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Today's Buy Opportunity: IberiaBank

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As macabre as it might sound, those who survived Europe's medieval Black Death enjoyed greater wealth and prosperity because of less labor competition. A similar phenomenon will likely occur in the American banking system after the recession ends -- the banks that survive will benefit from less competition and stand to thrive once the economy recovers.

IberiaBank (Nasdaq: IBKC  ) is one of those banks. It has been expanding its geographic footprint in the southeastern United States -- particularly in beaten-down southern Florida -- throughout the recession and has all the makings of a winning long-term investment. (You can see a map of its geographic distribution on slide 7 of this presentation.)

Fast facts on IberiaBank

Market capitalization

$1.4 billion




Lafayette, La.

Price/ tangible book value

1.3 times

Dividend yield


Key competitors

BancorpSouth (NYSE: BXS  ) , Prosperity Bancshares (Nasdaq: PRSP  ) , Regions Financial (NYSE: RF  )

Source: Capital IQ, a division of Standard & Poor's.

3 reasons to buy IberiaBank
Here are the three major reasons I like IberiaBank today:

  1. Opportunistic expansion: IberiaBank avoided the subprime lending mess that got many of its competitors in hot water and intentionally stayed out of the southern Florida housing bubble. While that may have looked foolish (lower case "f") to investors in 2005-2006, Iberia got the last laugh. Since November, it's made three FDIC-assisted acquisitions in Florida (Orion Bank, Century Bank, and Sterling Bank). Its other two FDIC-assisted acquisitions, CapitalSouth (2009) and ANB Financial (2008), gave Iberia additional exposure in Florida, as well as Alabama and Arkansas. What makes FDIC-assisted acquisitions so attractive is the FDIC's loss-share protection, which reduces Iberia's risk if some of its acquired banks' loans fail. In short, by staying patient and conservative, Iberia has been able to expand its geographic footprint quickly and with less risk.
  2. Conservative nature: Even though IberiaBank isn't making much interest income on its $1 billion cash ... it still has $1 billion cash on its balance sheet. Iberia also posts a Tier 1 capital ratio of 20%. By comparison, as of December 2009, Wells Fargo's (NYSE: WFC  ) Tier 1 ratio was 9.3%, Bank of America's (NYSE: BAC  ) 10.4%, and JPMorgan Chase's (NYSE: JPM  ) , 11.1%. Additionally, just 0.91% of Iberia's total assets were "non-performing" (loans at least 90 days past due) -- four full percentage points better than its southeastern competition.
    Source: Company presentation.

    All of these statistics speak well of Iberia's conservative lending practices. 
  3. Smart management: One of Iberia's unique aspects is that its executives work in different locations throughout the Southeast. President and CEO Daryl Bird, for example, works in Lafayette, La., while CFO Anthony Restel is in New Orleans, COO Michael Brown is in Little Rock, Ark., and Chief Credit Officer Gregg Strader is in Greensboro, N.C. That may sound strange, but this dispersion has two purposes: gain a better understanding of multiple markets and reduce geographic concentration in Louisiana (a lesson learned from hurricanes Katrina and Rita).

Mind your risks
Before you consider buying shares of Iberia for your portfolio, be sure to consider the risks to my thesis, including:

  1. A persistently low interest rate environment will keep Iberia's net interest income and earnings under pressure.
  2. With the majority of its operations located in and around the Gulf of Mexico, Iberia's business could be hurt by hurricane activity or other natural or man-made disasters (i.e., the BP spill).
  3. The FDIC loss-sharing agreements have finite lives (five years for commercial loans and 10 years for residential loans) and don't save Iberia from all losses incurred from non-performing loans at the acquired banks. In other words, Iberia would still get stung if a lot of those acquired South Florida loans go under.
  4. Banks are heavily regulated, and even more so now that the Dodd-Frank Bill is in effect. Increased FDIC insurance costs, heightened scrutiny of the fees that banks charge customers, and other restrictions may keep earnings growth suppressed.
  5. A sustained recession in the southeastern U.S. could lead to more foreclosures and loan delinquencies than Iberia planned for.

These are each meaningful risks, but I think the opportunity here outweighs them. Still, it's important to go into this investment with your eyes wide open.

Running a traditional discounted cash flow model on a bank stock is a difficult task for two reasons. First, debt is a raw material to a bank much like lumber is to a homebuilder, so defining a bank's true enterprise value is an exercise in futility. Second, a bank's capital expenditures are also tricky to classify, making free cash flow measurement a harrowing chore.

