FirstMerit Corp. is making some progress in dealing with its credit quality, analysts say.
On Thursday the Dominion Bond Rating Service initiated coverage of the $10.1 billion-asset Akron company’s long-term and short-term debt and the outstanding debt of its FirstMerit Bank, which is also based in Akron.
The privately owned Toronto agency assigned an A (low) rating to FirstMerit’s issuer and senior debt and gave the subsidiary’s deposit and senior debt an A rating.
In a research note Thursday, Dominion said the ratings reflect its expectation for improvements in FirstMerit’s loan growth, credit quality, and earnings in the short and medium term.
Also Thursday, J.J.B. Hilliard, W.L. Lyons Inc., a Louisville unit of PNC Financial Services Group Inc., upgraded FirstMerit to “buy,” from “neutral.”
Analysts say FirstMerit’s recent credit-quality issues came from taking on too much risk in its commercial lending operations. The problems were exacerbated by slow economic growth in northeastern Ohio, where many of its branches are located, according to analysts.
Ross A. Demmerle, an analyst with Hilliard Lyons, wrote in a research note that FirstMerit’s asset quality improved in the fourth quarter, because it had fewer nonperforming loans. He also wrote that “loan growth remains elusive” and may depend on Ohio’s jump-starting its own economy.
However, despite the weak local economy, FirstMerit’s market share “makes the franchise attractive to would-be buyers” and helps limit the stock’s risk, he wrote.
FirstMerit said its nonperforming assets fell 4% from the third quarter and 44% from a year earlier, to $45.8 million. Net chargeoffs rose 20% from the third quarter but fell by more than half from a year earlier, to $12.5 million.
Full-year profits fell 11.5% from a year earlier, to $107 million. However, FirstMerit posted fourth-quarter profits of $32.1 million, almost six times higher than a year earlier, when the results included several one-time items: FirstMerit sold its $621 million manufactured housing loan portfolio and $22.6 million of commercial loans, and it prepaid $221 million of Federal Home Loan Bank borrowings.
Kevin Reevey, an analyst at BankAtlantic Bancorp Inc.’s Ryan Beck & Co. Inc., said in an interview Thursday that FirstMerit has made some progress in turning itself around. He expects it to report high single-digit growth in both home equity and commercial lending this year, and he noted that it plans to build branches in Toledo, Pittsburgh, and Holmes County, Ohio.
He also said that FirstMerit’s fourth-quarter earnings improvement was caused mostly by increased fee income from its trust and credit card businesses, and that he doesn’t expect FirstMerit to be back on track before 2007.
Frederick A. Cummings, an analyst at KeyCorp’s KeyBanc Capital Markets, agreed that FirstMerit has addressed its credit quality issues, but he said it still has some work to do.
“Chargeoffs are clearly trending in the right direction” but are still not in line with those of similar-size banking companies, said Mr. Cummings, who has a “buy” rating on FirstMerit’s stock. He expects the chargeoffs to be in line with similar-size companies by yearend.
“Now the question becomes can FirstMerit grow its core commercial loan book?” he said. “Can FirstMerit grow their small-business and midmarket lending business right here in Ohio?”
A FirstMerit spokesman said officials would not be available for comment by presstime. Its shares rose 1.04% Thursday.
