Hail! Hail! to Michigan Banks

 | Jul 19, 2016 | 11:00 AM EDT
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It's going to be a busy week in the markets and for news in general. We have earnings reports from tech giants Microsoft (MSFT) and Intel (INTC) that could move markets. The first wave of regional and community bank quarterly releases need to be read and reviewed. The Republican National Convention in Cleveland should provide a continuing source of breaking news and silliness. And topping it all off, the Baltimore Orioles have a four-game series with the Yankees in New York and then come home to take on the Cleveland Indians.

In the midst of all this activity I am going to continue to use CNBC's annual list of the top business-friendly states to help find some banks that have the potential for high long-term returns.

This approach to finding community bank stocks makes sense to me. Banking in a state that has a strong economy, highly qualified work force and friendly regulatory environment makes for a profitable business. Real estate markets will be strong and demand for consumer loans will be high. And banks in less business-friendly states will be looking to enter the market by buying smaller attractive franchises in the state. This provides an additional tailwind to an already attractive sector.

Michigan was No. 7 on list of the most business-friendly states. That may come as a surprise to those who think of the post-financial mess in Detroit as the permanent state of the Michigan economy. The truth, however, is that Detroit, especially the core downtown market, is staging a nice comeback and the rest of the state is doing very well.

Ann Arbor is attracting new investments in biotech and technology startups. Grand Rapids is one of the strongest metro economies in the country today. There is a lot more to Michigan and Detroit and the state has developed a very business-friendly climate.

Michigan is a well banked state. There are many small community banks that trade at attractive valuations. Most of them are too small to talk about here, but it's worth your while to dig through the list of Michigan banks to find those that meet the criteria of a "trade of the decade" bank.

One bank we can discuss is Mackinac Financial (MFNC) , the holding company for mBank, which has 20 branches and about $729 million in assets. The Manistique-based bank has taken advantage of the post-crisis pricing in the sector and is working on closing its third acquisition since 2014. When the pending purchase of Niagara Bancorporation closes that will be 24 branches and $930 million. The deal will also allow Mackinac to expand its footprint in Wisconsin where it already have three branches.

Mackinac is in solid financial shape, with an equity-to-assets ratio of 11.7 and nonperforming assets accounting for only 0.60% of total assets. The stock is trading right around book value and should fetch a premium multiple if another bank looking to expand in Northern Michigan and Wisconsin decides that buying Mackinac's branch network and loan portfolio would accomplish that goal. In the meantime, the bank is growing and the shares have an attractive dividend yield of 3.24%.

As mentioned, Grand Rapids is in fantastic economic shape and Independent Bancorp (IBCP) is one of the more attractive banks in that area. The bank has 68 branches with about $2.28 billion in total assets. Independent has an equity-to-assets ratio of 10 and nonperforming assets are just 0.69% of total assets. Independent's loan portfolio is a well balanced mix of residential housing, consumer loans, commercial and industrial loans and commercial real estate.

The caveat here is that IBCP has had a pretty good run the past few years and now trades at about 1.4x book value. The bank's shareholder list is full of activists and bank specialists such as Joseph Stilwell, Clover Partners and PL Capital but I would wait for a pullback before jumping into the stock.

Independent could fetch $18-$20 a share in a potential takeover so look for a little better entry point before buying the stock. Hopefully, we see a broad market decline in the near future that allows us to be buyers at a better price.

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