As we discussed yesterday, PL Capital is opening an activist fund to target larger banks than they have in previous years. According to an article on the SNL Financial website, Richard Lashley, the co-founder and principal of the bank-stock activist firm, thinks that many of these banks are undervalued and the space is due for consolidation. I have made a lot of money tracking PL Capital's moves over the years, so when they speak, I tend to listen closely. I ran a screen the other day looking for likely targets in the $3 billion to $75 billion asset size that the firm is said to be targeting, and there are some really interesting potential names.
Zions Bancorp (ZION) would be the gorilla of the group, and I suspect that PL Capital would need help in the form of co-investors to take this one down, but at just 1.04x tangible book value, it is a juicy target. The bank has cleaned up its act on the credit side since the crisis and nonperforming assets are now just 0.70% of total assets. It is taking steps to cut costs and will be combining its 7 different bank charters into 1. Zion plans to reduce the workforce by about 6%, as well as taking steps to reduce preferred stock payments and interest expense. It may have a looming credit issue, as it has about $5 billion of loans and commitments to the energy sector that could be written down if oil prices continue to fall. It would be a huge undertaking, but it seems like there is a lot of value that could be unlocked by an aggressive activist campaign.
Although management has expressed its desire to make acquisitions to grow, Republic Bancorp (RBCAA) has not done so, and that could put it on the radar screen of an activist looking to move up in scale. The bank is earning returns on equity and assets that are below the national averages, and they have an equity-to-asset ratio of 14, so potential buyers would be acquiring excess capital along with the 40 branches in Kentucky, Ohio, Tennessee, Indiana and Florida. They would also be acquiring a clean loan portfolio, with non-performing assets that are just 0.68% of total assets. This outfit has been a favorite of mine for some time, and current management is doing a fine job, but it could easily fall onto an activists radar screen due to its size and branch network in attractive markets. Basswood Partners and Seizert Capital are noted bank stock investors that already have a stake in the bank. With the shares trading at 89% of book value, there is a lot of potential upside in this stock should someone decide to take an activist position. You get paid to wait for good things to happen with Republic, as the stock currently yields 3.26%.
Hancock Holdings (HBHC) is another bank that in underperforming the industry average for returns on equity to assets. They don't have ridiculous amounts of excess capital, as the equity to asset ratio is just above the national average of 11.28. Nonperforming assets have fallen from 2.72% of assets 3 years ago to just 0.83% today, so the loan portfolio is in solid shape. They have 235 branches and offices in Mississippi, Louisiana, Alabama, Florida, and Texas that would make an attractive addition to the right buyer looking to enter those markets. They are struggling with interest margins, like most banks today, and they do have some energy exposure, but overall, this an attractive bank and I would not be shocked to see an activist take a run at them in the future. Basswood Partners also has a stake in this bank, and they have been known to go activist in the past. You also get paid well to wait for developments in this stock, as Hancock Holdings shares yield 3.53%.
Activist firms like Basswood Partners and PL Capital appear to be looking at larger banks than they have the past few years. I cherry picked the first run of my screener -- looking for underperformers in term of return on assets and return on equity that also had excess capital -- and turned up a total of 31 stocks. Running the screen just using valuations measures, I find that there are another 38 midsized to large banks that trade below book value, and might be attractive targets for an activist campaign.