Bank Bets with Takeover Appeal

06/17/2015 10:00 am EST

Focus: FINANCIALS

Doug Hughes

Editor, BankNewsLetter.com

Doug Hughes specializes in smaller-cap community and regional banks and related financial services firms. Here, the editor of the Bank Newsletter, discusses a trio of favorites that he believes might be well-positioned as potential takeover targets.

Steven Halpern:  Our guest today is Doug Hughes, editor of the Bank Newsletter.  How are you doing today, Doug?

Doug Hughes:  Very good Steve, thank you.

Steven Halpern:  You’ve long been a leading expert on community and regional banks, as well as financial services firms.  Before we turn to some specific investment ideas, could you share your overall outlook for the small bank sector?

Doug Hughes:  Sure, Steve.  Many people just keep talking about rates going up here again in the last few weeks.  We’ve seen this fits and starts over and over the last six to nine months.

That’s not really going to be the cause for the sector to really keep a meaningful appreciation going.  It’s going to be…take out banks that have slow growth, that are in good markets, and they’re going to be taken out at fairly good prices if their asset quality is good.

Steven Halpern:  Okay, so today we’re going to discuss three individual stocks where you believe there could be potential takeover targets. Before we turn to the individual names, could you expand on some of these general factors that you look at when determining if a small banking or financial services stock would be attractive as an acquisition target?

Doug Hughes:  First, you’re always buying people; good people at a bank make the bank, and hence, leads to good asset quality, which is basically what you’re looking for.  You have to have a great asset quality or the bank will most likely never get taken out or at a bad price.  

Second, we want good markets, affluent markets usually are better, and/or growing markets.  

Third, management that’s been there a long time that knows what they’re doing. We like to see management there 10, 20, 30+ years and not a new management coming in every three or four years.  Usually there’s a reason for that.

Steven Halpern:  One stock in the banking area you like is Fulton Financial with the symbol (FULT).  What’s the attraction here?

Doug Hughes:  Their headquartered in Lancaster, PA.  It’s a very large bank. Usually we don’t focus this large, almost $20 billion maybe in a few more years.  

They’ve been around since 1882, very old bank, almost 260 branches now. They’re in some very good markets in Pennsylvania, Maryland, New Jersey, Virginia, 3500 employees, very smart management.  

Management just bought back over 50 million shares of stock over the last year when the stock was at its lows. They’re very frugal.  They always buy at the right prices.  Management is very smart, always uses their capital to make either great acquisitions or buy their stock back.  

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It’s just in a prime market and somebody I think is going to take them out within the next few years, hence be probably only at about 20% premium at today’s level since the stock has come up here about 20% over the last year, hitting a new high basically today.

Steven Halpern:  Now you’re also bullish on the outlook for Oppenheimer Holdings with the symbol (OPY), which is a bank that provides financial services and advice for high net worth clients.  What’s the story here?

Doug Hughes:  A little bit different, but kind of the same thing.  Has been around a very long time, very smart people there that run the operation, very frugal, and they’ve cut costs to the bone in the last few years after the last crash in ’09.  

The firm almost went out of business like Lehman and Bear Stearns, but they made it.

And with the stock market at an all-time high here…the CEO is very smart. I don’t think he’ll let an opportunity to let it get away again.  I think the company is for sale.  The stock has come up here again—also about 30% from the lows over the last six months—with most of these large players like Goldman Sachs (GS) and Morgan Stanley (MS) also hitting new highs through the year.  

This one, in the same retrospect, really hasn’t moved that much over the last several years. They’ve paid over $100 million in fines to the government.  That’s a lot for a small company like this, so they are making quite a bit of money, and with mergers and acquisitions going crazy last year and this year, they’re poised to make quite a bit of money.  

Bottom line is they’re just too small to stay alive by themselves, I think, in this market. They really need to sell to a Morgan and we still see at least ten points upside even though it’s already moved about seven points here.

Steven Halpern:  Now the third company on your list—I might not be pronouncing it right—but its Chemung Financial with the symbol (CHMG). What’s the situation here?

Doug Hughes:  Steve, this one is just a smaller $2 billion upstate New York rural bank that’s been around for 150 years. It’s like the fifth oldest bank in the country. They have a huge trust department with almost $2 billion in assets now.  

With the market, again, at all time highs here, this is a huge plus for that segment of their bank. Very smart management. They’ve all been there 30+ years.  

The stock’s, basically, trading at book value. A firm like this is worth at least one and a half times book.  Pays a nice 3.5%, 4% cash dividend while you wait. Even the first two we talked about paid almost 3% dividends, so all of these stocks they pay to hold and wait.  

They’re all very safe with very limited downside.  Very good asset quality here as well and insiders are always buying the stock as well.

Steven Halpern:  Again, our guest is Doug Hughes of the Bank Newsletter.  Thank you so much for your time today.

Doug Hughes:  Thank you Steve.  Have a great weekend.

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