To Our Clients, Colleagues and Friends:  

· Something we tend to forget about is that the Federal Reserve typically earns a profit from their trading and lending activities.  Last year, they earned $37 billion. Not a bad year.

· We just noticed that an insider has been buying shares in First California Bank.  What caught our attention was not that a senior officer was buying but that it was the Chief Credit Officer.  In this environment, that says a lot! 

· Last week marked the fifth anniversary of the War in Iraq .  The U.S. has spent $525 billion on the war and is currently spending $435 million per day. We figure it probably costs cities about $100,000 per year in direct and indirect costs to hire a policeman or a teacher, so depending on your priorities, one month’s spending in Iraq could put 130,000 teachers in the classrooms or 130,000 cops on the beat for a year.

· We’re starting to get reports from clients that February was a great month.  And when we say this, we’re not necessarily referring to volume.  Our clients are telling us that they had good profits in February. Most think March will be even better. 

· If we read correctly, Thornburg pretty much gave away the shop to get possible funding:
(a) They gave warrants to buy 27% of their company to the lenders providing new financing, exercisable at one penny a share, (b) they will (i.e. must) raise $948 million by issuing 12% notes that are convertible into common, and (c) as if a 12% coupon weren’t enough, these note holders will have warrants to buy 5% of the company’s shares at, again, one penny a share. The new lenders have also, get this, given Thornburg just seven days to raise the $948 million or there’s no new funding.  Brutal, just brutal.

· A reader asked us recently what the four things were that we considered most important in buying, investing in or evaluating a bank.  We narrowed it down to the following: 

1. Net Interest Margin and Cost of funds
There are lots of banks that have funding costs of 3.0% or lower, and it’s just easier to make money when you have cheap deposits. You can still find banks with a NIM of 5.0% or better.  There aren’t many, but they’re out there.

2. Percentage of deposits in non-interest bearing accounts
When we see banks where 25% or more of their deposits are non-interest bearing, we get very interested.  You can take free deposits and invest them at 4-5% in government bonds or 6-7% in loans and make a fortune. 

3. Credit quality
A year ago, no one paid any attention to this.  We look at the levels of non-performing assets as a percentage of total assets.  Lower is obviously better. Then we like to see reserves that are 2-3 times the levels of NPA’s.

4. Efficiency ratio
This is a measurement of total costs to total revenues, and it’s essentially how many pennies it takes to generate a dollar of revenue. We get very interested when we see banks with efficiency ratio of 35% or lower.  They’re rare, but they’re out there. By the way, a high ROA bank can have a crummy Efficiency Ratio if they’re in certain businesses. An example is that when it’s going well, mortgage banking generates a high ROA along with high costs.  So we also know when to ignore this. We just like management that doesn’t waste our money on stupid things.

If we were to choose only one measurement, it would be the Return on Assets (ROA). Yes, we know that you make money by your Return on Equity (ROE), but it all starts with the ROA.

· Radian Sr. V-P Gary Egkan won the award for being the first respondent to correctly name Andy Devine as the kids show host who implored kids to plunk their “magic twanger”.    Many of you thought it was Buster Brown, but that was the shoe company which sponsored the show. Andy ended each show saying “Yes, sir, we’re pals and pals stick together. And now, don’t forget church or Sunday school. So long, fellows and gals.”  And wasn’t that Frog of his kind of demented?  We thought so at the time, and we still do.

· You’re trying to decide which video to rent, and you just can’t decide. What would we recommend?  Well, you should consider renting The Rocky Horror Picture Show.  Describing it is kind of difficult: It’s a horror movie (but not very scary) about transvestite Vampires.  The Transylvanian castle where they go to party also has a Dr. Frankenstein-type who’s building a monster in the attic. We forgot to mention that it’s also a musical.  In fact, rocker Meat Loaf has an amazing musical solo which ends when he’s savagely beaten to death by the Frankenstein character. You’ll either think it’s one of the worst movies ever made, or you’ll think it’s pure genius.  Let us know.

Corky Watts and Joe Garrett   -  Garrett, Watts & Co.