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You win some, you lose some. Nearly two months ago, TheStreet.com Ratings singled out First Community Bancorp ( FCBP - Get Report), of San Diego and First Niagara Financial Group ( FNFG), 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.
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 Toronto-Dominion Bank ( TD - Get Report)) 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 ( BAC - Get Report), Capital One ( COF - Get Report), Sovereign ( SOV) and Wachovia ( WB - Get Report), 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.