...and Bank on Banks

03/10/2006 12:00 am EST

Focus:

Regional banks are also gaining popularity. Doug Hughes looks to Kentucky and Indiana; Richard Moroney looks to New York, Florida, and Washington state; and Roger Conrad "prefers" St. Louis, along with a southeast favorite.

(For more on the advisors cited below, please click on their photos.)

Hughes, Doug"Republic Bancorp (RBCAA NASDAQ) is the holding company for Republic Bank & Trust Company, which has 32 locations in Kentucky and two in Southern Indiana," notes Doug Hughes, editor of  BankNewsletter.com. "With over $2.7 billion in assets and $1 billion trust assets, they are a major franchise in their markets. To start, insiders own a ton of stock and they pay a nice 2% cash dividend and usually a 5% stock dividend every year. (Record date for the stock divided is March 24, 2006).

"The bank earned $1.80 a share in 2005, up 8.4% from 2004. Asset quality is very solid. With a book value of $11.50+ a share, trading at just over 1.7 times book and a p/e of 11, the stock is cheap for an institution of this size. Simply put, this is a franchise worth 2.5 times book someday to someone, or $29 a share. And while we wait, we get cash and stock dividends each year, with low downside risk to the $17 area. The risk reward is as good as it gets in today’s world, period. Accumulate heavily under $20 and buy all you can under $18.50."

Moroney, RichardRichard Moroney, editor of Upside, adds, "Intervest Bancshares (IBCA NASDAQ) offers general commercial banking services in Florida and New York City. Expertise in commercial real estate makes Intervest attractive to borrowers and brokers. Per-share earnings jumped 54% in the December quarter. Total assets grew 30%. Net interest and dividend income grew 61%. Many banks are struggling in today’s interest-rate environment. But consensus estimates project per share profit growth of 13% in 2006 and 11% in 2007. IBCA is a Best Buy.

"Riverview Bancorp (RVSB NASDAQ) reported per-share profits of $0.48 in the December quarter, up from $0.34. Total assets increased 36% to $739 million, while loans surged 50% and deposits rose 38%. Headquartered in Vancouver, Washington, Riverview has 17 branches and one lending center. For fiscal 2006 ending March, a two-analyst consensus projects per share earnings will be up 31% to $1.74. For fiscal 2007, per-share profits are expected to be $1.97. Riverview, trading at a reasonable 13 times projected fiscal 2007 profits, is being initiated as a Buy."

Conrad, Roger "It’s the best and worst of times for the banking industry," notes Roger Conrad, in Personal Finance. "Their borrowing rate is flat with the lending rate. Consequently, unless management is savvy and conservative, profit margins will get squeezed. Especially since the mortgage market, which fueled recent growth, has dried up. Some banks have suffered in this mixed environment. But Regions Financial (RF NYSE), which is a holding in our Income Model Portfolio, posted a 24% jump in its fourth quarter profits.

"Based in Alabama, the firm operates throughout the southeast. Its Morgan Keegan investment banking unit was the star—it boosted profits 12% to a record as the South’s largest bond underwriter and it realized gains in asset management revenue. We see a solid operation that can weather continued adverse interest rate conditions. Regions is a buy up to 35.

"We’re also adding a second banking play to our portfolio. Although it does not have a common stock, we recommend the NYSE-listed preferred of  First Bank of St. Louis 8.15% Pfd. (FBS A
 NYSE; Cusip 33610A209). It’s part of the Central Bancompany Holding Company, a statewide organization with 13 affiliate banks throughout Missouri. This allows First Bank to tap into a larger organization with cutting-edge technology, while maintaining operating independence.

"The bank is deposit-based and measures up well on our sector tests. The preferred stock is callable in June 2008 and pays a yield to maturity—which takes into account erosion of principal to its $25 per share call value—of around 6%. Like other preferred stocks, this one has relatively low float, so you’ll have to buy patiently. Pay no more than 27 for First Bank of St. Louis."

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