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FIG Fixed Income Webinar Slides Jan 2012

With a continued difficult housing and employment market and an election looming in the United States coupled with the ongoing troubles in Europe, 2012 is likely to provide opportunities for the nimble investors in the bond market.

FIG Partners Fixed Income Team held a webinar on Tuesday, January 24, 2011 to discuss the best ways to navigate the bond market in 2012 and provided their best ideas for fixed income managers for the new year.

There is a new king of the Dartboard Challenge, though the crown only moved to a new office at FIG Partners LLC.

A fortuitous loan sale gave the portfolio of FIG Partners analyst Chris Marinac a boost, clinching the title from last year's winner Brian Martin, also of FIG Partners.

SNL_Dartboard_Challenge_2011.pdf

• 2011 marked one of the busiest years for FIG, with 14 investment banking transactions, key personnel additions and record attendence at our conferences.
• We will continue to use a client-first approach to build relationships throughout the industry and remain committed to providing the highest level of service to our clients.
• We look forwad to increasing activity in the new year and helping financial institutions like yours reach their potential in 2012.

We would like to thank institutions like yours for helping making the past year a success! Please do not hesitate to contact us with questions.

FIG Partners 2011 Year In Review.pdf

Today's Wall Street Journal (posted last evening) confirms our analysis early this week that BAC-Bank of America could consider shrinking in size and retreat from certain areas of the country.

The article states "The drastic moves would be seriously considered only if Bank of America needs to raise more capital to cushion itself from mortgage woes and other turmoil. The exercise wasn't intended to force immediate action but rather to prepare Bank of America if its situation worsened, according to a person familiar with the Fed's approach."

The FIG Partners Weekly Musings industry note on 1-9-12 articulates smaller metro areas (MSAs) where BAC has small market share and could be reasonable areas to divest under such a scenario.  As the WSJ states today, this is part of contingency plans filed with the Federal Reserve and frankly were made several months ago.  While the immediate discussion in the national media is welcome news in our mind, we doubt near-term action occurs.  Yet, we still feel investors must keep this scenario in their list of probable outcomes as the next 8 to 10 quarters of regulatory actions unfold for the largest U.S. Banks.  As wrote in our Musings report this week, BAC is in the cross-hairs of bank regulators and we do not expect this issue to cease.

 Musings_1-9-12_BAC__Too-Small-To-Keep.pdf

Today's Wall Street Journal newspaper highlights the declining vacancy rates among apartment properties nationwide.  The WSJ article says vacancy rates are 5.2% down from 6.6% a year-ago and an improvement from 5.6% at the end of 3rd Quarter 2011.  Back in 2009, vacancy was over 8%.

As we talk with Bank CEOs, CFOs, and certainly credit officers, interest in new multifamily CRE lending is high.  Recall that multifamily receives a separate distinction among the regulatory call reports for both bank holding companies (BHCs) as well as bank charters such that CRE concentration ratios closely monitored by the OCC, FDIC, and Fed exclude multifamily.  Instead, Non Owner-Occupied CRE is examined as a percentage of Total Risk-Based Capital (and sometimes relative to Tier 1 Capital too) with a 300% combined Construction/ADC + Non Own.Occ. CRE still a key threshold that banks should not surpass.  But again, Multifamily is separate from concentration ratios, and banks can do at least 100% of capital in this individual category.

Despite the naysayers that CRE lending is dormant, we see and hear a fair amount of new activity going on the books of banks and feel that 4Q-2011 data being released this month and early February should confirm this trend.  Of course, loan payoffs remain quite high, and may offset some of this new multifamily lending outlined above.

Now that 2011 has come to a close, we can look back at the year to see how Bank and Thrift stocks performed.  The S&P Bank Index (BIX), our benchmark for covered companies’ relative ratings, declined 12.3% over the past year.  But, things were much worse for the Sector going into the 4Q.  The BIX gained 15.4% over the past three months, recouping much of the abysmal performance of the 3Q.

