This Regional Bank Shines With Profits, Growth: JPM

NEW YORK ( TheStreet) -- Heading into what is expected to be a rather depressing third-quarter earnings season for the nation's largest banks, long-term investors should take a hard look at FirstMerit ( FMER) of Akron, Ohio.

JPMorgan Chase analyst Steven Alexopoulos on Tuesday reiterated his "overweight" rating for the fast-growing regional lender, while increasing his price target for the shares by 50 cents to $25, representing potential upside of 15% from Monday's closing price of $21.74 a share.

FirstMerit's shares trade for 13.9 times the consensus 2014 earnings estimate of $1.56 a share, among analysts polled by Thomson Reuters. That's a much lower forward price-to-earnings ratio than some other fast-growing medium-sized banks, including Signature Bank ( SBNY), which has been growing its sales staff and was covered recently as part of TheStreet's 5 Lean and Mean Bank Stocks.

Two other Midwest names with solid loan growth include Lakeland Financial ( LKFN) of Warsaw, Ind., and Mercantile Bank ( MBWM) of Grand Rapids, Mich.

Alexopoulos estimates FirstMerit will earn $1.57 a share in 2014, rising from estimated 2013 EPS of $1.38.

The bank pays a quarterly dividend to common shareholders of 16 cents, for a yield of 2.94%.

FirstMerit had $23.5 billion in total assets as of June 30, with 415 branches in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania. The company in April completed the major acquisition of Citizens Republic Bancorp of Flint, Mich., which brought on $9.6 billion in assets and 219 branches. FirstMerit has also undergone a major expansion in the Chicago market, picking up 46 branches in the area during 2010.

The bank has been a solid performer in the wake of the credit crisis, with returns on average assets (ROA) ranging between 0.76% and 1.13% and returns on average tangible common equity (ROTCE) ranging between 8.88% and 14.99% over the past five years, according to Thomson Reuters Bank Insight.

For the second quarter, FirstMerit reported earnings of $48.5 million, or 29 cents a share, compared to $37.3 million, or 33 cents a share, in the first quarter, and $30.6 million, or 28 cents a share, during the second quarter of 2012. Earnings-per-share were down sequentially because the company's share count rose through $55.5 million offering of roughly $925 million that went toward the full tab of $1.284 billion for the Citizens Republic purchase.

FirstMerit's second-quarter results included "$32.1 million of one-time pre-tax merger-related costs," according to the company.

Despite the significant dilution from the second-quarter offering, FirstMerit's stock has returned 57% this year.

"While investing in regional bank stocks is in many ways a hope trade for better days ahead given current sector valuations and management teams talking more about opportunities rather than delivering on them, we find FMER to be a breath of fresh air," Alexopoulos wrote in a note to clients on Tuesday. "Contrasted to banks that deliver above peer growth but give away the store (and shareholder profits) to take share, over the past year FMER delivered 12% organic total loan growth, compared to peers at 4%," the analyst added.

Rather than being a play on the "normalization" of bank earnings as the U.S. economy improves, credit costs decline and the interest-rate environment becomes more favorable, FirstMerit is a growth play. The attractive dividend yield is just a bonus.

According to Alexopoulos, "the company is now readying to move forward with its plan to take market share in disrupted Midwestern markets. There are over 10,000 middle market companies in Southeast Michigan and Metro Wisconsin, and FMER has already hired 29 new bankers, including 21 in Michigan and 8 in Wisconsin."

Despite its relatively large size, FirstMerit continues to take a community-based approach that helps the bank poach business from larger rivals. The bankers the company is hiring tend to be locally based, with deep knowledge of local businesses, industries and potential borrowers. When a commercial lender moves to another bank, there is a tendency for some business clients to migrate along with him, or her, bringing along multiple loan and deposit relationships.

Alexopoulos also emphasized that the bank has actually followed through with previously discussed growth plans, unlike some of its peers whose touted "opportunities remain exactly that."

FirstMerit's shares were up slightly in midday trading Tuesday, to $21.78.

FMER Chart FMER data by YCharts

Interested in more on FirstMerit? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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