I want to take a look today at the top three holdings of another of my favorite bank stock activist investors, but first I have to share with you some comments American Banker published Tuesday.
Mark W. Olson, chairman of Treliant Risk Advisors and former Federal Reserve Board governor, made some predictions for the banking industry in 2016.
"With total bank capital at the highest level in many years and bank earnings continuing to recover, I predict that there will be in excess of 400 unassisted bank mergers in 2016," Olson said. "This will be the highest total of mergers since year 2000."
Richard J. Parsons, former executive at Bank of America (BAC), also touched on mergers. (Bank of America is part of TheStreet's Action Alerts PLUS portfolio.)
"In at least one quarter of 2016, and quite possibly the entire year, the industry will see for the first time the number of bank charters shrink on an annualized basis by more than 6%," he said. "As a result, investor interest in the banking sector, and most specifically in smaller regionals and larger community banks, will spike to levels not seen since well before the financial crisis."
To take advantage of this powerful trend, let's now turn to the top holdings of PL Capital, the bank stock activist investing firm. The company's principals have been called the boogeymen of banking. They have deep industry experience and when they come calling with a 13D, bank management knows they are going to come under fire by people who know what they are talking about.
The PL folks know exactly what they want to see happen. They pass the ultimate litmus test, and borrowing their ideas has made me quite a bit of money over the past few years.
The firm's largest position is Metro Bancshares (METR), which is being taken over after a successful activist campaign on the part of PL Capital. We will skip any discussion of this one.
The second-biggest position in their portfolio is Banc of California (BANC), which is waging an activist campaign as I write this. Richard Lashley, one of PL Capital's principals, has sent a series of sharply worded letters to management critiquing their governance, growth plans and valuation.
"The company's growth and profitability metrics are strong and well above industry averages, so there must be a reason why BANC is not more highly valued by investors and the market," Lashley wrote the board in November. "You, your management team and the board need to understand why this valuation disconnect exists, and then address the market's concerns."
The bank trades at 1.2x book value but just 12x earnings. The stock also yields 3.2%, so you collect a decent dividend while waiting for the activist campaign to play out.
Enterprise Financial Services (EFSC) is based in Clayton, Mo., and is the third-largest holding in the fund. The bank has branches in the St. Louis and Kansas City areas, as well as two branches in Phoenix. Although PL Capital owns 8.78% of the bank, it has not gone active by switching the 13G filing to a 13D yet.
PL Capital may not have to so as Enterprise appears to be performing well right now. In the most recent earnings report, CEO Peter Benoist pointed out some accomplishments.
"Over the past 12 months we've increased portfolio loans by 13%, deposits by 12%, and net interest income by 9%," Benoist said. "Our core net interest margin is equivalent to the prior year level and total operating expenses are 6% lower than a year ago."
The bank has raised its dividend three times in the past year as results have continued to improve.
BankFinancial (BFIN) rounds out the largest positions for PL Capital. I am honestly surprised this bank has not been sold yet. PL Capital owns 7.7% and has a representative on the board. The bank is based in Burr Ridge, Ill., and has branches in Cook, DuPage, Lake, and Will counties.
The Chicago suburban area has seen a lot of M&A activity in the past few years, and this bank would make an attractive target. It has $1.4 billion of assets so it is above survival levels but not quite to the sweet spot of over $3 billion. If BFIN doesn't a deal that gets it to that level, I think someone else will buy it on its way toward that level.
The Trade of the Decade is working and should continue to work in 2016. Borrowing ideas from one of the best activist investors in the bank sector is a good way to participate.