Bank Bets with Takeover Appeal

Focus: FINANCIALS

Doug Hughes Image Doug Hughes Editor, BankNewsLetter.com

Doug Hughes focuses on regional and small banking stocks; here, the editor of Bank Newsletter looks at the outlook for the sector and highlights three favorite investment ideas with strong upside potential and limited downside risk.

Steve Halpern:  Joining us today is regional bank specialist, Doug Hughes, editor of Bank Newsletter. How are you doing today, Doug?

Doug Hughes:  Great.  How are you Steve?

Steve Halpern:  Very good.  Thanks for taking the time.  Now, when considering bank stocks, the market’s been preoccupied with the outlook for interest rates.  Could you give a quick overview on what you see for interest rates and the potential impact on the regional bank stocks that you follow?

Doug Hughes:  Sure.  Just as we said at the beginning of the year, we still expect there to be rate hikes.  Everybody’s been all over the map, as you see on the TV, with no rate hikes or up to four or five rate hikes, but we just held steady at three.  

We think we’re going to get one this month, one in June and we think we’re going to get another one in September or December and generally, that helps these community regional banks.

For example, our pick last time we spoke, Iberia Bank (IBKC), every time they raise the rates a quarter point, they make 7% more on their money, so that’s quite a bit of an increase.  

Not all banks will have that, but many of these smaller and mid-sized regional or any of the community banks will make anywhere from 3% to 8% on every quarter point hike, so generally it’s a great positive.  

Steve Halpern:  Now I know you focus very heavily when you’re assessing a bank, you look at the high quality of management, as well as strong finances.  Could you walk our listeners through a quick overview of the primary factors you consider when selecting stocks?

Doug Hughes:  Sure.  Well first of course, again yes, you’re always buying people when you’re buying a bank, so the people have to be top-notch.  

We like a great market area where it’s a high income area and/or a high gross and then you obviously have less asset quality problems, if it’s a high income area and more likely in a takeover cabinet.  Most banks take it over are generally very strong asset quality, very strong people and very strong fluid market.  

Steve Halpern:  Now turning to a few individual stocks, one you like is Commercial Banks Shares (CMOH), which is based in Ohio.  What’s the attraction here?

Doug Hughes:  We’ve liked this stock for many, many years and it just continues to grind higher.  The bank earns roughly close to $3 a share this year, which puts it at a p/e of around 9 to 9 1/2.  

The have a 5% stock buyback in place for the bank.  Insiders are always buying the stock also.  Book value is around $33 a share, so we’re trading around $29, $30.  

It’s about 10% under booked, with a PE of that again nine or so.  It’s hard to beat that.  There are very, very few bad loans.  The management has been there forever.

If they were to sell out, it’s worth at least $40, $44 a share.  It’s a nice 3.5% cash dividend while you wait.  They’ll probably actually pay an extra special dollar of cash dividend, I have a feeling this year.  

They had somebody die at the bank and they got a cash settlement for life insurance.