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Commercial Real Estate Is Driving Loan Growth In Northeast Banks, Says Managing Director At Stifel Nicolaus; Read More Of His Take On The Regional Banking Space In This Exclusive Interview

67 WALL STREET, New York - April 5, 2012 - The Wall Street Transcript has just published its S&Ls, Investment Banks and Asset Management Report offering a timely review of the sector to serious investors and industry executives. This S&Ls, Investment Banks and Asset Management 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: Regional Loan Growth Trends - Dodd-Frank Creates Opportunities for Brokers - Midcap Banks' Market Share Gains - Exchanges Trading Volumes and Cash Flow

Companies include: E*TRADE (ETFC); F.N.B. Corporation (FNB); Interactive Brokers (IBKR) and many more.

In the following brief excerpt from the S&Ls, Investment Banks and Asset Management Report, interviewees discuss the outlook for the sector and for investors.

Collyn Gilbert, Managing Director, joined the Stifel, Nicolaus & Co., Inc., research team in March 2007 in connection with Stifel's acquisition of Ryan Beck & Co., Inc. She has been following the small- and mid-cap bank and thrift sector on the buy and sell side for 17 years. Ms. Gilbert was awarded number one stock picker for thrifts and mortgage finance companies by StarMine in 2010, 2009 and 2006. She also was awarded number two earnings estimator for thrifts and mortgage finance companies in 2008 by StarMine. Ms. Gilbert also has been named to Zacks All Star Analyst lists. Before joining Ryan, Beck & Co. in April, 2002, she was a Senior Equity Analyst with Ferris, Baker Watts in Baltimore, where she covered banks and thrifts in the Mid-Atlantic region. During her tenure at Ferris, Ms. Gilbert was named one of Baltimore's top 40 professionals under 40. Before Ferris, Ms. Gilbert was an Analyst with Hovde Financial, a Washington, D.C.-based boutique investment banking firm. She has a B.A. in economics from Bucknell University.

TWST: What are the trends you're observing with regard to loan growth and credit quality?

Ms. Gilbert: Interestingly, we are seeing good loan growth. Our group has grown loans in the last couple of quarters about 2% or so a quarter. So we're seeing decent loan growth. To me that's really strong loan growth. And why are they getting it? How are they getting it? They are getting it from simply taking share, because we're at a fortuitous point in the cycle where a lot of the larger banks have just kind of abandoned sort of small business lending or downstream lending for the moment, so the ability to take share from the large banks is a real opportunity right now. And then secondarily is commercial real estate. That's the one asset class that's actually performing fairly well. There's demand going on in the market, especially as it relates to multifamily, which a lot of the New York metro banks that I follow in the Northeast are levered to multifamily. So those are two dynamics that have been driving loan growth. Then, you're also seeing a lot of banks choosing to portfolio residential mortgage loans, which is also fueling loan growth. And many banks have just decided to say, "You know what? We'd rather underwrite in portfolio our own residential mortgage loans rather than buying somebody else's securitized mortgages." So they're opting to do more resi loans versus MBSs. So overall, the loan growth trends have been favorable. I don't know how long that could last though, but for now it's working. And your second question on credit, that's not as strong of a story. I mean, it's strong from the standpoint that the Northeast banks were not nearly as derailed as banks in the Southeast and in the Midwest. But there is a lag here among the Northeast banks. I mean we're still seeing NPA inflows. I think that's a function of a lot of these borrowers were strong enough to withstand, say, the first three years of this financial downturn, but now they're starting to feel a little stressed. And I think the other driver to why we're seeing nonperforming assets still escalate in this part of the market is because of the foreclosure laws in New York and New Jersey are such that the courts are so backed up, it's taking three or four years to actually foreclose on a property. So what you're having is those inflows, but you're not having cures on the back end. You're not seeing resolution on the back end. So some of these NPAs are just sort of in a locked position.

TWST: You mentioned the trend of smaller banks picking up customers from the larger banks. Which of the banks in your group seem to be benefiting the most from that trend?

Ms. Gilbert: On the multifamily side, I think, you're seeing New York Community (NYB) pick away at some multifamily loans and commercial real estate loans that are on the larger side. Some of these loans are coming out of the conduit market, so not directly from a large bank, but from that large bank source. I think you're also seeing People's United (PBCT)and Valley National (VLY) pick away at that upper-middle-market commercial borrower. They are seeing some success from taking share from some of the large banks. Another bank that's been very aggressive in growing and taking teams of lenders and building their lending group is Provident New York (PBNY). So I would say the share game is being played across the board. Any bank that's getting loan growth is getting it through taking share, because line usages have not been increasing. That's one consistent message we're hearing among our banks is that it's not that their current borrowers are borrowing more, it's just that they're bringing in new customers. So any bank that's seeing any kind of loan growth is generally doing it from bringing in new customers.

TWST: Would you single out three stocks you see as best bets and tell us what sets each of them apart?

Ms. Gilbert: So keeping in mind my comment about the kind of low returns, I mean we're not looking at 25% upside to some of these names. It's kind of like 10%, 12% upsides. But the names that we like - again, they kind of fit that model of growing tangible book and paying a decent dividend - would be M&T Bank (MTB), Dime Community (DCOM), Fulton Financial (FULT). Those three screen the best. And then we also like Oritani (ORIT) and People's United. The last two - Oritani, it's a little bit more of an interesting company. It's a recently converted thrift with quite a bit of excess capital. They're a niche multifamily/commercial real estate lender in New Jersey. They're growing nicely, they're very profitable. They've got capital that they can put to work, either through increased dividends, buying back their stock, and they're building a franchise. I think that's going to be desirable into what I think will be a consolidating market - all of this for a reasonable valuation in its shares. And then, People's United, I think the driver behind that is when we look at the banking landscape, there may be some stocks that we could buy, where I think - maybe are more attractive. But I think it's harder to find attractive businesses - meaning they're diversified, they're well positioned from an interest rate perspective, they've got a good core basis of funding, there's an ability to leverage on the revenue side - just an overall kind of improving business. And there are not many banks, quite frankly, that I follow that are in that camp. But one that comes to mind is People's United. And I still think the sentiment on this name is still pretty negative and misguided from this concern that they're going to do dilutive acquisitions. But I think this new management team has a new direction. They're focusing very much on profitability, and I think they're going to make smart decisions. So that's another one that we would recommend.

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