The day after Fulton Financial Corp. in Lancaster, Pa., reported last week that its fourth-quarter earnings fell 18% and nonperforming assets more than doubled, its stock shot up roughly 14% and has held steady since.
The $14.9 billion-asset Fulton is just one of many community banking companies whose share prices soared last week, even after they reported less-than-spectacular earnings.
Analysts said the rally could be attributed largely to the Federal Reserve rate cut and investors' unwinding of their short positions, but some also cited investors' changing expectations.
Though most banks and thrifts are reporting increases in nonperforming loans, sentiment among investors is that things could have been worse, said Matthew Schultheis, an analyst at Ferris, Baker Watts Inc.
Consequently bargain hunters are on the prowl for community bank and thrift companies that, though hardly immune to the souring real estate markets, are weathering the downturn better than expected.
There are some signs of weakness in the home equity and commercial real estate loans, Mr. Schultheis said. "But so far it doesn't seem so widespread as to be catastrophic, particularly for the small banks."
With bank and thrift stocks generally trading well below their 52-week highs, he said, many investors see now as a good time to buy.
"People who are interested in banks now haven't been interested for years," Mr. Schultheis said. "A couple of years ago it was the bank wonks who were looking at bank stocks. Now all of a sudden we are seeing value guys."
Frank Barkocy, the director of research at Mendon Capital Advisors Corp., said last week's rally was largely due to the Federal Open Market Committee's cutting the overnight interest rate by 0.75%. He expects investors to start homing in on selected stocks that are poised to benefit from Fed rate cuts, he said.
But he agreed that investors also have reason to be optimistic about credit quality.
"The feeling is that, while the problems are far from over, the extent of the future problems might not be as severe as we saw throughout 2007," he said. "There could be a desire to buy ahead at some really distressed prices."
However, not all market observers agree that there are investors betting on the worst being over.
"The rally for the bank stocks has nothing to do with the individual fundamentals in our view," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets. "It has to do with market sentiment that has changed very quickly here, in view of the Fed cutting rates by 75 basis points and then a possible resolution to the bond insurer crisis. Those two factors have changed the psychology of the banks, which has forced the shorts in these stocks to cover."
Consider the $2.4 billion-asset Seacoast Banking Corp. of Florida for example.
Matt Olney, an analyst at Stephens Inc., said the company posted notable gains in the wake of the Fed cut, suggesting that investors shorting this stock decided to take their profits. (Short sellers bet on a stock to go down.)
Seacoast, which had been hit hard last year by the sluggish Florida real estate market, reported Wednesday that its fourth-quarter earnings fell 66.5% from a year earlier, to $1.9 million. Nonperforming assets grew 442% from a year earlier, to $67.6 million, or 3.56% of loans and other real estate owned.
Yet its stock finished Thursday up 24%, at $9.71 a share. (It began to give back some of that gain on Monday, then rebounded in the late afternoon, rising to $9.98.)
Mr. Cassidy said that he believes more trouble might well lie ahead for the financial sector. "Very few banks that have put up results thus far have put up results that they are proud of," he said. "They all were underachieving results, and in some cases they were an absolute disaster. And in all of the conference calls, I don't recall any of them saying, 'Yeah, we think this is the worst of it.' We didn't hear that."
Still, Ronald Peterson, an analyst at Sterne, Agee & Leach Inc., said he thinks there has been a shift in investors' attitudes about quarterly results lately. "If there aren't any credit blowups, then it's a good quarter," he said.
David Darst, an analyst at First Horizon National Corp.'s FTN Midwest Research, said the community banks are probably seeing some benefit from having avoided the large asset-quality problems some investors may have anticipated. "All in all, there wasn't a credit meltdown," he said.
Even Fulton had some "bright spots" in its fourth-quarter earnings report, including better-than-expected loan growth, he said, and overall its Pennsylvania markets are holding up surprisingly well through the credit downturn so far.
