Topics covered: Residential Mortgage Situation -- Regional Banks Mergers and Acquisitions Timing Strategy -- Commercial Mortgage Portfolio Decay -- Timing Of Commercial Mortgage Portfolio Bad Debt Write Offs-- FDIC Hit List For Bank Closings -- Mutual Holding Company Structure -- Interest Rate Scenarios -- Banking Pricing Power -- Expensive Bank Valuations -- Tangible Book As Guide For Bank Stock Pricing -- Distressed Sales Of Community and Regional Banks -- TARP Program -- Attitude Of Institutional Investors Towards Resurgence in Community Banking -- Unique Business Models -- Regional Bank Boards Looking For Exit
Companies include: BB and T (BBT); Colonial (CNB); First Niagara (FNFG); PNC (PNC); National City (NCC-PA); Harleysville National (HNBC); Citizens First Bancorp (CTZN); Regions Financial (RF); Bank of America (BAC); SunTrust Banks (STI); Pinnacle Financial (PNFP); Northwest Bancorp Inc. (NWSB); Beneficial (BNCL); Investor Savings Bancorp (ISBC); Territorial Bancorp (TBNK); FNB Bancorp (FNBG.OB); National Penn (NPBC); Trustco Bank (TRST); KeyBank (KEY); MandT Bank (MTB); New York Community Bancorp (NYB); Bank of New York Mellon (BK); Wells Fargo and Company (WFC); JPMorgan Chase and Co. (JPM); Wachovia (WB); Harleysville Savings Bank (HARL); SVB Financial (SIVB); Signature Bank (SBNY); Provident Bank (PBKS); Valley National Bank (VLY); Community Bank System (CBU); NBT Bankcorp (NBTB); Fulton (FULT); Citibank ©; Allied Irish (AIB); Bank of Hawaii (BOH); First Horizon Bank (FHN); Comerica (CMA); Synovus (SNV); Zions (ZION); South Financial Group (TSFG); Bancorp (TBBK); Legg Mason (LM); IBERIABANK Corp. (IBKC); Wilmington Trust (WL); SandT Bancorp (STBA); PHH (PHH); Goldman Sachs (GS); Citigroup ©; U.S. Bancorp (USB); Fifth Third Bancorp (FITB); KeyCorp (KEY); Lehman Brothers; Colonial; Washington Mutual; TD Banknorth (TD), Lakeland (LBAI), Westfield Financial, Inc. (WFD), United Financial Bancorp, Inc. (UBNK), Chicopee Bancorp, Inc. (CBNK)
In the following brief excerpt from just one of the 21 interviews in the 130 page report, industry experts discuss the outlook for the sector and for investors.
Anthony Polini, Senior Vice President, Financial Services, joined Raymond James & Associates Equity Research in 2007, and primarily follows banks and thrifts located in the Northeast and Mid-Atlantic states, as well as Puerto Rico. Mr. Polini began following the banking industry in 1985, when he joined Pru-Bache Securities. He has worked at several firms since then, including A.G. Edwards & Sons, Mabon Securities, Midwest Research and Advest, Inc. Throughout the years, he has received numerous professional accolades and has been frequently quoted by the press. He has appeared on CNBC, The Nightly Business Report, Bloomberg, and various TV news and business programs. He earned his B.A. in psychology and philosophy from the University of Pennsylvania and has an MBA in finance from St. John's University.
Christopher Nolan covers mid-cap banks and special-situation companies in the financial services sector as a Vice President of Equity Research at Maxim Group. Previously, Mr. Nolan worked as a Senior Analyst at Oppenheimer & Company, covering community banks. Prior to joining Oppenheimer, he worked as an Associate at UBS, covering P&C insurance underwriters, reinsurers and insurance brokers. He is a member of the top-ranked team by Institutional Investor magazine, covering regional banks and specialty finance companies. He holds the designation of Chartered Financial Analyst (CFA) and an MBA in finance from Columbia University in New York.
TWST: Let's shift our attention from the mechanics to the environment for acquisitions. Tony, are they all going to be FDIC-originated?
