Tuesday, March 31, 2009
(Cont'd from above)...

What happened at the end of the S&L crisis… hobbled banks stopped lending or went under… with their brands forever tarnished… and then new banks sprung up… banks that weren’t familiar with… banks with great balance sheets and they expanded into the chaos… this is the Hobbesian banking environment, life will be nasty, brutish and short for the troubled banks… some of the regional players will swallow their competitors and turn into regional levisians of finance… what a swell book that was, classic vacation reading… we need to be on the lookout for those banks… and you are in luck… because I have done this before… and this is something that I can really help coach you… at my hedge fund where I was there for 14 years, I compounded a 24% after all fees… I bought 9.9% of the positions, that was the maximum, you could not own 10%… in 6 healthy regional banks all across the country… the banks that eventually emerged from the wrath better, stronger and bigger… and many of them got taken over… so I was happy with either the outcome of the dividend raises that I got, or the takeovers.

Now, the people who write me off as Bozo the clown… usually guys who have never managed money in a day, in their lives… they can’t help you find the regional bank winners… they have never done it… although that clearly makes them superior in their own minds to the guy who has made millions doing so… I guess there is no accounting for taste… but I think I know what the winners look like… and applying the same kind of rigor that I used at my hedge fund… the first bank that I have seen that really looks like the winners out of the S&L crisis is… FirstMerit Corporation (FMER)… of Akron, Ohio.

One that I would be sorely tempted to take a 9.9% position in if I were to go raise the $2b that I could get pretty quickly if the critics could just run me out of this job… that I insist on keeping… that is right, the winner will be this well run $1.4b company similar to International BancShares whose CEO we talked to yesterday… FirstMerit is the fourth largest bank in Ohio, with $11.1b in assets… 160 branches in 25 Ohio counties, you probably never heard of it unless you lived there though… we like FirstMerit because its competitors have indeed been devastated… the major Ohio banks went haywire with loans during the top… they have been darn right mutilated with losses… some have even failed the dreaded Tim Geithner stress test… FirstMerit is definitely the void to fill their shoes… or take them over with an assist from the FDIC… FirstMerit’s branches are primarily in the counties around Cleveland… I have often wondered whether Lebron James banks there, and whether he has a special 10 foot tall ATM.

And FMER also sees Columbus and Toledo as growth opportunities… we will have to check them out when we go to The Ohio State University on April 22nd… the main thing to recognize here is that FirstMerit’s biggest competitors seem to be in trouble… Huntington Bancshare is the market leader by deposits in Columbus and in Cleveland PNC is the number one player, KeyCorp in the number two spot… these three banks don’t appear to be as in good shape as FMER… Huntington worst of the bunch… I think FirstMerit on the other hand is a superior performer, with a superior attitude, and a superior state of mind.. not unlike Mason Storm, in what should have been an Oscar winning performance by Steven Segal in “Hard to Kill”.

Look at the key metrics of this bank… that is what I am always trying to teach you… the things that you need to look at to figure out what is best of breed… FirstMerit, one of them, net charge off the loan ration.. because this is a good idea of how many bad loans it is being dragged down by… it is a mere .68%.. that is extraordinary… 1.1% for its peers.. but much higher for the bad guys… this bank seems to make almost no bad loans… definitely a contender for the Mad Money George Bailey Excellence in Banking Reward for 2009... its return on assets, how profitable the bank is relative to its assets, comes in at 1.13%… hey what is the peer average, .23%… return on equity 12.6%… puny competitors 2.38%.

Why has FirstMerit appeared to do so well.. one of the reasons is that Cleveland’s housing market has held up much better than the US as a whole… with prices down just 6%… compared to 19% for the entire country… they never ran up in the first place, perhaps because the Cleveland Indians never win… and while people threat about auto workers in Ohio who bank at FirstMerit, getting laid off… less than 5 auto plants owned by the no longer big 3 are in FirstMerit’s areas… FirstMerit has a terrific CEO in Paul Craig, he came on board not that long ago in May of 2006.. he completely and utterly turned the company around… prior to this arrival, it had been an underperformer… but the new CEO came in and hired a Chief Credit Officer, rebuilt the companies underwritings and risk monitoring, sold a portfolio of residential development credits, reducing FirstMerit’s exposure to residential development loans to just 2%… how smart was that.

Now the company is really working to attract commercial customers away from its competitors… I think it is pants-ing PNC… which is distracted, it is currently integrating National City… as well as the other banks in Ohio, which seem to have serious issues, more pants-ing… FirstMerit is also clearly interested in some FDIC assistance in takeovers… perfect way to grab market share… and it is one of the best positioned to do so… with 7.27% tangible capital to equity ration… I have got to give you this stuff… because otherwise you will just say, hey FirstMerit Cramer says it is good, I have to give you the data… that is compared to just 5.5% for its peers… this is what the regulators look at when they want to cordon off healthy banks… they are even using the term ring fence… it is so they can acquire the weaker ones… FirstMerit should be one of the banks that get ring fenced so it can gobble up weaker competitors from the FDIC… it reminds me of the old Fleet Bank, when Fleet took over in New England as a beneficiary of the Resolution Trust Corporation… no one had ever heard of them… suddenly they are a national bank almost… big regional if not national.

Yet RTC sold off the remains of broken S&L’s to healthier banks… they went from zero to quero at Fleet in a couple of years taking advantage of banking chaos… I think that FirstMerit Corporation (FMER) could do the exact same thing.

Here is the bottom line…

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