Solid as a Rock

01/20/2006 12:00 am EST

Focus:

Doug Hughes

Editor, BankNewsLetter.com

When it comes to investing in regional banking stocks, Doug Hughes is the advisor to bank on, as he focuses exclusively on this sector. Further refining his niche, he favors regional banks with takeover appeal, including Granite, his top 2006 pick.

"Bank of Granite (GRAN NASDAQ) currently operates 21 banking offices in North Carolina and Hilton Head Island, South Carolina. These are some very strong markets and a franchise like this is valuable in today’s world. This bank once was the premier name within the group and we think it is headed back towards that status. Bank of Granite now over $1.1 billion in assets, deposits approaching $900 million and loans up 8.7% last year to $753 million.

"The bank has increased their cash dividend for 52 years in a row and earnings in the latest quarter of $.32 a share were up 32.8% showing their expansion is working and the costs are now behind them. Asset quality also continues to improve as does the net interest margin. Allowance for bad loans is at 1.60%, very solid with non-performing loans at 0.67%. The efficiency ratio is down to under 49% and dropping. Their book value is now almost $11 a share and the bank continues to repurchase stock at these levels.

"With over 320 hard-working employees and a strong mortgage shop, maybe the Bank of Granite will find a buyer over the next year. Management is getting up there in age and they also own a lot of stock, so someday they will want to get paid. In fact, they also pay themselves very reasonable salaries for today’s world. Management has also been buying a little stock lately, which I consider a good sign.

"If they continue to come in with strong earnings, look for a rebound in the stock to $20-$22 within 1-2 years and $28+ if a deal were to happen. In the meantime, enjoy the healthy cash dividend with a yield of 2.70%. If no deal happens, look for a 10%-13% annualized return for many years to come. They have 13 million shares outstanding and this one trades plenty but has a big spread sometimes, so please by it slowly under $18.75 and all you can under $17.75. Downside should be limited to around $17 a share even in a hard sell-off."

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