Monday, October 24, 2011

NYB FNFG AF FNB TRST FNLC OCFC: Regional Bank Earnings/MSFT/Sold OCFC at $12.45/Quicksilver Resources/Added 30 HBAN as LT at $4.8/Bought 50 FNFG at $8.88

Microsoft (owned) reported okay results last Thursday. For its first fiscal quarter, MSFT reported net income of 5.74 billion or $.68 per share on $17.37 billion in revenues, a 7% increase. SEC Filed Press Release dated October 20, 2011 Cash and short term investments rose to $57.403 billion as of 9/30/11, up from $52.772 billion at the end of the prior quarter.  MSFT did recently raise its quarterly dividend to 20 cents per share from 16 cents. Microsoft shares initially had a slight negative reaction to this report on Friday before nudging up 12 cents last Friday to close at $27.16.

Tiernan Ray noted in his Barrons' column that Rick Sherlund is recommending Microsoft. Sherlund, who used to be the axe on MSFT when he was an analyst at Goldman Sachs, believes that the launch of Windows 8 next year will be a catalyst for driving the stock higher. He noted that laptops are becoming lighter, and there is not much difference in weight between a new Samsung laptop and the IPAD. And the laptop has a keyboard. Windows 8 is supposed to have touch screen features and will be capable of running Office. With the laptop having a bigger touch screen, more features, a built in keyboard and a similar weight than the tablet, the question is why would the IPad  continue to eat into the laptop's market share?

Merrill Lynch is predicting that another rating agency will downgrade U.S. debt before year end.

In this post, I am going to discuss a number of regional bank earnings reports. These reports generally show a negative impact from the Fed's Jihad against the Saving Class, as the banks suffer a contraction in their net interest margins.  Operation Twist is expected to have a negative impact due to a flattening of the yield curve. These issues will have a disproportionate impact on thrifts who depend on mortgage lending.

The banks will suffer a double whammy on their mortgage portfolios, as their higher yielding mortgages are refinanced and the spread on new mortgage loans looks more unattractive due to the Fed's current monetary policy.  When one focuses on the current inflation data, running at an annual rate of 3.9%  based on the government's last CPI report, it would not appear wise to generate and hold long term mortgages yielding 4% to 4.25%.

Quicksilver's 2016 senior bond (own) surged almost 10 points last week after the company announced that it will form a MLP to hold some of its Barnett Shale assets, take the MLP public to raise more than $400 million an then use the proceeds to retire debt.  SEC Filed Press Release

As noted by Paul Krugman in his NYT column, a central part of the GOP's job plan is to permit more pollution.  Colbert reached the same conclusion. While this stance will win enthusiastic applause from the TBs, it is not likely to curry much favor with the independents.

Herman Cain, the current GOP front runner for President, says that the unemployed are responsible for their failure to have a job. The audience at a recent GOP debate applauded him for taking that stand. Colbert Report  Video Clip I suppose those middle aged unemployed persons can go to work delivering pizzas or flipping burgers. His 9-9-9 tax plan is designed to widen the gulf between the top 1% and the bottom 80%. That plan, which includes a 9% national sales tax, is probably the most regressive tax plan offered by any candidate for President, apparently based on the belief that the middle class and the poor need to be impoverished for the greater good of the Job Creators.  Tax Policy Center (see also republican Bruce Bartlett's commentary)

In a NYT article discussing the foibles of Eastman Kodak, an interesting historical tidbit is mentioned. Kodak's CEO, Kay Whitmore, who was later fired in 1993 NYT, actually fell asleep during a meeting with Bill Gates. Mr. Whitmore was a chemical engineer who had worked his way up in the film business at Kodak.

1. New York Community Bancorp (NYB)(own: Regional Bank Stocks Basket Strategy): New York Community Bancorp reported third quarter GAAP net income of $119.8 million or 27 cents per share. Non-GAAP cash E.P.S. was reported at 30 cents per share.  The Board declared the regular quarterly dividend of 25 cents per share. As of 9/30/11, NPLs to total loans stood at 1.44% (non-covered); NPAs ratio to total assets was 1.24% (non-covered); the cash efficiency ratio was 40.33%; the cash efficiency ratio was 41.65; the net interest margin decreased to 3.33% from 3.5% as of 6/30/11; the allowance for losses on non-covered loans to total non-covered NPLs was just 33.44%; and tangible book value was $7.04 per share. 

