Don't Overlook The Financial Sector - Page 2 of 2

Don’t Overlook The Financial Sector

California, and has $16 billion in assets. It has one of the most attractive deposit franchises in the industry — core deposits make up 89% of its total. Its credit numbers are very strong — City National’s nonperforming asset ratio is 0.7% and net charge-offs are quite low. Although the bank is located in California where there is clearly pressure in the housing market, its exposure to construction and real estate development is just 12% of its portfolio. I think the stock will go north of $60 over the next 12 to 18 months.

Is there another name that might not be on everyone’s radar?
Bank of Hawaii (BOH). It is based in Honolulu, has an asset base of $10.5 billion, and is simply one of the best-performing banks in the industry thanks to its credit and deposit numbers. It has exceptionally strong credit — its nonperforming asset ratio is 0.1%. Conservative management has kept construction and land development exposure to only 5% of its loan portfolio. It has a very strong deposit franchise with core deposits at about 80% of the bank’s total. Additionally, management has consistently repurchased stock from shareholders. This is a great company and I think the stock can move to $60 a share in 12 months.

How about a turnaround or a takeover story?
Provident Bankshares (PBKS) is both. It’s located in Baltimore and has an attractive core deposit franchise — 90% of its total. Its credit numbers are average with nonperforming assets making up 0.80% of its total. The bank operates in good markets in the Baltimore-Washington corridor, yet management hasn’t done a good job of maximizing value. We think Provident is a takeover candidate for a bank such as PNC Financial Services Group, BB&T Corp., or M&T Bank. We think in a buyout, the company could fetch $18 a share.

Cummings’ Picks

    52-week Price Range      
Company (Ticker) Price Low High 2008Est. EPS 2008P/E Ratio Comment
Bank of Hawaii (BOH) $49.48 $41 $56 $3.84 12.9 The Honolulu-based financial institution has credit numbers and a solid deposit base.
City National Corp. (CYN) $50.48 $48 $79 $4.10 12.3 The Beverly Hills-based bank has a solid deposit core, clean credit numbers, and good fee revenue.
Provident Bankshares Corp. (PBKS) $11.09 $10 $36 $0.56 19.8 Despite a recent bond write-off, its deposit base and location make it an attractive takeover candidate.