Friday, April 24, 2009
(Cont'd from above)...

Jim (cont'd):   

The trick is to find the right DD3 banks that are in good shape and have the ability to move up to D1... you know that I like FirstMerit in Ohio… but as someone who owned 9.9% of 6 regional banks around the country, that is the largest position that a hedge fund is allowed to take… well at the end of the savings & loans crisis when the winners were being sorted out from the losers… I wanted to find more of these banks and own a larger percentage… the government would not let me… but that is where the best opportunities are right now… again, just like than… which is why for speculation Friday I want to introduce you to First Niagara Financial Group Inc. (FNFG)… a bank based in upstate New York that I think could potentially double thanks to a big acquisition in Western Pennsylvania… I hope the first of many.

First Niagara did a big $361m Eckley offering at $12.25 a share this week… usually introducing a lot of new shares in the market sends the stock lower… but First Niagara is now up about a point from where it did the offering… that is one of the most bullish signs that you can get… it is often the beginning of a concerted move higher… let me tell you why that this bank could be the son of FirstMerit Corp. (FMER), or at least its first cousin… on top of its 114 branches in upstate New York that no one ever heard of… First Niagara is buying $4.2b in deposits… 57 branches and $839m in business and commercial loans in Western Pennsylvania… a very similar area, demographically, to upstate New York… something that should help them get rolling quickly and take share away from competitors.

These new assets were put up for sale thanks to the PNC/National City merger… they had to sell them to appease the regulators… giving First Niagara a great opportunity to buy… this deal will make First Niagara the third largest bank in Western Pennsylvania… and since the company plans to create jobs in the area that reduces the uncertainty about whether or not the regulators will approve… look when the government makes someone sell something… the buyer always gets a great price… remember this, we embrace this logic with Chattem Inc. (CHTT)… do you remember Chattem?... when it bought the good stuff that the government forced Johnson & Johnson (JNJ*) to sell… it made them sell a lot of these different kinds of products that we have got right here… Unisom, Cortizone, Act Mouthwash… why… Kaopectate, Balmax for diaper rash.. you have all seen these… because we knew that Chattem was buying on the cheap… because the government was making JNJ sell them… the result, Chattem went from $34 the day before they announced the acquisition to as high $82 in less than a year and a half… now there is a move right...

I think that we could get something similar with First Niagara… even as one is a consumer goods play and the other is a bank… unlike First Niagara, Chattem jumped about 10 points when the news broke that they were buying these brands… FNFG has not had a similar move yet although it did have a nice percentage gain this week… in part because the bank market isn’t as smart and doesn’t understand the great value that this company is getting… but thanks to our knowledge base in Cramerica about these kind of deals… I think that First Niagara at $13 and change is a steal… like FirstMerit, which repaid the TARP money that it took from the government on Wednesday when we were out at Ohio State… First Niagara plans on repaying the $184m that it got from TARP now that it raised the money thru its big equity offering.

This is what we like… not banks that are all stressed out because they need to raise money, or take money from the government… or can’t repay the government… but banks that are giving money back to the federal trough… because they can stand on their own two feet… do you know what I say… slow… slowly, ever so slowly, step by step, inch by inch, slowly First Niagara rises… we are starting to see real capitalism emerge in the financial system… not that we would have wanted that brutal abesian capitalism before… but that would have meant that we had a half a dozen Lehmans… but at this point we are out of the depression… we can let the banks sort themselves out into the winners and losers… winners, FirstMerit and First Niagara… winners pay TARP back… they not only survive, they thrive… just because you have never heard of First Niagara until tonight does not mean that it can’t be a huge bank someday… or be swallowed up another huge bank… and then, well, that is what happens when we get out of this crisis.

First Niagara has been one of the more responsible lenders… its net charge off of the loan ratio is incredibly small… nearly twice, half of its peers… ration of nonperforming loans, total loans, .72% vs. 1.03% for its peers… that is really significant… the company has far fewer bad loans on the books than other similar banks… that is a big reason that I have confidence in it… it will be a winner… remember, the $834m in loans that it is acquiring from PNC… PNC, by the way, to be very statesman like in the mode of Bishop TuTu or the Dahli Llahma is not exactly in great shape… almost all of these new assets, Wall Street jibberish for loans, are solid… they are buying middle market commercial loans that are good… or small business loans… there are no sub-prime loans that First Niagara is getting… no loans out of its geographic footprint, like in California or Florida… none of those awful home equity loans or residential construction loans… and none of them can be more than 30 days past due… these are gifts everybody… First Niagara got gifts… and our government is not a Trojan horse… it is a gift horse.. .this company has been very careful… the careful banks will be the last one standing… probably with a fistful of dollars, or of course maybe even a few dollars more, to quote bank sage blondie Eastwood.

The bottom line…

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