While most investors are likely thinking “good riddance” to 2011, with the hopes that the coming year will bring more positive returns to the Bank Sector, we note that how one defines the results of the past year very much depends on the size of the institutions being described. It is important to include dividend payments as part of the stocks' total return measure. Some higher-payout companies have a dividend yield of 4% or more, making the assumption of dividend reinvestment crucial to accurately gauging price performances between companies.

Very Large-Cap banks and thrifts (those with market caps of $5 billion or greater) suffered the most during 2011.  The average total return of large-caps was -21.7%, while only one (1) stock out of the 21 in the group had a positive return.  Mid-Cap banks and thrifts (market caps between $1 billion and $5 billion) did better, but still experienced a negative average total return for 2011 of -9.6%.  Only about 1/3 of the 50 stocks in the Mid-Cap group had a positive total return for the year.

Small-Cap banks and thrifts (with market caps of $250 million to $1 billion), of which there were 84 stocks at year-end 2010, performed best, with an average total return of -3.4%.  Many of these companies are the focus of FIG Partners’ research coverage and are popular among institutional investors’ portfolio holdings.

Looking to banks and thrifts with market caps below $250 million, but above $50 million, the Micro-Cap space had 198 stocks in it as of year-end 2010.  These stocks saw varying performances, making it difficult to summarize what happened as a group.  Although the average return was –4.5%, making the group the second best performer behind Small-Caps, the variance of returns was wide (standard deviation of 23.7%).  Also, despite having a negative average return, almost half of the stocks had a positive total return for the year.

The majority of other stocks in the Bank and Thrift Sector had market caps below $50 million, which we refer to as “Nano-Cap” stocks.  These equity investments have different payoff distributions from more liquid investments, as they often can see zero shares traded for several days (or longer), and in a lot of cases exit due to an M&A event.

See our Weekly Musings report for further details.

For 2011, here is a friendly reminder that more public Banks and Thrifts have increased their tangible book value this year (so far thru 9-30-11) than was achieved for all of 2010 or 2009.  Our data is from the FIG Partners Research Team and SNL Financial LC.

Note that when unrealized securities gains are eliminated, the number of banks with tangible book growth declined but is still a strong number overall.  We track unrealized gains via AOCI-Accumulated Other Comprehensive Income in the Shareholders' Equity component of the balance sheet.

Just when you thought builders and bankers had learned a permanent lesson from the commercial real estate downturn of 2007-2011, the news in Miami suggests that memories really are short.  The Miami Herald reports that the 24-story 70-unit Bellini Williams Island building broke ground in the in past week.  The property is located in Aventura, FL north of downtown Miami.  The property brochure is worth a look at a minimum.

In fact, there are half-dozen of new condo projects planned in the Miami MSA during the next year as international demand has strengthened both on condo sales and rental leasing - this is especially true now that the busy Winter "snowbird" season is well underway.  A good example is the St. Regis Bal Harbor Resort & Residences in the wealthy barrier island in Northeast Miami where 15 units worth more than $50 million were sold in the first month of sales according to website www.condovultures.com.

Further, the latest edition of Florida Trend magazine reports that over $950 Million of real estate investment by foreign investors has been placed into Florida in Calendar 2011 (i.e., of which $471mm is in Miami) lead by investors from Malaysia, Canada, Germany, Israel and the UK.

How do we interpret this?  If you feel the glass is Half-Full, then this is a clear signal that a bottom has been reached in CRE activity in South Florida with pricing surely improving and other areas of the state and Southeast region likely to follow in the next 12-18 months (which cannot be anything but bullish for banks and bank stocks).  If you see the glass as Half-Empty, then you are skeptical that these developers are beginning to sow the seeds for future problem loans at banks and the credit cycle is starting all over again.  In our minds, the truth is that both views inside the glass are correct.  Yes, CRE prices in South Florida could be a harbinger of future stability and modest upticks in other cities.  Meanwhile, the lack of memory on the pain suffered during the past 4 1/2 years is obviously troublesome and reminds why capital and loan loss reserves need to stay high.

