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Skyline's Financial Picks in the Crisis' Wake

Skyline Asset Management's Mike Maloney discusses a bank and a securities-processing firm that emerged as attractive gems.

Mike Breen: ...and the crisis has brought opportunity, and we discussed before a firm [called] Penson Worldwide, and that's a similar thing, a financial-related firm that actually looks quite attractive even after last year. Maybe you can explain that firm a little bit.

Michael Maloney: Penson Worldwide is the number-five clearing and execution firm in the world. Basically, they work with brokers, hedge funds, trading shops to clear trades. Obviously it's a very important part of the overall stock transaction and option transaction process.

Penson has been doing very, very well in taking market share if you look at their correspondents, the number of customers that they've signed up. They've been growing that very, very steadily, but the stock got hit because earnings came down, because interest rates came down when the Fed funds rates went to basically zero.

Penson makes a significant portion of their earnings off of the customer balances that they hold, the interest they earn on the customer balances they hold, and as interest rates came down, that interest income that they earn went down.

So if you look at the bottom-line earnings and you don't disaggregate the sources of earnings, it looks likes earnings are coming down for Penson. But if you actually look at the core business metrics: Are they going up, are they signing new customers, are they signing the customers that are growing the fastest, are their customers adding customers? All those metrics are very, very positive.


The stock trades at about $10. We believe they are going to earn about $1 a share this year, so it's very, very attractively valued on what are depressed earnings. At some point, we don't know when our interest rates are going to go back up, but they can't go any lower than zero, we don't think. So, again, it's very inexpensive stock and very well valued.

Breen: Some of the problems of the bigger firms, some who cease to exist, probably helped them as well.

Maloney: Certainly.

Breen: Being an independent might be good now.

Maloney: Exactly. The big competitors, Merrill, which was bought out by BofA is a big competitor. Bear Stearns is big in clearing and execution, but they tended to go for the bigger shops and weren't a real direct competitor, and then Goldman Sachs. Two years ago, a correspondent thought it was a good idea to do business with a Goldman or a Merrill that was a large diversified firm rather than a smaller independent like Penson.

But with the problems that a lot of the bigger shops have had, there are real questions about conflict of interest. You take buying services from a competitor caused a lot of brokers and correspondents to rethink that relationship and that's a big driver of Penson's strong internal growth right now.

Breen: And for a value shop, you have an interesting bank player, I believe, out in Silicon Valley.

Maloney: Exactly. There's a company called Silicon Valley Bank Shares. It's an interesting bank because the credit problems are pretty widespread across the banking industry, but they're really concentrated in real estate related both in commercial and residential real estate. It started in the mortgage business, and it's spread to commercial real estate. Silicon Valley has very, very little exposure to real estate.

As you can imagine, being in Silicon Valley, they're technology related and in particular they're venture capital related. They are the bank for the venture capital community. So they do fund early-stage venture capital companies, and the market got a little bit worried about the issues that might face some early-stage venture cap companies: Will their funding get pulled back and will that cause risks?

We know there's going to be some losses there, but we looked back in past cycles and saw that the company was well capitalized to handle any of those losses. Great liquidity in the bank; they've significantly grown their deposits, and it's a true, great franchise. It's one of the best, most profitable banks in the country. We were able to get it at a significant discount...

Breen: One of the only profitable banks.


Breen: this point in time.

Maloney: We were able to get it at a significant discount to tangible book value. Any time you get a company of that quality for below book value is just a great, great opportunity for us.

Breen: Fantastic! We wish you the best of luck.

Maloney: Thanks Mike.

Breen: Take care.

Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.