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10 Bank Stocks You Need to Watch During Earnings Season (Update 1)


>Updated with Monday comments on JPMorgan Chase from Credit Suisse analyst Moshe Orenbuch.

NEW YORK ( TheStreet) -- It was a rocky second quarter for bank stocks, following what seems to have become an annual pattern for the sector.

The KBW Bank Index (I:BKX) closed at 45.79 Friday, down 8% during the second quarter, following a fat 26% return during the first quarter. On Friday, however, the index had recovered 12% from its second-quarter closing low of 41.00 on June 4.

In addition to weak investment banking and trading results, following a decent first quarter, there are several other major themes for the industry, heading into second-quarter earnings season:

HARP 2.0

Banks with mortgage lending operations will report another strong quarter for loan originations and income from quick loan sales to Fannie Mae (FNMA) and Freddie Mac (FMCC) , following President Obama's expansion of the Home Affordable Refinance Program, or HARP, which allows qualified borrows with mortgage loans held by Fannie or Freddie to refinance their entire loans balances, no matter how much the value of the collateral property has declined.

Sterne Agee analyst Todd Hagerman said on Friday that while he expects banks to report another strong quarter for mortgage loan originations, he expects mortgage revenue "to retreat somewhat" from the first quarter, because of last quarter's strong gains-on-sale. The analyst "also expects "diminished results from mortgage hedge gains will also likely be a drag on mortgage banking results given the relatively flat yield curve."

Fannie and Freddie Putback Demands

With Fannie Mae and Freddie Mac showing increased aggressiveness in demanding that mortgage loan sellers and servicers repurchase nonperforming loans, some of the major industry players are beefing up their repurchase reserves, including First Horizon National (FHN) of Memphis, Tenn., which on Thursday announced $272 million in second-quarter charges , after the company "obtained significant new information from Fannie Mae" on sold loans the company was no longer servicing." The consensus among analysts polled by Thomson Reuters is for First Horizon to post a second-quarter net loss of 50 cents a share.

PNC Financial Services Group (PNC) of Pittsburgh on June 12 disclosed that it was experiencing "elevated levels of GSE-related repurchase demands" during the second quarter, primarily for mortgage loans originated from 2005 to 2008. The company estimated its new mortgage repurchase claims for the second quarter would total $288 million in the second quarter, increasing from $213 million during the first quarter and average quarterly putback demands of $193 million during 2011. PNC said that "As a result, PNC expects to add residential mortgage repurchase reserves of approximately $350 million in 2Q12." Analysts expect PNC to report second-quarter earnings of $1.26 a share, declining from $1.44 in the first quarter, and $1.67 in the second quarter of 2011.