As a result, we'll focus on Iberia's equity (book) value to get an idea of what it could be worth. With Iberia stock trading for around $50, and considering its book and tangible book values are $48.31 and $38.71 per share, respectively, let's compare its current P/BV and P/TBV to the historical averages.



5-Year Average

10-Year Average

Price to book

1.04 times



Price to tangible book

1.30 times



Source: Capital IQ, a division of Standard and Poor's, as of Aug. 12.

Based on this, it wouldn't be a stretch to see Iberia back in the range of $70-$80 per share if and when the Southeastern economic recovery strengthens.

Foolish bottom line
There's a lot to like about IberiaBank's business, and even more to like about its current stock price. At around $50 per share, I believe we're buying in with a 30%-40% margin of safety and substantial upside potential.

Previous recommendations (Click here for full list of recommendations and performance):

Come back to tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! To see the performance of previous recommendations, click here.

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of IberiaBank. To see an FAQ on "Eleven O'Clock Stock," click here

Fool analyst Todd Wenning does not own shares of any company mentioned. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (33)

Comments from our Foolish Readers

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  • Report this Comment On August 17, 2010, at 11:20 AM, Melaschasm wrote:

    IBCK appears to be poised for some decent profit growth. However, it has a 1 star CAPS rating. There has been ample evidence that shows 1 star stock underperforming stocks with a higher rating.

    While this might be a good choice, and a total debt to equity ratio of .61 is much better than most of the big banks, I am hesitant to go against the group wisdom of CAPS.

  • Report this Comment On August 17, 2010, at 2:27 PM, MMTInvestor wrote:

    Hi Todd,

    Enjoyed your piece very much, and I'll definitely take a closer look at IBKC as a result. In addition to the above points, I also like the relatively strong insider holdings (although there have been some notable sales of late).

    One bank I keep coming back to when people put forth their favorite undiscovered US regional bank stock is Hudson City Savings Bank (HCBK), in which I hold a long position. It has some of the same positive investment characteristics as IBKC, but is by no means the same animal.

    Out of curiosity, have you looked at HCBK closely; what do you think; and how does it compare to IBKC?

    Thanks, and foolishly,

    Scott F.

  • Report this Comment On August 17, 2010, at 2:49 PM, MMTInvestor wrote:


    HCBK doesn't have nearly the same footprint as IBKC, but as a shareholder, I've been intrigued by the rumblings I've heard about them maybe selectively expanding into Florida and the SE to serve their rich customers who live down South in the off season/winter.

    Just something to watch.


  • Report this Comment On August 17, 2010, at 3:09 PM, ron153 wrote:

    Interesting opportunity, but I'll stick with something more certain from a credit quality standpoint, Wells Fargo. Opportunistic investors wait for moronic market behavior to create discounts, and there is nothing much more moronic than selling Wells Fargo in the 25's, ike people are doing today.

    Bill Miller likes to talk about opportunities of a lifetime, and this is one of the most obvious ones I have seen in 37 years of investing. It is similar to the opportunities in bank stocks in the late 1980's and early 1990's. Maybe IBKC is one too...

  • Report this Comment On August 17, 2010, at 8:26 PM, xetn wrote:

    "What makes FDIC-assisted acquisitions so attractive is the FDIC's loss-share protection, which reduces Iberia's risk if some of its acquired banks' loans fail". That is really the taxpayers that are providing the "protection" through theft (er, taxes).

    BTW, what is this bank's exposure to commercial real estate. There are a lot of banks (mostly smaller, regional) that did not involve themselves in the sub-prime market, but did lend in the commercial markets. That sector seems poised to fall off a cliff.

  • Report this Comment On August 17, 2010, at 11:31 PM, TMFDiogenes wrote:

    Interest stuff, Todd.

    For those interested in how Dodd-Frank would affect Iberia, my guess is it may not be that bad. Most of the additional regulation will be over swaps dealers, prop trading, banks over $50 billion in size, highly-levered banks, and those with terrible loan standards. Dodd-Frank could actually be a net-win for Iberia if they get off pretty easily and larger banks get hobbled slightly.


  • Report this Comment On August 18, 2010, at 3:32 PM, Melaschasm wrote:

    Since my CAPS portfolio does not include any regular banks, I decided to add this one. The numbers seem better than most, with a debt/equity ration below one being the thing I like the most.

    I am not prepared to add this to my real money investments, but perhaps I will learn enough about the company from CAPS to make an investment in the future.

  • Report this Comment On August 21, 2010, at 8:29 PM, philkek wrote:

    Thanks for this bank information. It is interesting and worth watching for future gains. Better Business Bureau warns investors to investigate BEFORE you invest. I will check the fundamentals carefully before I invest any money. Fool on for profits.

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