Southern Exposure

 | Feb 06, 2013 | 3:30 PM EST
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I spent some more time last night reading the Milken Institute's list of best-performing U.S. cities. I consider it a must-read for investors who are tracking job growth, real estate and banking investments. It contains valuable information, and I'd go so far as to suggest visiting the Milken Institute regularly for its wealth of information and research on markets, healthcare, energy and other topics that could help make us all better investors.

As I review the list, I see that Austin, Texas, is second -- a perennial top-10 city that has become a center of technology, with Dell (DELL) and IBM (IBM) its largest employers. Many Austin residents are about to become cash rich if the Dell go-private deal goes through. The problem with Austin, however, is that almost all the smaller banks there are privately held. The largest banking presence is Wells Fargo (WFC), followed by Bank of America (BAC), so it's hard to find a bank to buy and get an Austin-specific play.

That's not the case with the third city on the list, Raleigh, N.C., which climbed 11 spots as the research triangle's hub attracted strong high-tech job growth. Universities are among the largest employers in the area and have been expanding their research facilities. Cisco (CSCO) also has a strong presence in the region and it has been upgrading its facilities in the region. Open source software company Red Hat (RHT) also makes it home in Raleigh. The region has one of the most educated work forces in the area, as it draws from North Carolina State University as well as nearby University of North Carolina at Chapel Hill and Duke University. Tobacco Road has morphed into the High-Tech Highway, and Raleigh is a major beneficiary of the transformation.

First Citizens (FCNCA) is the largest, and one of the oldest, banks in the area. It was founded in 1898 and it has grown to more than 400 branches in 17 states. The bank has taken advantage of the recent financial crisis to acquire other banks with FDIC assistance and it will emerge as one the regions strongest financial institutions. Officers and directors of the bank own more than 40% of outstanding shares, so they have a vested interested in growing the bank and its stock price.

The bank trades right at tangible book value this year and is adequately capitalized, with a tangible-equity-to-assets ratio a little over 9. Non-performing assets are above 3%, but much of that is covered under a loss-sharing agreement with the FDIC. The bank is over-reserved with loan-loss reserves at 1.62x total nonperformers. First Citizens should grow with the Raleigh metro area and be a solid performer over the next decade.

One of my favorite Trade of the Decade banks has a strong presence in this market. Capital Bank (CBF) is the combination of several smaller banks in the Southeast that went public just last year. Several of these banks were troubled institutions on the verge of closing and the deals were done with FDIC assistance. At first glance, the almost 7% nonperforming-loan rate looks alarming, but that has fallen from more than 12% in a short period, and many of the assets are covered under an FDIC loss-sharing deal. Capital Bank has 15 branches with more than $500 million in deposits in the Raleigh-Durham region, making one of the larger banks.

The stock is cheap right now, trading at just 70% of tangible book value. Its recent earnings report was not well received by the market, despite beating estimates. The bank also announced a buyback program of $50 million in common stock. The equity-to-asset ratio is over 15, so it has plenty of capital to manage loan losses, support buybacks and, hopefully, initiate a dividend in the future. Capital Bank not only has a strong presence in Raleigh, but also has good-sized presence in several other Southeastern cities.

The more I consider the idea, the more attracted I am to mixing the Milken best cities report with the Trade of the Decade as a source of great bank stock ideas for long-term profits.

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