You win some, you lose some.
Nearly two months ago, TheStreet.com Ratings
First Community Bancorp
, of San Diego and
First Niagara Financial Group
, of Lockport, N.Y., as two potentially attractive investment candidates based on price-to-book multiples, as well as earnings, loan quality and reserve coverage.
Since then, First Niagra has soared, while First Community has slumped:
First Community Bancorp reported a surprising first-quarter loss on April 17, with shares sliding 6% on the day, to close at $24.42. The spanking has continued from there, with shares closing at $22.72 Friday. The total return since we discussed the company on March 4 is a negative 16.39%.
In our earlier analysis, both holding companies easily met all of our criteria, maintaining healthy profiles through the ongoing mortgage crisis. Both were selling at price-to-book ratios below 1, with the book values appearing to be well supported by strong asset quality, good earnings performance -- especially for First Community -- and very strong reserve coverage.
First Niagara, on the other hand, reported decent first-quarter results Thursday, with net income of $18.8 million, down from $27.8 million last quarter, but slightly up from the same period a year ago. Shares rose 6% on the day to close at $13.90. First Niagara's total return since March 4 was a lovely 19.21%.
In comparison, the S&P 400 Financial Index returned 8.36% for the same period.
What Happened to First Community?
After several years of good earnings results, First Community announced a net loss of $272 million, springing mainly from a $275 million writeoff of goodwill. Like most bank holding companies that have acquired rivals, First Community carries goodwill as an intangible asset on its balance sheet, to represent the premium over book value it paid for the 19 banks it has acquired over the years.
The net loss is quite a whopper for a $4.9 billion holding company. The loss represented $10.05 per diluted common share. The company's book value dropped from $40.65 at the end of 2007 to $30.49 as of March 31. The holding company stated that the writeoff was "in response to the recent volatility in the banking industry and the effect such volatility has had on the market prices of banking stocks, including First Community Bancorp's."
So much for our confidence in that book value number. After the writeoff, First Community still had $528 million in intangible assets on its balance sheet, so maybe there are more goodwill writeoffs in store. The holding company pointed out that this was a non-cash event and didn't affect First Community's capital ratios or reserve coverage. However, the presence of goodwill and writeoffs like this can alarm the market and lead to serious consequences for investors.
In a recent column on the BankStocks.com Web site, Vernon Hill, the former chairman and CEO of Commerce Bancorp (since acquired by
) called goodwill an "accounting fiction," saying it "distorts our understanding of bank financials." He also pointed out that several large banks, such as
Bank of America
( SOV) and
, have 50% or more of their capital comprised of goodwill.
Acquiring banks net-out the goodwill and report returns on what they call "tangible" assets and equity, thus showing higher returns than they would if their figures reflected the premiums paid for acquisitions.
Getting back to First Community, If we exclude the writedown, the company's operating earnings also tanked, with net operating income of just $2.3 million, compared to $17.1 million last quarter and $28.5 million in the first quarter of 2007. This was mainly the result of a $26 million provision for loan loss reserves, up from $2.8 million last quarter and zero in the first quarter of 2007.
This elevated provision for loan losses was quite surprising, considering that First Community's loan loss reserves covered 316% of nonperformers as of Dec. 31. In March, First Community sold $34.1 million in bad construction loans, charging a $16.2 million loss against its reserves. That is tough medicine, but it allowed the company to avoid trying to work out those loans, which it estimated would have taken several quarters.
The earnings release didn't contain complete loan quality information, such as the amount of loans past due 90 days but still accruing. Nonaccrual loans totaled $32 million and loan loss reserves totaled $68.9 million as of March 31, leaving strong reserve coverage of over 200% of the nonaccrual loans.
First Community announced on Thursday that it will reincorporate under the name of PacWest Bancorp. On May 14, the company's name will change and it will trade under a new stock symbol: PACW.
A Decent Quarter for First Niagara
First Niagara's returns on average assets and equity for the first quarter were 0.88% and 5.42%, down from 1.36% and 8.26% last quarter, and 0.95% and 5.47% in the first quarter of 2007. The decline in net income from last quarter mainly reflected a one-time gain on branch sales that was included in the fourth-quarter 2007 numbers.
Operating income, excluding nonrecurring items fared better, with First Niagara reporting net income from operations of $20 million for the first quarter, compared to $19.3 million last quarter and $20 million in the first quarter of 2007.
First Niagara's asset quality remained strong, with nonperforming assets comprising 0.38% of total assets, up slightly from 0.35% last quarter. Loan loss reserves remained strong, covering 222.16% of nonperforming loans.
Like First Community, First Niagara carries a significant amount of goodwill and other intangible assets on its balance sheet. These items totaled $808 million as of March 31. With First Niagara's stock priced at 1.04 times book value, a significant writedown of goodwill appears unlikely.
Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.