A Tour Of 4 Midwestern Regional Banks

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cincinnati based Fifth Third Bancorp (NASDAQ: FITB) has a well-earned reputation as a conservative, well run institution. Despite having much of its asset base in two of the states (Michigan and Florida) most devastated in last decade's recession, Fifth Third has only been unprofitable one year in the last twenty, in 2008. In contrast, 2012 proved that the roughly $120 billion asset bank is back to its pre-recession levels. The year was capped by a strong fourth quarter coming in at $390 million, or $0.43 per share. This was a 30% jump from the fourth quarter of 2011, and also a few cents above the $0.41 per share that analysts had forecast.

Overall in 2012, earnings came to $1.54 billion, or $1.66 per share, up 41% from the $1.18 in 2011. Lowered loss provisions and excellent loan growth, especially on the mortgage side of things, brought about the stout earnings. $1.66 per share equaled a 1.32% return on assets, and an 11.1% return on equity, solid numbers both. Yet, the issue for any well performing bank from my standpoint is whether there is reason to expect improvement in key metrics as we look ahead over the next few years. With Fifth Third, unless there is an improved credit curve, I don't see how revenue and profit pictures can meaningfully grow.

Mortgage originations grew in 2012 to $25.2 billion, a 35% jump from the $18.6 billion in 2011. The bank's overall loan portfolio grew by about $4 billion, or by 5% to almost $84 billion at the end of 2012 versus 2011. Fifth Third's common capital at year end 2012 stood at 9.5%, which while well over the regulatory minimum, stood below most of its peer banks' levels.

At the recent Citigroup conference, Fifth Third noted that in 2012, it paid out a total of 62% of its profits to shareholders in the forms of stock buybacks and dividends. That payout total is relatively comfortable for a bank of Fifth Third's stability, and we can expect that ratio to grow slowly, if at all in coming years. Therefore, since I don't see much in the way of earnings improvements over the next year or two, I don't see much room for increasing the size of the dividend or buybacks. I think Fifth Third is a suitable choice for very conservative investors, but for those looking for capital growth, it might be best to look elsewhere.

Comerica Bank (NYSE: CMA) continued its recovery from the recessionary years with an improved 2012. Earnings came to $521 million, or $2.67 per share, a jump of nearly 30% from the $2.09 posted a in 2011. The earnings improvement was led by a $65 million dollar drop, or about 45% plunge in its provision for loan losses. Also relatively strong loan growth of 7% over the course of the year aided net interest income to eke out a $75 million, or 4.5% gain.

But what I like most about Comerica is it still has plenty of room to improve earnings further. In the Sandler O Neill West Coast Conference in early March, Comerica management stated goals of a return on assets in excess of 1.3%, and an efficiency ratio of under 0.60%. In 2012 the bank's return on assets was just 0.83% and its efficiency ratio was 0.69%. Comerica will achieve those improvements by continuing the recent path of taking assets out of its slow growth Michigan market, and reinvest those assets in faster growing Texas and California. Indeed, in 2012 the bank's Michigan loan portfolio fell by 2%, while the Texas and California loan books grew by 10% and 13%, respectively.

Unfortunately, I do not look for Comerica's profit goals to be achieved in the next 12 to 24 months, as the sluggish economy and interest rate spread flatness makes growing revenues a difficult chore for nearly all banks. Comerica returned 80% 2012 earnings to shareholders in forms of dividends and share buybacks. Comerica already has capital levels well above even Basel III standards, but I would like to see that ratio trend down closer to 60%.  The current interest rate environment will not be here forever, and by the next three to five years, Comerica is in an excellent position to reward patient investors.

Huntington Bancshares' (NASDAQ: HBAN) Midwest concentration hit it hard last decade, but it has more or less recovered fully. In 2012 profits came to $641 million, or $0.71 per share, up about 18% from 2011. The earnings allowed for a 1.15% return on assets, compared with 2011's 1.01%. The earnings increases were due to a surge in mortgage income allowing for non interest income to advance 12%, or by $117 million. Net interest income also rose 5% on a 3 basis point jump in the net interest margin along with a modest 2% growth in loans. Loan growth was held down due to Huntington's sale of $2.5 billion of auto loans during the year. Management looks for more modest loan growth in 2013.  But I see revenue growth as a real struggle, and a likelihood Huntington will have to post higher loan loss reserves in 2013 than it did in 2012 as reasons to be skeptical of earnings growth in 2013. Further beyond, I see Huntington having lower upside than other large banks, as it never has had a return on assets much over 1.3%.

Obviously, I have a similar, less than optimistic prognosis on the above three banks. Is there any Midwest bank I see having a chance for strong profit growth in the 2013 – 2014 time frame? Yes indeed, and it is Akron, Ohio based FirstMerit (NASDAQ: FMER). First it has a history of steady, if not spectacular profitability. As of the close of 2012 it returned a profit in the past 55 quarters. Second it reported steady progress during 2012, finally in the fourth quarter achieving a return on assets of 1.03%. 

But what really stands out for FirstMerit is that it finessed its way into purchasing Michigan based Citizens Republic Bank in the third quarter of 2012. As a Michigan focused bank Citizens has only recently returned to profitability after several years of steep losses, and the $900 million, all stock purchase was done on the cheap. It may take through all of 2013 to overcome the dilution of the deal, but the former Citizens will have a sharply increasing profit curve in coming quarters, and by sometime in 2014 FirstMerit's earnings, and stock price, will be the better for it. The time though is now to invest in the probable winner.

StockCroc1 has no position in any stocks mentioned. The Motley Fool owns shares of Fifth Third Bancorp and Huntington Bancshares. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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