New England Economy Remains Strong, With 6% To 7% Unemployment Versus 9% Nationally Says Says Senior Research Analyst At Sterne Agee; Find Out How This Affects The Northeast Banking Space In This Exclusive Interview

Wall Street Transcript

67 WALL STREET, New York - January 9, 2012 - The Wall Street Transcript has just published its Northeast and Mid-Atlantic Banks Report offering a timely review of the sector to serious investors and industry executives. This Northeast and Mid-Atlantic Banks Report 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: Pockets of Growth in Northeastern Banking - Delayed Consolidation Activity - Macroeconomic Fears Depress Financials' Valuations - Improving Credit Quality and Strong Fundamentals

Companies include: 1st United (FUBC); Bar Harbor Bankshares (BHB); New York Community (NYB) and many more.

In the following brief excerpt from the Northeast and Mid-Atlantic Banks Report, interviewees discuss the outlook for the sector and for investors.

Matthew Kelley, a Managing Director, joined Sterne Agee & Leach, Inc., as a Senior Research Analyst focusing on Northeast banks and thrifts in February 2006 after working as an Analyst at Moors & Cabot since 2002. Previously, he covered banks and thrifts for RBC Capital Markets and Tucker Anthony - acquired by the Royal Bank of Canada in 2001. Mr. Kelley holds a B.S. in finance from Marquette University and is a Member of the BancAnalysts Association of Boston.Mike Shafir is a Senior Research Analyst at Sterne Agee & Leach, Inc. He joined the firm as a Research Analyst, focusing on Northeast banks and thrifts, in April 2006 after working as an Analyst at Moors & Cabot since 2004. Mr. Shafir holds a B.A. in history from Brandeis University and an MBA in finance from Rutgers Business School.

TWST: Broadly speaking, when you run down the headwinds and tailwinds, which one do you feel like is winning out at the moment?

Mr. Kelley: I just updated a spreadsheet looking at the top performers of 2011, looking at a group of 80 or so companies overall with market caps over $150 million. Of the top quartile performers, you had three sellers: You had Bancorp Rhode Island (BARI), you had State Bancorp (STBC) and Tower Bank (TOBC), and all sold at pretty healthy multiples. Those are all healthy organizations. Beyond the sellers, you've got a bunch of overcapitalized institutions that are in that return-of-capital mode. So going down the list, Rockville Financial (RCKB), Kearny Financial (KRNY), Meridian Interstate (EBSB), Northfield (NFBK) and Northwest Bancshares (NWBI). Many of those are "buy" rated names that we have in our coverage universe. Those would be the two threads that really stick out in the names that have worked in 2011. And again, we think those continue in 2012. I'd add a few more of the strong organic growth stories: Signature Bank (SBNY), First Connecticut (FBNK), Meridian again, Oritani (ORIT).

TWST: When you talk about these pockets of growth, are there unifying characteristics among the growing banks?

Mr. Kelley: Number one, the New England economy overall is performing much better than the national averages and much better than the Northeast overall. Unemployment is in the 6% to 7% range, versus the national rate, just below 9%. In the Boston market, inside of the 495 loop, you've got a lot of activity in the education and health care space that is driving some better commercial real estate metrics. In the western Pennsylvania market, you have the impact of the Marcellus Shale, the natural gas exploration opportunity that we think will, over time, have some benefits for certainly that local economy and banks in that market. In the mortgage market, you're seeing the shadow banking system continue to be unwound, and a lot of that market share is returning to community and regional banks that are originating mortgages and selling them into the secondary markets. That's been a strong subsector of growth. The multifamily lending space is one where a lot of the institutions that we focus on have been able to gain some share and actually put up some decent loan growth. Those are the types of asset classes and regions that we see kind of those pockets of growth in.

TWST: You mentioned that you have seen some transactions involving healthy banks. Are some of the people on your list described as healthy?

Mr. Kelley: Absolutely. Going down the list, the types of names that we've identified: United Bank (UBNK) in Springfield, Mass., certainly a healthy institution. Looking at Metro Bancorp (METR), a little bit more hair in that one. Bar Harbor Bankshares (BHB) in Maine; OceanFirst Financial (OCFC) certainly fits into the healthy camp; Flushing (FFIC) fits into the healthy camp; Oritani. It's primarily a list of healthy bank sellers that we've identified. Again, most of the ones that are in the report are private or very small.

TWST: What's your broad-brush outlook as we look ahead to 2012?

Mr. Kelley: Overall, we are of the view that the year ahead is going to remain challenging for loan growth as the economy recovers at a very modest rate. We are looking at GDP in the 1% to 3% type range, and looking at elevated unemployment, which results in limited growth opportunities in the loan growth side. The most important factor is going to be a sustained low-rate environment, and that results in lower margins and spreads for most of the traditional community and regional banks in the country. And then you have these external events that are very hard to quantify, and they have cast a large shadow over the banking market - issues in Europe and issues in D.C., from a regulatory perspective - and they are resulting in depressed valuations for an extended period of time. We think that going small into some these types of names where you have different catalysts could pay off - again, much more freedom in capital management, the ability to buyback stock and pay dividends, more deal activity if you look down the size chain and the opportunity to take share. While the pie may not be expanding at a significant rate, a lot of the companies that Mike and I are looking at are market share gains. And so, against a very challenging macro backdrop, we think that there are some specific pockets of opportunity.

Mr. Shafir: What I would add is that recently we published a small piece on what names we want to look at that aren't really going to be affected by the macro headlines. If you think about larger institutions, specifically the megacap banks, it's really more or less a play on what we have going on in the macroeconomy and the sentiment in Europe. What Matt and I are trying to highlight is, if you just go slightly down market cap, you are going to get into some institutions that have catalysts that aren't affected by the macro. That's what we want to highlight coming into the new year.

TWST: So where are you pointing investors now, what are some of your favorite stories now?

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 Northeast and Mid-Atlantic Banks Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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