Summary

• First Niagara Financial Group just reported its third quarter earnings with a net loss of $665 million, equal to $1.90 per share.
• I predicted that it was likely the company would be seeing strong loan, deposit and earnings growth here at this point in 2014 but was only partially correct.

• All things considered the bank has strengths and weaknesses but following this report I am more neutral on the stock than I had been in the past.

First Niagara Financial Group (NASDAQ:FNFG ) just reported its third quarter earnings. I am disappointed but overall I will say this was a so-so quarter. There were clear weak points and clear strengths. Earnings per share were expected to be weak and came in as expected. Net loss was $665 million, or $1.90 per share. One of the big contributors to these results was an impairment charge of $800 million, as well as a pretax $45 million reserve to address a process issue related to certain customer deposit accounts. Excluding these charges, operating net income available was $63.3 million, or $0.18 per diluted share, compared to net income of $71.6 million, or $0.20 per diluted share in the third quarter of 2013. I am unhappy with any year-over-year decline for a regional bank. Revenues missed expectations. Operating revenues of $349 million were a decrease of 1% from the prior quarter, missing expectations by $11.7 million. What about the key metrics, such as loan growth, deposit growth and the efficiency ratio? These are critical. Despite the rough headline numbers, loan and deposits look great. Average loans increased 9% annualized compared to the prior quarter, which is very strong. Average commercial business and real estate loans increased 6% annualized over the prior quarter, while average consumer loans increased 13% annualized. Average transactional deposit balances increased 7% over the prior year quarter and currently represent 37% of the company’s deposit balances, up from 35% a year ago. The efficiency ratio was weak, coming in at 71.6%, which worsened from the 69.2% last quarter.

In my in depth article on First Niagara, I highlighted the bank as a growing regional powerhouse in the northeastern US. I predicted that it was likely the company would be seeing strong loan, deposit and earnings growth here at this point in 2014. Well this prediction was partially correct as loans and deposits continue to grow, but I did not anticipate year-over-year earnings declines, which are incredibly disappointing. In fact, shares are now down 7% this morning at the time of this writing.

I think this report tends to be a bit bearish, especially with the revelation that the bank discovered an internal issue that may impact certain customer deposit accounts. The bank is conducting an internal review to determine the potential impact on its customers. But the CEO stated that customers should be confident that their account balance information accurately reflects the funds on deposit. The bank has set aside $45 million to deal with this issue. This news could spook some individuals and could lead to customers losing confidence and leaving the bank. It probably won’t be a huge issue but could have a small detrimental impact. Although there were charges and some issues that led to year-over-year earnings declines, I was not happy to see an efficiency ratio in the 70% range. This means it is costing the bank more to make every dollar. The loan growth and deposit growth are strong, and so I still like the long-term outlook on this stock, but I am less bullish. I now have a neutral rating on the stock, and think the long-term investor could cherry pick more shares on selloffs, but I am no longer as bullish as I was given this year-over-year decline.

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