First Niagara: Financial Winner

NEW YORK ( TheStreet) -- First Niagara Financial Group ( FNFG) was the big winner on Monday among major U.S. financial names, with shares rising 2% to close at $9.27.

The broad indices all ended with solid gains, led by Caterpillar ( CAT), which was up 3% to close at $82.71, even though the construction equipment maker reported a decline in first-quarter profit to $880, or $1.31 a share, from $1.586 billion, or $2.37 a share, a year earlier. The company also lowered its profit outlook for 2013 to $7 a share on revenue ranging from $57 billion to $61 billion, from the company's previous profit outlook range of $7 to $9 a share, on revenue ranging from $60 billion to $68 billion.

On a much more positive note, Caterpillar Controller Mike DeWalt said during the company's earnings conference call that the company's direct sales in China "were up in the quarter. All-in, including machines, power systems and parts, we were higher than the first quarter of 2012."

According to a transcript provided by Thomson Reuters, DeWalt added that the company had "made quite significant progress" in lowering its inventory in China, and said "While inventory reduction is expected to continue into the second quarter, we do expect to begin increasing production in China during Q2." Adding to the China growth theme, DeWalt said "for the first time since the first quarter of 2012, our order backlog increased from the prior quarter-end."

In economic news on Monday, the National Association of Realtors reported that existing home sales in the United States declined by a seasonally adjusted 0.6% to an annual rate of 4.92 million in March from a downwardly revised rate of 4.95 million in February. The March sales pace was still up 10.3% from a year earlier. Once again, the NAR blamed declining supply for the slower sales pace. NAR Chief Economist Lawrence Yun said "the good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favorable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents."

The KBW Bank Index ( I:BKX) was down slightly to close at 54.83. The index was down 2.4% last week.

With first-quarter results for banks being decidedly mixed so far, KBW analyst Frederick Cannon in a note to clients on Sunday said in a note to clients that "U.S. home price appreciation should drive higher bank stock prices despite near-term mortgage banking earnings pressure," and that "we find a strong correlation between home prices and bank stock prices," he wrote.

First Niagara

First Niagara of Buffalo, N.Y., on Friday reported first-quarter earnings available to common shareholders of $59.7 million, or 17 cents a share, compared to $53.6 million, or 15 cents a share in the fourth quarter, and $58.5 million, or 19 cents a share, in the first quarter of 2012.

The first-quarter results were lowered by $6.3 million, or a penny a share, in expenses related to the departure of former CEO John Koelmel and another executive. The fourth-quarter results included $3.7 million in restructuring charges and a "$16 million accelerated CMO premium amortization adjustment," according to the company.

On an adjusted basis, first-quarter net interest income was $266.1 million, declining slightly from $268.6 million in the fourth quarter, reflecting the lower number of days in the first quarter. First Niagara's net interest margin contracted by three basis points during the first quarter, to 3.39%.

A major highlight for First Niagara was a 13th consecutive quarter of double-digit annualized growth of commercial loans. Average commercial loans in the first quarter were $12.2 billion, increasing from $11.7 billion the previous quarter, and $10.2 billion a year earlier.

First Niagara on March 19 announced the abrupt resignation of CEO John Koelmel, who had led the company through an aggressive expansion over the past several years through acquisitions and branch purchases. The company's total assets increased to $36.8 billion as of Dec. 31 from $8.1 billion five years earlier; its branch count grew to 431 at the end of last year from 114 at the end of 2008.

First Niagara's interim CEO is Gary Crosby. The company's board of directors is conducting a search for a permanent successor to Koelmel.

Guggenheim Securities analyst David Darst says his firm was waiting for the first-quarter earnings report to upgrade First Niagara, following Koelmel's ouster. The analyst on Monday upgraded his rating for the lender to a "buy" rating from a neutral rating, with a price target of $10.50.

"The whole name of the game has been that people have been uncomfortable with the CEO, Darst says. "We have had negative estimate revisions consistently over the past year," but with the change in leadership, the analyst expects "a more balanced approach to achieving profitability improvement and managing growth.

Following First Niagara's string of acquisitions, "we are at a point now when earnings are stabilizing, and premium amortization on discounted acquisitions can be set against revenue declines," Darst says, adding that "if they continue to grow with some operating leverage, investors will be more comfortable with the story and multiples will expand back to peer levels."

First Niagara's shares trade for 11.6 times the consensus 2014 earnings estimate of 80 cents a share, among analysts polled by Thomson Reuters.

According to Darst, the average forward price-to-earnings ratio for First Niagara's banking peers is 12.5 to 13.0 times forward earnings.

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Interested in more on First Niagara? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.

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