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By Jason Stipp | 10-20-2009 05:28 AM

When Good Things Come in Small Banks

M3 Funds' Jason Stock on finding compelling small banks in strong communities and the attractiveness of mutual holding companies.

Jason Stipp: I'm Jason Stipp with Morningstar, reporting from the Value Investing Congress in New York. I'm here with Jason Stock of M3 Funds. He's looking at the banking sector, and they're still somewhat bearish on the banking sector overall, but they are still finding some opportunities.

Thanks so much for joining me, Jason.

Jason Stock: Thank you.

Stipp: So you said today that overall the banking sector, you're still somewhat negative. What's some of the things behind that, as the market seems to think that the credit crisis is behind us, but what are you seeing out there that's still casting somewhat of a bearish glow there?

Stock: Our main focus right now is the commercial real estate. We think the banks, although they've raised a lot of capital, they haven't raised enough capital to survive the upcoming commercial real estate losses. Vacancy rates are rising significantly and banks are extending out a lot of the problems.

A lot of these loans are maturing between 2009 and 2013. The banks are extending these out another couple of years rather than dealing with the problem. And we do think the regulators are going to start focusing a bit more on commercial real estate loans and requiring that these banks begin to properly reserve for the losses that we see on the horizon.

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