What We Learned From Bank Earnings

Editor's note: An earlier version of this article incorrectly stated that New York Community Bancorp raised its dividend for the 33rd straight quarter. Instead, the bank announced a dividend for the 33rd straight quarter. We regret the error.

Earnings season is winding down, so now is as good a time as any to reflect on some of the things that we learned. If the 2008 financial crisis taught us anything, it's that the banking industry is often a harbinger for larger market moves and fluctuations. I've decided to take a step back and see whether investors can learn anything based on the earnings that banks reported over the past month.

While I focused most of my attention over the past month on regional bank earnings, I'll expand beyond these regional players and include some of the larger banks as well. Instead of focusing specifically on earnings, I looked at various factors that contributed to the performance of banks over the past quarter. Through my research I have identified three trends that helped, as well as hindered, some banks this quarter.

1. It pays to pass Fed tests
Passing the most recent round of Federal Reserve stress tests in March helped many banks to strong quarters. Of the 15 banks that passed the most recent round of tests, 12 exceeded analysts' estimates for earnings during the quarter, with only State Street, Bank of America (NYS: BAC) ,and Morgan Stanley coming up short. Of the three public banks that failed, only Citigroup (NYS: C) managed to also miss on earnings and was soon to be embroiled in a battle with shareholders over compensation for CEO Vikram Pandit.

Many of the banks that passed also decided to return value to shareholders, either through a dividend increase or a share-repurchase program. Most of the large regional banks, including US Bancorp and BB&T, announced dividend increases and large share buybacks shortly after passing the stress tests in March. Bank of America, on the other hand, passed on both for the time being, though some think that a dividend increase may come sooner rather than later.

2. Acquisitions fuel growth
Many of the smaller regional banks found growth through acquisitions, both FDIC-assisted and not. While not quite on the same scale as Wells Fargo's purchase of Wachovia or JPMorgan Chase's purchase of Washington Mutual in the aftermath of the financial crisis, purchasing other regional competitors helped some banks grow their reach within their respective regions.

PNC Financial (NYS: PNC) purchased RBC Bank, the U.S. retail banking subsidiary of Royal Bank of Canada, converting 900,000 customers and more than 400 branches to the PNC name and expanding the footprint of the Pittsburgh-based bank. First Niagara Financial (NAS: FNFG) followed suit and hopes to complete its acquisition of 196 branches from HSBC by May, further expanding operations in the Northeast.

3. Balance-sheet improvement is key
My reviews of regional banks saw one final key emerge to strong quarterly performance. The majority of banks that met or exceeded expectations had one thing in common: an improvement in overall asset quality. Some banks had only seen improvement from the previous quarter, while others had steadily decreased the ratio of nonperforming assets on the balance sheets.

One bank that stands out is New York Community Bancorp (NYS: NYB) . Q1 marked the sixth consecutive quarter that the bank improved the quality of its assets, with better loans helping push net income up slightly from the previous quarter. The bank also announced a dividend for the 33rd consecutive quarter, pushing its yield near 8%.

It's not all good news on the balance-sheet front. Bank of Hawaiireported a 5% increase in total loans during the quarter but also cited a long foreclosure process as the cause of a slight increase in nonperforming assets.

Is it time to invest in banks again?
One quarter should not be all you look at when determining whether a company is worthy of investment. Nevertheless, the first quarter of 2012 was among the best in recent memory for many of the nation's banks both large and small. Many of the larger banks have been tested and should be able to withstand further crisis, and as a result, they have been returning money to shareholders in the form of dividends and share repurchases. The stronger regional banks have also been acquiring some of their weaker competitors, further strengthening the system as a whole.

After nearly causing another depression before being bailed out, most banks have recovered nicely over the past three years, with many returning to the point they were at before the crisis. If you're interested in the industry as a whole, now might be a great time to find a worthwhile one to invest in. In fact, one of the banks mentioned here is featured in our free report, "The Stocks Only the Smartest Investors Are Buying." To find out which one it is, get your copy today before it's too late.

At the time thisarticle was published Fool contributorRobert Eberhardl ikes certain banks but holds no position in any company mentioned.Follow himon Twitter, or check out hisholdings and a short bio. The Motley Fool owns shares of Bank of Hawaii, JPMorgan Chase, Bank of America, PNC Financial Services Group, Wells Fargo, and Citigroup and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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