New York Community Bancorp closed at $12.41 last Friday, up 22 cents.

2. Added 50 First Niagara (FNFG) at $8.88 (Regional Bank Stocks Basket Strategy)(see disclaimer): FNFG is my largest position in this basket. First Niagara reported third quarter non-GAAP earnings of 73.6 million or 25 cents per share, one cent below the consensus estimate. As of 9/30/11, the net interest margin was 3.48%; the efficiency ratio was 67.04%; the Texas Ratio was 10.19%; NPLs to total loans was at .5%; NPAs to total assets was at .29%; the allowance for NPLs to NPLS stood at 137.7%; and the tier 1 total risk-based capital ratio was 12.15%.

During the conference call, FNFG raised the Durbin Amendment's negative impact for the 4th quarter to $3.5 million from $1.5 million Earnings Call Transcript

A negative factor for stockholders in my opinion is this bank's acquisition of 195 branches from HSBC for about $1 billion dollars which has not yet received clearance from the government. Bloomberg Based on the question and answer session during the earnings call, analysts appear to be concerned about the amount of stock that will have to be sold to finance this acquisition. While FNFG's plan to finance this acquisition will change with market circumstances, the Bloomberg story mentioned that the bank planned to issue $750 to $800 million in stock.  FNFG's management believes that this acquisition is a "strategic home run" (Transcript - Seeking Alpha). Based on his comments, he does not want to assign the blame for the recent weakness in the shares to his decision to acquire those branches. Instead, based on the comments made by the CEO, John Koelmel, during the conference call, he apparently believes that the Fed's Jihad and Operation Twist are to blame. I would instead assign about 60% to 70% of the recent share price weakness to the need for a large share issuance to finance the acquisition of those HSBC branches. Listening to that executive, I did not come away with the impression that disagreeing with him could be hazardous to one's job prospects at that bank.

Long term, I believe that FNFG will be a winner, but I may have to hold my 350 shares for a few years to realize a decent gain in them. The dividend yield at a total cost of $8.88 is over 7%.

First Niagara closed last Friday at $8.91, down 18 cent on a strong day for other banks and the market. Barclays maintained an overweight with a $15 price target but lower earnings estimates for the 4th quarter and 2012 due to net interest margin contraction.

3. F.N.B. (FNB)(own: Regional Bank Stocks Basket Strategy): F.N.B. reported net income of $23.8 million for the 3rd quarter or 19 cents per share, up from 15 cents in the year ago quarter. The consensus estimate was for 18 cents. As of 9/30/11, the total risk-based capital ratio was estimated to be 13.3%; the net interest margin was 3.79%; the efficiency ratio was at 59.01%; NPLs to total loans was at 1.85%; NPAs to total assets was 1.67%; and the allowance for loan losses as a percentage of NPLs was at 86.75%.  

4. Astoria (AF)(own: Regional Bank Stocks Basket Strategy): Astoria produced another disappointing report, easily the worst one for banks included in this strategy. AF reported net income o $11.2 million or 12 cents per share. The consensus estimate was for 19 cents. The bank blamed the flattening yield curve and mortgage prepayment activity. Fortunately, I sold out of AF at over $14 and only recently bought back 50 of the 150 previously sold at $8.9. As of 9/30/11, NPLs tot total loans stood at 2.44%; the net interest margin was a paltry 2.27%; the Non-GAAP efficiency ratio was 66.03%; the tier one risk-based capital ratio was 14.89%; and tangible book value was $11.45 per share (much higher than the current price).

I do not expect much positive price action in my 50 shares of AF over the near or intermediate term, but see some benefit to holding it for several years and reinvesting the dividends to buy additional shares. The bank has good capital ratios and a large number of branches in Long Island. Astoria Federal Savings Branches  I may round the lot up to 100 shares somewhere south of $7 per share.  I suspect that institutional investors are disgusted with this bank and have been dumping the shares since this last report.  Astoria declined again last Friday to close at $7.74 on close to twice the average 3 month volume.     

