Another Alluring Regional

 | Apr 07, 2014 | 2:00 PM EDT
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I am constantly searching the news and the Interwebs for new information that can help me be a better investor or uncover new opportunities -- and last week I found something that's highly interesting, as well as useful in understanding exactly how the Trade of the Decade, regional banks, is shaping up. In particular, I found a report from BKD CPAs & Advisers that tracked last year's mergers-and-acquisitions activity. There has been a lot going on, and the pace is picking up as regulations and a weak economy have almost forced banks to consider mergers.

The deal count was down a little bit in 2013, with 225 deals done vs. 235 in 2012 -- and it wasn't quite up to the 297-deal level we saw in 2007, before the credit crisis hit with its full fury. Nonetheless, last year's pace picked up steam nicely, and the number of deals was still well above the paltry 147 completed in 2011. The average deal last year was done at 1.19x tangible equity value, so deal valuations are rising a little as well. I expect the pace to accelerate this year, and I anticipate this to continue for several years. The last time we saw a merger wave in the aftermath of a crisis, deal multiples peaked at over 2x tangible book value.

Away from M&A, stock valuations for banks are improving a little, as well. For all publicly traded banks, the average price-to-book value increased from 86% of tangible book to about 1.06%. Again, I expect this number to top out well above 2x book before this is all over and done. The exciting thing about this is that most banks have put their credit issues behind them and will see book value grow over the next several years. As a result, the multiple of current book value could become 3x to 4x as the Trade of the Decade continues to accelerate.

There aren't as many cheap banks right now as there had been in 2010 or 2011, when pretty much all of them traded below book value, but there are still plenty of opportunities to get your money to work in good banks at good prices. I sat down this morning and looked for banks trading below book value that will allow you to participate in the Trade of the Decade.

Republic Bancorp (RBCAA) is one of the more interesting cheap banks around. It has a very healthy core banking business, operating 42 branches in Kentucky, Tennessee and Indiana. It also has a business that makes tax-refund loans. Although the bank has had some legal wrangling with Jackson Hewitt in the past, those issues have been resolved, and Republic recently signed a new two-year deal with the tax-preparation outfit. It also has a new deal with Liberty Tax Services that should add to the top and bottom line.

Otherwise, Republic is expanding its commercial-lending operation and is planning to open a lending operation to work with its mortgage-lending division. That should help spur residential-loan growth.

Republic stock has sold off since the bank announced the cancellation of a deal to buy H&R Block's (HRB) banking operations. In spite of that setback, management said in the last earnings release that it was committed to growing via acquisition. The bank will need to get its stock price up before it goes on any buying spree, though, as the stock currently trades at just 85% of tangible book value and does not really make for an attractive takeover currency right now.

That aside, the stock should remain a leading dividend growth stock. The stock yields 3.17% right now, and Republic has raised its payout for 14 years in a row.

There are two ways to win with this stock. Republic could just continue making smart acquisitions and grow the bank over the next decade, and keep raising the dividend payout at an above-average rate, which should provide for very satisfactory long-term returns. On the other hand, the firm does have a very attractive branch network and some very interesting lending divisions, so you cannot rule out a larger bank stepping in and buying earnings growth by taking over the company.

The Trade of the Decade is still very much in play, and it is gaining momentum. It is going to be the most boring way to get rich in the stock market you will ever find.



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