Portfolio manager Cale Smith on investing, Spoke Funds®, and Islamorada in the Florida Keys.

My firm Islamorada Investment Management will be having its first annual Investor Meeting here in Islamorada on Saturday, January 30, 2010. It will be open to all investors, scallywags, parrotheads, conchs and their friends and families. I’ll be putting more info out about it here on the blog and in my monthly letter to investors, which you can sign up for here.

We’ll talk Tarpon, Gecko, answer any questions and learn more about some of our portfolio companies…while wearing flip flops. And shorts. In January. When it will be beautiful.

My apologies, Chicago.

So if you’ll be in the Keys in January, or if you’d like an excuse to leave the snow and come down to our little village, please consider yourself invited. Drop me a line if you plan to come.

Later that night will be the full moon party at Morada Bay. Looks like it will be a blue moon, too.

Hope you can make it. Should be a fun weekend.

More details to follow.

Below is the presentation that TIB Financial (NASDAQ:TIBB) gave at the special meeting of shareholders last week in Key Largo. Shareholders approved the increase in shares authorized, as per today’s press release. For those readers up north, TIB was founded here in Islamorada in 1974 – “TIB” stands for “The Islamorada Bank” – and as you’d expect, there’s a lot of interest in the Keys about the company.

Next up, TIB will attempt to sell a rather large chunk of new shares to institutional investors in order to comply with the regulators’ new capital ratio requirements. Though it seemed to cause some anxiety at the shareholders meeting, I don’t anticipate TIB having any problems finding institutional buyers for those shares. Despite its current woes, which have clearly been hard on a lot of local shareholders, TIB does still have a franchise in banking in the Keys. And never underestimate the ability of investment bankers to get a raise done when millions of dollars of fees are at stake. Just how Wall Street works.

Were I already an investor in TIBB, I’d key in on the three slides below, which speak to (1) some signs of progress in the business in Q2, most notably in indirect lending, (2) the intended use of proceeds from the raise, which includes a large cushion and (3) the bogeys management has set as targets to measure success after the turnaround.

While I wouldn’t be a Pollyanna about the road to come for TIB, I wouldn’t necessarily let the despair of large paper losses color my thoughts about the future too much, either.

If you’re considering becoming an investor in TIB at recent prices, I’d recommend doing the same analysis that the institutions who are considering buying shares in the raise are likely doing. There are probably too many variables to put together an in-depth model that anyone could have a high degree of confidence in, but you could certainly model a handful of different scenarios to get some brackets around a valuation. There’s also a rough but reasonable way to determine a ballpark value for shares in the long-term.

More specifically, you could attempt to determine what TIBB’s normalized earnings would look like once it’s out of this current ditch, apply pre-credit-crisis-level loan loss provisions, then account for taxes, TARP dividends and factor in the dilution associated with the pending raise, assuming a share price near today’s. TIBB appears to have had a historical P/E ration of close to 16, too, which could be used as is, or given a haircut as you feel is appropriate. When multiplying the appropriate P/E times that normalized earnings per share figure, you’d get an approximate value for the company in a more normal operating environment. No telling how long it might take the company to reach that state again, but it’s clearly going to take some time.

While I haven’t followed TIBB too closely nor too long, I do think the special shareholders meeting last Wednesday was probably the emotional low point for a lot of locals and the company, too. Water under the bridge now, though. Numbers on the scoreboard will tell the story from here on out.

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The Treasury Department’s long awaited Public-Private Investment Program, or PPIP, has finally launched. Here’s how I described the plan in my March letter to investors:

The basic idea is that if the big banks can sell off their bad assets, they can function again. The banks know this but can’t find any buyers. The government is bringing buyers to the table by sweetening the deal. In one part of the program, big investors can buy toxic assets “legacy loans” with some of their own money and a lot more of the government’s. In the other part, a handful of really big funds will be allowed to buy “legacy securities” – big bundles of repackaged loans – by putting up $500M each. The government will match that with $1 billion more through a special fund that has been closed to private firms until now. Some of that $1B would be non-recourse, meaning the funds are protected if they default. The funds get to cheaply buy just the best assets with borrowed money and no risk of imploding. So, they stand to make an absolute killing.

As pointed out in this New York Times article, the feds have “reached a deal to sell $1.3 billion in mortgages from Franklin Bank, a Houston-based lender that failed last November and was taken over by the F.D.I.C.”

Now if you’re asking yourself, “Why are taxpayers buying the toxic assets of a bank that is already dead?” you’re not alone. It’s one thing for Treasury to be providing large subsidies to private investors to buy toxic assets. That was a seemingly rational way to take toxic assets off the balance sheets of the country’s banks and help the banking system recover from the credit crisis.

But as pointed out in this post on The Baseline Scenario, these particular toxic assets at Franklin Bank already became property of the US government once the bank failed. At that point, the government owned 100% of the upside and 100% of the downside on those assets.

Until last week, that is, when the government through the PPIP program gave half of the potential upside to an investment fund – “Residential Credit Solutions of Fort Worth” – a company founded by a veteran of the subprime mortgage industry. As described above, that company bears no risk under the PPIP program when buying those assets.

In other words: the government gave half of the potential gains from those assets to a company started by an individual who may or may not have helped enable the crisis to begin with – and then kept all of the downside to itself.

Why are we subsidizing investors who are buying the assets of already dead banks? How does this help strengthen the banking system?

I have no idea.

Perhaps you can tell me.

Hat tip to FinanceGuy and RortyBomb, too.