April 7th | 5:30 PM – 9:00 PM | 719 S. President St. Baltimore, MD | RSVP: AnalystTeam@jhu.edu

Specials
_____________________________________________________________

Bottled and draft beers are $3 each plus tax and service charge.
House Red and White Wine is $4 per glass plus tax and service charge.
Sodas are $2.50 each plus tax and service charge

Lebanese Taverna has been kind enough to provide us with the following complementary foods:
2 Large platters of hommos
2 Large platters of Baba Ghannouge

We will be sitting at the Captain’s Table in the lounge

Facebook page: http://www.facebook.com/event.php?eid=149535058443602

Morning Conference of 3/31/2011

Topic: Overview of this week market.

Most of our members who participated in the morning call have expressed their opinions and provided what they though about the market for the week.

Chang: There was news coming out saying JPM Morgan’s CEO was expecting 100s of municipal securities my not be able to make it or may fail due to local developments and difficulties in paying their debts. Chang was so concern about this subject due to the fact that he is covering UMB bank in the quarterly report that the team is about to publish at the end of this month. And UMB bank is heavily exposed to the local developments and municipal debts.

Saliq: Saliq’s topic was a little bit broad and international covering the unrest in Libya and how this specific issue has affected the market. The market had gone up for the past few days but the fundamentals weren’t supporting it as a result the market dropped due to what was happening in Libya. Several reports published by the government and the private sector. Investors expect both reports to be of the same results when actually they are not. Saliq thought that the unemployment rate will stay the same at 8.9%.

Hamza: commentated on what Saliq said and both agreed.

Lorena: Many stocks jumped this Wednesday and drove the Dow to its highest point in 2011 with ATT&T leading the way with over 2% increase in its stock price due to speculative view of the deal with T-mobile. The deal that many think will be approved by regulator. In addition, the S&P was up over 5% this year and 0.7% on Wednesday. Saliq disagreed to what Lorena had just said. He said that the latest reports showed that the market was affected by what happened in Japan and the Middle East. However, Lorena thought that many stocks would gradually step in the process of  recovering from days of negative news about Japan and the unrest in the Middle East and they were in their way up. Chang intervened and said that the Dow reached its highest on February 18.

                                           

Soujanya: Soujanya covered the latest news from the Fed regarding banks who borrowed money during the financial crises and then she moved to the latest news from Obama in a speech he had in George Washington University. Obama outlined a plan to cut oil import by one third and allow oil drilling within several parts of the country. Then she talked about Ebay buying GSI for $2.4 billion to improve its commerce experience.

At the end Saliq jumped in with the latest information from reliable sources about the market highs and lows.

This was a summary of the morning conference call the team had on 3/31/2011.

Hussain Jubail

Friday’s Jobs Report March 2011

The March unemployment rate hit a two-year low at 8.8 percent in March. Nonfarm payrolls gained 216,000, with private-sector employment rising by 230,000.

After adding 192,000 jobs in February, most economists believe Friday's jobs report would indicate weather the economy is finally gaining some flying speed or not, which makes it so critical.

Fortunately, there was lots of good news in Friday’s jobs report.

http://www.bls.gov/news.release/empsit.nr0.htm

As Labor Department announced, the economy added 216,000 new jobs last month. Factories, retailers, education, health care and an array of professional and financial services expanded payrolls.

Private employers added 230,000 jobs last month, on top of 240,000 in February. It was the first time private hiring topped 200,000 in back-to-back months since 2006.

The Street has been clouded for a while by the higher oil prices and complicated political conditions in Africa and the Middle East, renewed weakness in the housing market, uncertainty about the federal deficit, influence of sovereign debt crises in Europe, and supply chain disruptions from the Japanese crisis. Friday's jobs report made a lot of people cheer, and the stock market is rallying today, but there are still some hidden signals in this report to take into account.

Though the unemployment rate is dropping, the number of people who remain unemployed is still considerable: 13.5 million people would like to work, but can’t get a job, and nearly half of them have been out of work for 27 weeks or more.

As Capital Economics said in a note today, "if the rate is only falling by 0.1% each month, it would take another three and a half years to get back down to the pre-recession level." Payroll employment stood at 130.7 million in March, still down 7.2 million from the peak in December 2007.


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Lorena Li