Mr. Polini: Yes, I think Chris made a really good point about the bank failures. I think there are 500 or 600 more to come. I don't necessarily think it derails the relative price performance for the bank stocks, but we certainly have just started with the FDIC "hit list" so to speak. The next 12 months are pretty much limited to FDIC deals. However, by the fall of 2010, perhaps seasonally that's a good time to see a pickup in M&A activity. I actually think 2011 could be a very good year. A lot of these banks are just beat-up. Even in the Northeast, banks had a really rough time with the economic and regulatory environment. Their boards are getting elderly. These are boards of directors that have been to the dance before, so to speak, and may have decided not to hook up in the past at much higher price levels. But I do think these stocks will need to lift up to a higher valuation level where we can get some deals done. But over the near term, we're limited to FDIC deals. Over the longer term, I actually think we could see a substantial pickup in true M&A activity.
Mr. Nolan: I agree and I would add to that I think what you could see is possibly a return to things such as regulatory goodwill, which basically enables regulators to give incentives to banks to actually acquire a weaker peer. I think right now as things stand, the regulatory assisted deals are the only game in town simply because many banks are not willing to part with their capital for a deal unless basically they're given a franchise with a very limited downside or just the deposits. But I think going forward, there is going to have to be some give in terms of the regulators, in terms of increasing the incentives for banks, which could take many forms. But for now, I agree with Tony, it's really regulatory-assisted or nothing.
TWST: I think you both mentioned that you cover some big banks along with the small banks. Do the small banks have an advantage going forward?
Mr. Nolan: Yes and no. I think a lot of it right now depends on the baked-in credit quality to the loans that are already on the books and to which the bank is exposed to. It's going to really drive terms of the credit costs going forward. You've got certain franchises out there which just demonstrate a superior credit quality going forward thus far, like People's United Financial (PBCT). We have a "hold" rating on it. But at the same time, I think a lot of it - at least with the smaller banks - really comes down to the perceived stability of the bank from the customer service and then also some sort of competitive service offering. I think right now the competition for depositors is really centered for the most part on safety and service. I think the competition for loans is, as it always has been, on price. I've noticed banks have also been ratcheting back the terms. They've been making much more stringent terms, particularly for commercial real estate lending. So I tend to think that smaller banks, where smaller companies can have a better relationship than they would have with a large bank, might be better positioned.
Mr. Polini: Chris made some very good points. I think the three largest banks right now, Wells Fargo & Company (WFC), BofA and JPMorgan Chase & Co. (JPM) control about a third of the nation's deposits and have kind of an oligopoly with that deposit base, as well as in the residential mortgage arena. That bodes well for pricing power and all three of those companies actually have some good underlying core revenue growth. For the smaller guys, it really depends on who has the better offensive game right now. If you have a strong offensive game, you're probably taking market share away. But if you're bogged down - and I know some companies that are just bogged down within one portfolio they have in Maryland, and it's negatively impacted their core business in Pennsylvania so to speak. So it all depends on what position you're in right now. If you're in a position of relative strength, and you've been employing an offensive game that's worked throughout the recession from a competitive standpoint, you probably have an edge, and you're probably in a good position to take market share away from some of the bigger guys. There's certainly disruption in the Northeast and Mid-Atlantic just still with Wachovia (WB) and obviously we have some other deals happening as well, like Harleysville Savings Bank (HARL) in Pennsylvania. There are winners and losers on both the large-cap and small-cap side.
Regulatory Disclosures for Anthony Polini
For disclosure at The Wall Street Transcript on 9/30/2009.BAC Bank of America Corporation: Raymond James & Associates received non-investment bankingsecurities-related compensation from Bank of America Corporationwithin the past 12 months.NPBC National Penn Bancshares:Raymond James & Associates makes a NASDAQ market in shares of National Penn Bancshares. NYB New York Community Bancorp: Raymond James & Associates acted as a co-manager in the issuance of New York Community Bancorp, Inc. (NYB) fixed rate senior notes due June 22, 2010 on December 17, 2008. Raymond James & Associates received non-investment banking securities-related compensation from New York Community Bancorp within the past 12 months. Raymond James & Associates sole-managed a follow-on offering of New York Community Bancorp shares in May 2008. WFC Wells Fargo & Co.Raymond James & Associates co-managed a follow-on offering of 468.5 million Wells Fargo & Co. shares at $27.00 per share in November 2008 and a follow-on offering of 392.2 million WellsFargo & Co. shares at $22.00 per share in May 2009. Raymond James & Associates received non-securities-related compensation from Wells Fargo & Co. within the past 12 months.
Please see www.twst.com for disclosures for Christopher Nolan
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 130 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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