Small Bank Newsletter

February 06

 

1. BANK OF GRANITE CORP (GRAN $18.50) the bank operates 21 banking offices in Caldwell, Catawba, Burke, Watauga, Wikes, Mecklenburg and Forsyth counties 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 in the group and we think it is headed back towards that status. The Bank is 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 will find a buyer 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, 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 healty 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 in a hard sell-off. Headquartered, Granite Falls, North Carolina.

 

FOLLOW UPS:

1. POPULAR INC (BPOP) insiders continue to buy. Hold.
2. KEARNY FEDERAL (KRNY) take profits now on this one over $12.60.
3. NORTH FORK BANCORP (NFB) take profits now on this one also, over $27.50

Wow, what a snap-back in November from October’s blood-bath. How-ever we don’t see this continuing like last year and hence we are taking short-term profits on the ones listed above. This year we would look to continue to sell any issues at year end if they run up and reach full valuation, or get near it. The only way to make money in 2006 will be to hang on to our core holdings, wait for deals to happen, trade a lot (more risky) and to continue to buy new issues and secondaries if the prices are right, and they are in the right markets. Do not use up to 100% margin anymore, as we have the past 6 years, as rates and valuations both continue to rise. Simply not worth the risk anymore other than for pure takeout plays and selective short-term trading ideas for people who don’t mind the risk. ( also margin rates were 2.5%, now going to 5% +) We should continue to see many more, very small deals as the new laws are simply too expensive for many very small banks, to stay public (good news for us). Some examples of these could be MCPH, ASFE, and FBTT. For any of those thinking of starting a managed account with us, we should have a few good secondary offerings coming out next year which could be the only way to go in 2006.

Enjoy your profits of the last 6 years and look for much more normal returns in the range of 7%- 17%, for the next 5-10 years, with some flat years and some years up over 25% if we get a lot of deals.

Interest rates are still going higher!

BankNewsletter.com 1-888-814-7575 10/04

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Douglas Hughe s -- Small Bank Newsletter, Hughes Investment Management , can and does take positions, in stocks it recommends.All material Copyright© 1995-2006 by Douglas Hughes. Reproduction of this publication in whole or in part is strictly forbidden.

 

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