Bank Stocks Fall Despite Positive Earnings

Umpqua Holdings' executives were scratching their heads Friday over the sudden drop in the company's stock price following what appeared to be a strong earnings report this week.

After the markets closed Wednesday, the $11.5 billion-asset company in Portland, Ore., reported a profit of $23.1 million in the second quarter, up 31% from the same period last year, thanks primarily to record mortgage banking revenue and a 6% increase in total loans. On Thursday, however, its shares fell nearly 7%, to $12.84, in extremely heavy trading and they shed another nickel Friday.

Chief Financial Officer Ronald Farnsworth was at a loss to explain the why the stock fell in light of the results. Its earnings per share 21 cents a share were in line with analysts' estimates, according to Thomson Reuters.

"It's almost like we announced and the stock sold off," said Farnsworth, adding, "we had a great quarter of loan growth."

Farnsworth noted that a handful of other regional banks that reported positive earnings late Wednesday including TCF Financial (TCB) and PacWest Bancorp (PACW) also saw their stocks slide as well. On Friday, shares of Associated Banc-Corp fell almost 5% despite the fact that it posted its highest quarterly profit in four years.

Frederick Cannon, director of research and chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods, suggested in a research note that Umpqua's shares fell "due to what we believe are unfounded concerns over some small upticks in problem credits."

Umpqua's nonperforming assets rose 2% from the first quarter, to $81.9 million in the second quarter, even though they fell 25% from a year earlier.

Umpqua said in its second-quarter earnings release that it has aggressively charged down impaired assets to their disposition values and the assets are expected to be resolved at those levels, "absent further declines in market prices."

Analysts who follow Associated were similarly puzzled by that company's stock drop following its earnings report in which it said that commercial loans increased by 12% year over year and 3% from the prior quarter.

"I am perplexed in light of their earnings," said Terry J. McEvoy, a managing director and senior analyst at Oppenheimer & Co.

McEvoy speculated that Associated's shares fell because investors are concerned that loan growth may be peaking.

"I guess there is a view out there, and some of that is coming from bank CEOs, that in the second half of this year they could expect to see a slowing in commercial loan growth balances based on global economic uncertainty," he said. "For certain banks that have above peer loan growth, if that doesn't materialize over the next two quarters then that could be a risk so we could see investors reacting to that. A good thing today could be a bad thing tomorrow."

Scott Siefers, a managing director at Sandler O'Neill, had a simpler explanation for the drop in Associated's shares Friday.

"Bank stocks were down overall," he said. "There was nothing unusual in Associated's earnings."