The Next Bank To Watch?

Boston Co. money manager David Diamond thinks small but makes big hits. Every stock he buys has a market capitalization under $750 million. Yet his Small-Cap Value Fund, whose assets he says will jump from $270 million to $475 million this year, is up 24% so far in 1995--a tad ahead of the Dow. Why? Many of his picks end up as buyout targets.

That's what Diamond suspects lies in store for one of his latest picks: Community Bank System (CBSI), a holding company for Community Bank, which operates 36 commercial banks in upstate New York. He bought 3% of the stock, although it had been in a downswing, because of expectations that second-quarter and 1995 profits would be disappointing. But with assets of $1 billion, a healthy balance sheet, a low price-earnings ratio, and dominance in the regions it serves, Community Bank appeared truly undervalued, says Diamond. He thought Community Bank would be an ideal target for a larger bank wanting to penetrate the region.

True enough, Marine Midland Banks, owned by Hongkong & Shanghai Banking, did not hesitate to buy a 4.9% stake in the bank, in June.

Diamond suspects Marine Midland will ultimately go after Community. "Why else would it acquire a big piece of the stock? It is in a somewhat similar market, and it's easy to see the franchise value that Community Bank has," says Diamond, who thinks the shares are easily worth "north of 50." CFO David G. Wallace says Marine Midland hasn't made a buyout offer.