When I sat down to write this I figured I would pick a few banks that I thought were highly likely to be taken over in 2016. As I was studying my list of bank stocks, however, I realized that was pretty much impossible. I can make a case for all of them.
Just about every bank under $3 billion in assets has a decent probability of being taken over and those below $1 billion in assets have an even higher probability of receiving an offer.
So, I decided that it would be more useful and interesting to take a look at the biggest holdings of the leading bank stock activists and specialists. I track their buying on a regular basis but it has been a long time since I isolated their largest holdings in search of opportunities to piggyback our way to profits.
FJ Capital Management, in McLean, Va., is one of my favorite firms from which to borrow ideas. They are smart and have been very successful in the small bank space. The founders and members of the firm have a ton of their own money in their fund. You can have a degree of confidence that they are doing a thorough job of investigation before pulling the trigger. We have made some money with their picks the past few years and I expect to make more from utilizing their ideas in 2016.
FJ Capital's biggest holding is Investors Bancorp (ISBC). The bank, based in Short Hills, N.J., did a second-step conversion offering March 2014. The bank then quickly became a favorite of both value and bank stock investors. Cash is being used to grow the bank and M&A is a big part of the strategy.
CEO Kevin Cummings told TheStreet earlier this year, "We did an IPO last year and raised $2.2 billion. We have the capital to expand, and we're very much involved in mergers and acquisitions. Every bank that's for sale, the investment bankers are calling us."
The bank is focused on growing its commercial lending business and in the last quarter had 7% sequential growth in commercial and industrial lending. Commercial real estate lending was up 13%. Earnings were up 21% compared to the third quarter of 2014. The bank is buying back stock, and as of the end of the third quarter had repurchased 25.3 million shares.. This is going to be a great growth story over the next few years.
The firm's second largest holding is Anchor BanCorp Wisconsin (ABCW). This is a bank stock investing favorite as the shareholder list includes most other major bank specialists and activists as holders. After eight quarters of profitability and improvements in credit conditions, bank officials realized they would not be able to use their deferred tax asset valuation allowance. They reversed it in the last quarter.
Anchor BanCorp has 52 branches in Wisconsin with about $2.2 billion in total assets. It would be a very attractive acquisition for a large bank looking to enter or expand in the region. Officers and directors own a little more than 20% so they have a strong interest in achieving profitable growth, or selling the bank at a strong price.
FJ Capital's third largest position is BNC Bancorp (BNCN). BNC has been growing primarily via acquisition and recently announced it would buy High Point Bancorp (HPTB) in a deal that will give BNC almost $7 billion in assets. In the last five years the bank has done more than dozen deals and it looks to grow past the $10 billion mark.
BNC will likely be doing more deals in the next few years to add to the asset base and to continue to grow earnings at a double-digit rate. With the stock trading at 1.78x book, it has a strong currency to do new deals and expect it to do so in 2016. As BNC continues to grow, it will start getting some interested glances from larger regional banks interested in expanding into the North Carolina marketplace.
There will be a lot of bank deals in 2016. More than 85% of banks with over $5 billion in assets expect to do a deal next year and 69% of those with between $1 and $5 billion plan to be buyers as well, according to Bank Director magazine. One of the best ways to spot attractive bank stocks is to examine the holdings of investors who have proven they can pick winning names. FJ Capital passes that test easily.
In a later column, we will look at another successful bank stock investor and review its largest bets as we close in on the new year.