5. TrustCo (TRST)(own: Regional Bank Stocks Basket Strategy):  TrustCo reported third quarter net income of $9.2, up 10.4% over the 3rd quarter of 2010. As of 9/30/11, the net interest margin was 3.38%, down from 3.47% at the end of the second quarter; NPLs to total loans stood at 1.89%; NPAs ratio to total assets was 1.27%; the coverage ratio was at 1; the efficiency ratio was 55.71; and the tangible common equity to tangible assets ratio was 8.04.  The E.P.S. number was 10 cents, one cent better than the consensus estimate and flat with the year ago quarter, due to an issuance of shares that was unnecessary in my view for the reasons discussed in Item # 1 TRST. The company sold 15.640 million shares at $4.6 back in July.  The bank ended the quarter with 135 full service branches. Trustco Bank | Your Home Town Bank I am reinvesting my dividends to buy additional shares, and will vote against the Board for authorizing the issuance of those shares at $4.6 for as long as I own the shares.

6. First Bancorp (FNLC)(own: Regional Bank Stocks Basket Strategy): The First Bancorp reported third quarter net income of $3 million or 27 cents per share, down 2 cents from the year ago quarter. This bank recently redeemed the government's preferred stock but the government's warrants remain outstanding. As of 9/30/11, NPLs to total loans stood at 2.42%; NPAs to total assets were 1.91%; the efficiency ratio was 49.3%; the net interest margin was at 3.29%; and the capital ratios were in excess of the levels for well capitalized banks. I do not believe that there are any analysts providing earnings estimates for this small bank based in Maine.

7. Sold 50 OceanFirst Financial at $12.45 (OCFC)(Regional Bank Stocks Basket Strategy)(see Disclaimer): OceanFirst Financial reported net income of $5.1 million or 28 cents for the third quarter, down from 29 cents in the year ago quarter. The consensus estimate was for 28 cents. As of 9/30/11, the tangible equity ratio was 9.46%; the efficiency ratio was 57.58; the net interest margin declined to 3.55% from 3.75% as of 9/30/10; the allowance for loan losses as percentage of NPLs was 47.33; and NPLs to total loans rose to 3% from 2.23% in the prior quarter.

I was sufficiently unimpressed with this report that I elected to sell my 50 shares at $12.45. Bought 50 OCFC at 10.4

Realized Gains Regional Banks


8. Added 30 HBAN as LT at $4.88 last Thursday (LOTTERY TICKET strategy)(see Disclaimer): This brings me up to 60 shares of HBAN. I was allowed to exceed the $300 limit due to prior realized gains. (see snapshots at   Lottery Ticket Strategy: New Gateway Post Bought 50 Huntington Bank at $4.27 Added 40 shares of HBAN at $3.69 Sold 90 HBAN at $5.83).

This last 30 share purchase was an average down:  Bought 30 HBAN @ 7.25 as LT (February 2011 Post).

HBAN shares fell 6.87% on the day of my purchase, closing at $4.88, after the bank reported earnings for the third quarter that missed expectations by once cent according to one service and met the consensus estimate according to  Reuters. TheStreet Whatever, I believe that the decline was the wrong reaction. Considering the deep hole that prior management dug at Huntington, the recent earnings results represent a good start toward recovery in my opinion.

For the third quarter, Huntington reported net income of $143.4 million or 16 cents per share, up from 10 cents per share in the year ago quarter. SEC Filed Press Release The net interest margin did decline slightly to 3.34%. The regulatory capital ratios were good. The Tier 1 and total capital ratios were 12.37% and 15.11%, up from 12.14% and 14.89%, respectively, as of 6/30/11. As of 9/30/11, the efficiency ratio was at 63.6%, the total allowance for credit losses as a percentage of nonaccrual loans and leases was 187%; the tangible common equity to tangible asset ratio was at 8.22%; NPAs to total assets was 1.57%; non-accrual loans and leases to total loans and leases was at 1.45%.  Exhibit 99.3 to SEC Filed Press Release. Huntington is headquartered in Ohio and has 600 branches across six states. Huntington - Corporate Profile The new CEO, who took the helm in January 2009, is featured in this article at U.S. Banker:

The current consensus estimate is for earnings of 62 cents per share this year and 63 cents next year.  For the stock to significantly improve over its current level, the bank will need to show more earnings growth in 2012 than currently forecasted by this consensus estimate.

If I continue to see improvement at HBAN, I will take it out of the LT strategy and put it in the Regional Bank Basket Strategy where I can commit more funds.

Huntington Bancshares closed at $4.9 last Friday. Oppenheimer downgraded the stock to neutral from outperform last Friday. 

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