I suspect it will be a crazy news weekend. The noise around the inauguration and inevitable protests is going to be something special. As a confirmed news junkie, I suspect I will watch most of it, but I won't try to trade based on news out of DC. Only a full-on post-inaugural crash will motivate me to reach for the buy or sell button. I don't think that will happen, but one can always hope. This morning I have the TV muted and am searching around for some small bank special situations that might give us outsized profits over the next few years. That seems more productive to me than worrying about protests in DC or the various pronouncements out of Davos this week.
The first bank I want to talk about is First NBC Bank Holding Company (FNBC) . This bank has managed to get itself into difficulties with the FDIC in spite of a fantastic operating environment. The bank has been designated a troubled institution and entered into a Consent Order with both the FDIC and Louisiana Office of Financial Institutions. The bank has an above-average amount of nonperforming assets, with total NPAs at 3.50% of total assets. It has also had to take writedowns on some of its tax credit investments.
Under the Consent Order, it needs to raise capital; it has begun that process. The bank recently announced that it would sell approximately $1.3 billion in loans and nine First NBC Bank branches to the Whitney Bank Division of Hancock Holdings (HBHC) . The deal should provide more than $200 million of liquidity for First NBC. Founder Ashton Ryan has stepped aside as CEO under a leadership restructuring plan. While it still has a way to go, it is making decent forward progress. Higher oil prices have also helped improve the condition of some of its energy-related loans, and that could also help the bank stabilize its financial conditions. It also added Crowe Horwath, a banking specialist, as its new auditing firm.
The bank has a shareholder list full of activists and bank specialists. The largest shareholder is Castle Creek Capital, with an 11.4% stake in First NBC. The firm is well known to Trade of the Decade investors. It Takes a private equity-like approach to investing in banks, taking large stakes in selected institutions and working with management to increase shareholder value. It is deeply underwater in its position, and I expect it to push management to take steps to get the stock price back up to levels that provide an acceptable rate of return. That is a lot higher than the current stock price.
Bank stock specialists Michael Salzhauer, Wellington Management, and Stieven Capital were all buying back in the third quarter of the year. It will be interesting to see who else was stepping up to the plate and buying the stock in the fourth quarter.
Activist hedge fund Clinton Group has been buying shares and sent a letter to management back in November that recommended a change in leadership. Interestingly, it was pushing for an outright quick sale, saying: "We believe strongly that First NBC Bank can have a bright future, but that future dims through each passing day of inaction. I urge you to move forward with all due alacrity. Furthermore, in light of recent rumors regarding a potential sale of First NBC Bank, I would urge you to consider the long-term value of the bank as you contemplate the options ahead of you. Our analysis suggests that the bank could be worth significantly more than its current trading level (perhaps in excess of a 50% premium) and we would be disappointed to see a sale of a premier New Orleans banking franchise occur at a bargain-basement price."
First NBC is more of a special situation bank that my usual Trade of the Decade suggestions, and it should be viewed as a much higher risk proposition. If management fail to execute the turnaround and see the conditions of the Consent Order on a timely basis, this stock is not going to do much and may fall further. If they do succeed, the upside will be measured in several multiples of the current stock price. I would not buy a full position at once, but would scale into this stock using any bumps in the road to accumulate shares at lower prices.