Bullish and Bearish Takes on Regional Banks

• On 12:20 am EDT, Sunday October 11, 2009

67 WALL STREET, New York - October 10, 2009 - The Wall Street Transcript has just published its Northeast and Mid-Atlantic Regional Banks Report offering a timely review of the sector to serious investors and industry executives. This 121 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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); M and T 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); S and T 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 121 page report, expert banking equity analysts discuss the outlook for the sector and for investors.

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.

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.

TWST: Tony, so far it seems everybody I've talked to about this issue has voiced concern about commercial real estate and a second wave of residential foreclosures. Are your banks somehow focused on different business models than these other analysts?

Mr. Polini: The commercial real estate market bottom is probably a second-half-of-2010 event. Between now and that time frame, we probably have at least three if not four quarters to build provisions. We should also have some more positive data points in other areas. For example, I would expect the consumer segment of the business to look a lot better six to nine months from now. We are starting to see some early signs that consumer loan problems are bottoming but doing so at ridiculously low levels. A slight decline in early-stage consumer delinquencies from depression-like levels is not necessarily something to write home about. But in early March, on average bank stocks were down 90% over the previous two years. We are trying to balance, find some equilibrium point where the change in sentiment is enough to get these stocks up to levels that are reasonable before we can apply a more fundamental approach. So while we are worried, I don't think it derails the bank stock rally. I think most people have thrown away the next two quarters for the industry. Just look at what little National Penn (NPBC) did this week. The bottom line is you can substantially dilute your stockholders or you can take big write-downs as long as you have something positive to say about tomorrow. Bankers right now are gaining credibility. Even if KeyBank (KEY) or Regions (RF) said something positive about tomorrow, and took a big dilutive equity offering or a big write-down today, their stock prices would likely go higher.

Mr. Nolan: I agree. In terms of if a bank is trading at discount-to-tangible book, I think the market already expects dilution in that price. I have been with Maxim for about some six months or so. So I have been able to tailor my coverage to a certain degree, focusing on names which I think have higher fundamentals. But for names which are trading at a premium, like M and T Bank (MTB) and New York Community Bancorp (NYB), those are names which at premiums of 1.5 to two times tangible book and given their fundamentals - not to mention the overhangs in commercial real estate - the question becomes: Are the valuations justified? I'm not so sure they are. I tend to look at the past commercial real estate down cycles, the last real major one was the Savings and Loan crisis of the late 1980s, and the bank groups tended to underperform the overall market as the number of bank failures started to accelerate. And then just at the peak, when the number of banks slowly started to decline, then the group started outperforming. So I agree with Tony, and I think commercial real estate will probably start to really bloom into a real issue in 2010. But I think leading up to that, because it is such a large issue, that it's questionable whether or not many of these banks will be building sufficient provisions. Many of the banks that I cover actually still have dividends well in excess of their earnings. I think unless we see cuts in dividends, I'm not so sure these companies are going to be well prepared balance sheet-wise for a major correction.

Mr. Polini: This price-to-tangible book thing, I mean, I just find it absurd to focus on that as a valuation methodology when we penalize any bank that does an attractive purchase acquisition. How could you ever own Bank of New York Mellon (BK) or NYB? NYB did three very accretive deals, which is why they trade at a relatively high price-to-tangible book. Without the deals, they would trade at a very low price-to-tangible book ratio. It's just a rationalization process that some investors won't give up.

Mr. Nolan: With all due respect, no it's not. Because what happens is - and I agree, you can't look at the price-to-tangible book on an isolated basis - but what you do look at is the key valuation metrics for banks or P/E, or P/E in price-to-book, price to tangible book. Now what happens is people generally think these two metrics tend to move independently of each other. They don't. They are linked by return on equity or return on tangible equity in the case of price-to-tangible book. So if you take a bank's ratio of price-to-tangible book divided by its P/E, you get the implied forward return on tangible equity for that name. That gives you an indication in terms of what the market is implying, or what the market expects the hurdle rate for equity returns on that name to be. But I tend to talk about return on tangible equity simply because it's a more conventional metric. I tend to think that when you have many banks which have written down the value of their goodwill to the extent that they have, including goodwill in valuations, is questionable. That's not to say that there haven't been some good acquisitions in the past, but at the same time it's a double-edged sword here.

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 121 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.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

Buzz up!