Bank stock binge: Fred Cummings focuses on the banking industry for higher returns.

Recent economic conditions have yielded good and bad news for the banking industry. On the one hand, a recession and the slow economic recovery that followed have stalled corporate loan demand and weakened bank revenues. On the other, low interest rates have propelled consumer borrowing, most notably in mortgage lending, where new home loans as well as refinanced mortgages have increased.

As a bank analyst for KeyBanc Capital Markets, Fred Cummings' job is to spot those banks that are likely to survive the current changes and those that may be acquired by competitors. He primarily covers banks in the Midwest, often visiting and personally meeting with CEOs, CFOs, and other key executives. "We're looking for banks that do the best job extending credit to corporations and consumers with a very conservative underwriting policy. [This way,] the banks will be able to get paid back without taking a high level of charge-offs," Cummings says. "We also focus on the bank's ability to grow their core deposits--their checking, savings, and money market accounts."

According to Cummings, recent economic and business trends have caused a number of bank mergers and acquisitions in the Midwest. "In the entire banking too few customers and there's too much competition. This is why we are seeing industry consolidation," Cummings says. To capitalize on the consolidation, he has identified four bank stocks he believes will outperform the market over the next 12 to 18 months.

Fifth Third Bancorp (Nasdaq: FITB) is a bank holding company that does business through its affiliates in several states including Indiana, Illinois, and Tennessee. "Fifth Third has been out of favor with investors in the last couple of years because they've had some internal control issues. We think those issues are behind them, and we project a 12% growth rate over the next few years," Cummings says. Cummings believes the bank was able to turn things around because it improved its accounting methods and trimmed expenses.

Cummings favors U.S. Bancorp (NYSE: USB), a multistate financial services holding company that provides consumer and commercial banking, payment services, and trust and asset management. "They are trading at a discount to other banks right now, but it's a very shareholder-friendly company," he says. "Their goal is to return 80% of their net income to shareholders, either through stock dividends or stock repurchases." Cummings adds that the income generated from the company's payment services business is "growing fast."

One bank that Cummings expects to benefit from interest rate hikes is Lancaster, Pennsylvania-based Fulton Financial Corp, (Nasdaq: FULT), a holding company for several subsidiary banks that operate in Pennsylvania, Maryland, New Jersey, and Delaware. Each subsidiary offers consumer and commercial banking services, and Cummings says he's been eyeing Fulton as much for its loans as for its acquisitions. "What we like about [Fulton] is that, unlike many other banks, they have strong corporate loan growth. They also have a disciplined acquisition strategy and, therefore, we see them expanding their market share," he says.

Cummings also expects Oak Hill Financial Inc. (Nasdaq: OAKF) to benefit from higher interest rates. The Jackson, Ohio-based financial holding company engages in commercial banking and consumer finance lending through its wholly owned subsidiaries. "Oak Hill's loan growth has increased in markets like suburban Columbus, Cincinnati, and Dayton," Cummings says. "They are picking up business in the commercial real estate loans market and they will continue to grow."

Company                             12-to 18-      P/E on
Exchange Symbol           Price *   Month          Projected
                                    Price Target   Earnings

Fifth Third Bancorp       $48.59       $60.00         14
(Nasdaq: FITB)

U.S. Bancorp              $29.23       $32.00         12
(NYSE: USB)

Fulton Financial Corp.    $21.44       $24.00         15
(Nasdaq: FULT)

Oak Hill Financial Inc.   $35.31       $40.00         13
(Nasdaq: OAKF)

Company                   Est. 5-Yr.
Exchange Symbol           Annual EPS
                          Growth Rate   Why Stock Will Outperform

Fifth Third Bancorp          12%        Company ha improved its
(Nasdaq: FITB)                          accounting methods and
                                        trimmed expenses.

U.S. Bancorp                 10%        Company has been trading
(NYSE: USB)                             at a discount and is
                                        shareholder-friendly.

Fulton Financial Corp.       10%        Company has strong
(Nasdaq: FULT)                          corporate loan growth and
                                        a disciplined acquisition
                                        strategy.

Oak Hill Financial Inc.      10%        Company's loan growth and
(Nasdaq:OAKF)                           business in commercial
                                        real estate have
                                        increased.
* AS OF SEPT. 21, 2004