The important question on all of the above is "Who Is Financing This Condo Construction?" [and what is their ticker symbol?]  Our sense is that foreign dollars are particularly driving the Condo construction activity that is currently percolating.  It is interesting that no financial institution is mentioned in the two press articles we cite here.  The banks with whom we speak are booking new ADC loans on single-family projects on impaired OREO while closing a fairly active pipeline of owner-occupied CRE loans.  We also suspect that insurance funds are stepping up much more than Banks.  However, if you are community bank in South Florida such as SGBK-Stonegate Bank, FUBC-1st United Bancorp, or even SBCF-Seacoast Banking Co., you will be happy to finance the suppliers and tertiary businesses that support the 24-story hi-rise condo projects and related construction that ensues in the next year.

The Wall Street Journal's article entitled Ax Falls at Smaller Banks reiterates a theme we have expressed often in recent months: banks need to become more cost effective, specifically on overhead expenses.  Quoted in the article is FIG Partners' own Director of Research Christopher Marinac.  The article is available to Journal subscribers.

For a second quarter in a row, the FDIC's quarterly list of "Problem Banks" has declined to 844 institutions (i.e., down from 865 at 6/30 and 888 at 3/31). The FDIC's direct definition is: "Problem" institutions are those institutions with financial, operational, or managerial weaknesses that threaten their continued financial viability. Depending upon the degree of risk and supervisory concern, they are rated either a "4" or "5".

Separately, third-party loan review specialist Steve Powell (http://www.shpco.net), who works with financial institutions across the Southeast and beyond, keeps track of his clients' credit quality for the recent quarter and going back to 2008 (and we understand the data set goes well beyond a handful of banks -- it is a wide list of community players). His picture of "adversely-graded" credits is quite good and it underscores the stabilization and minor improvement that we also note exists among public banks and thrifts across the Country.

So, the real question in our minds is "Do Investors Care About Improved Credit Quality?" It has seemed to us for the past few months that fears of lingering asset write-downs and high problem loans are less of a concern among bank stock investors. Instead, the worry is over lackluster revenue growth from weak top-line spread, or NII-Net Interest Income, thanks to low interest rates as well as holes in the Fee Income line items from mandated Interchange Fee reductions and less enthusiasm about ongoing growth of Fiduciary and Mortgage areas (i.e., mortgage has had a decent 2011, but will refinancing impact as much in 2012?). Then, add a dose of skepticism that banks will truly become more efficient with overhead costs plus a lack of M&A activity.

Bank investors remain on the sidelines with plenty of excuses. But, we think this entire mess began with credit quality concerns way back in mid-2007 and therefore the improvement in credit quality today (which we feel should continue in the next 2-3 quarters, or as far ahead as the equity markets will look) remains a highly relevant topic. While it is easy to gravitate into the Bears' camp against Banking, we simply disagree with this attitude and Group Think.

Forgive us for pointing out reality...at least as we see it. The industry is in a better place, lead by improved asset quality. In fact, a key reason M&A has not been faster or more pronounced is that Buyers have not trusted the loan books of the Sellers. The more faith that seeps into a "credit stabilization" theme within Banking, the better off the industry should be and the faster M&A should gain traction, along with more companies selling assets, raising capital again to expand, etc.

Banks and thrifts generally declined last week.  Out of the Top 50 Banks & Thrifts, only 3 stocks posted positive returns.  The average of the group was -3.6%, although some of the largest banks in the Nation declined the most.  C-Citigroup lost 10.4% while JPM-JPMorgan & Chase shed 8.0%.  The average change for the year for the Top 50 is now -24.1%.

Bank stock indices were generally flat last week.  The benchmark S&P Bank Index (BIX) increased 1.3%, while the KBW Regional Banking Index (KRX) inched up 0.6%.  Likewise, the group of Top 50 Banks & Thrifts had an average return of only 0.3%.  Interestingly, some of the largest banks in the Nation performed near the bottom of the list, while some mid-sized Southeastern Regional banks led the group.

Barron's Magazine highlighted FIG Partners' West Coast analyst Tim Coffey's recent research report on GBCI-Glacier Bancorp in its "Research Reports" section this week.  For those with subscriber access, the article can be viewed here.

Bank stocks rallied last week, with the group of Top 50 Banks & Thrifts rising 6.4% on average.  The majority of the group outperformed the S&P Bank Index (BIX) and some mega-cap banks gained more than 10% on the week.