3 Regional Banks Report: Should You Buy?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many regional banks are continuing to report earnings this season. We continue to see that those banks that lost money in 2008 and 2009 are only marginally profitable today, while those that had steadier performance are on more solid footing today. Earnings in the fourth quarter are proving more difficult to come by for many banks than in the previous quarter, as the temporary easy fix of taking cash from reserves is often in these banks' rear windows. So, let’s take a look at a few more regional banks that have only recently reported their 2011 results.
Huntington Bancshares (NASDAQ: HBAN)
Huntington is a large regional bank with about $54 billion in assets and 640 branches spread across a footprint throughout the lower Great Lakes states. It is the 34thlargest bank in the country by assets. It was trading recently at a little under $6 per share. Its 52 week trading range is from $7.70 to $4.46, and it has a 12 month trailing price to earnings ratio of about 9.5. Its market capitalization is almost $5 billion, and it recently quadrupled its quarterly dividend to 4 cents per share, for an annual yield of 2.8%.
After losing over $3 billion dollars in 2009, Huntington has entered a period of utter stability In the fourth quarter of 2011, it posted earnings of $101.9 million, or $0.14 per share, which while down 16% from the third quarter of 2011, continued the bank's pattern through each quarter of 2011 of earning between $0.14 and $0.16 per share. For all of 2011, Huntington earned $543 million, or $0.60 per share. This was 74% more than 2010 earnings. But the return on assets in 2011 was a fairly paltry 0.69%. In fact, looking back to the year 2001, Huntington has never recorded a return on annual return on assets in excess of 1.0%
In the fourthquarter, Huntington's net interest margin grew four basis points on a sequential basis, up to 3.38%. Low cost deposit increases exceeded the decline in interest income due to lower interest rates. Non-interest income dropped 11% sequentially in the quarter, largely due to the loss of debit card interchange fees due to the Durbin Amendment. To help counteract the loss of debit fee service charges, Huntington announced closing nearly 30 branches, and replacing those by leasing supermarket space in 40 Eagle Giant supermarkets.
Huntington has undertaken some clever marketing ideas in order to help grow its retail business. Yet, the standards for success at Huntington seem lower than other banks. It is not selling cheaply right now, and I think you can do better to buy any number of banks rather than Huntington. U.S. Bancorp and Fifth Third Bankcorp are my favorite two among large, Midwest-based regional banks.
FirstMerit Corp (NASDAQ: FMER)
FirstMerit is an Akron, Ohio-based bank with over 200 branches scattered across Ohio, Pennsylvania, and the Chicago area. At year end 2011 it held almost $15 billion in assets. FirstMerit stock was trading recently at about $16 per share. Its 52 week range is from $18.78 to $9.98, and it is trading at a price to earnings ratio of 14.3. FirstMerit has a market capitalization of $1.73 billion, and pays a quarterly dividend of $0.16 per share, for an annual yield of 4.0%
FirstMerit is one of those rare regional banks that never had major write offs, or posted any quarterly losses during the 2008 – 09 recession. In the fourth quarter of 2011, FirstMerit reported profits of $30.5 million, or $0.28 per share. This was up about 13% from the fourth quarter of 2010. For all of 2011, FirstMerit posted earnings of $119.5 million, or $1.10 per share. This was 8% better than 2010's $1.02 per share.
Many of First Merit’s secondary numbers are improving as well. Its 2010 purchases of Midwest Bank and Trust and George Washington Savings Bank both introduced FirstMerit to the Chicago market, and increased its asset base by nearly 40%. FirstMerit will eventually wring efficiencies from these acquisitions. FurstMerit had an annualized return on equity of 0.83 in the fourth quarter. This was down three basis points from the third quarter of 2011, but up nine basis points from the year ago quarter. I expect that measure of profitability to expand as costs from the Illinois banks are stabilized.
FirstMerit has a history of having an annual return of more than 1.0% prior to 2009. It also has a history of paying about 60% of its earnings as dividends to shareholders. Earnings growth momentum is expected to slow down in 2012, so do not look for a dividend increase in 2012. I expect this equity to track the market in 2012, but with its current dividend yield, this issue may appeal to income investors.
Commerce Bancshares. Inc. (NASDAQ: CBSH)
Commerce is a Kansas City-based bank with about 360 offices scattered among Missouri River states. It has about $20 billion in assets, and is another generally conservative bank that never even came close to losing money in any quarter during the recessionary years. Commerce stock was trading recently at almost $40 per share, and its 52 week range is from $44.00 to $33.06. It trades at a price to earnings ratio of 14, and has a market capitalization of $3.52 billion. It pays an annual dividend of $0.92, for a yield of 2.3%.
Commerce reported fourth quarter and full year 2011 results as strong as almost any bank I have seen, For all of 2011, it reported an all-time company record income total of $256 million, or $2.82 per share. This figure was 17% above 2010's $2.40 per share. In the fourth quarter of 2011, Commerce earned $65.1 million, or $0.69 per share, which while essentially the same as the year ago quarter, failed to meet analysts’ expectations for the quarter by one cent per share.
Commerce has failed to achieve a return on assets of over 1.0% once since 2000. In 2011, its return on assets was an impressive 1.32%, and its efficiency ratio was a solid 0.591. Loans as of year end 2011 were only 44% of assets. Given the bank’s historically conservative stance, I don't believe we will see any kind of explosive loan growth in the unsecured loan portfolio. Commerce has been aggressive in 2011 in growing its auto loan and commercial mortgage portfolios, but that is still a modest portion of the bank's portfolio.
As much as I respect a bank that has been well run over the years, this fact is already reflected in Commerce's relatively high price and price to earnings ratio. Its dividend yield is merely average, as well. I do not see much upside for the stock price for 2012 or even beyond, and urge those seeking anything more than the safest of bank stock investments to look elsewhere.
The Motley Fool owns shares of FirstMerit and Huntington Bancshares. IUMFool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.