Professional Documents
Culture Documents
www.ValueInvestingCongress.com
April 3, 2014
PL Capital, LLC, 47 E. Chicago Avenue, Suite 336, Naperville, IL 60540 John Palmer (630) 848-1340 Fax: (630) 848-1342 jpalmer@plcapitalllc.com Richard Lashley (973) 539-5400 Fax: (973) 539-5404 rlashley@plcapitalllc.com Curt Thompson (312) 560-2675 Fax: (630) 848-1342 cthompson@plcapitalllc.com
Disclaimers
2
Information in this document is provided by Richard Lashley, PL Capital, LLC and their affiliates. It may not be based on sources considered to be reliable. In no case is any information contained herein warranted or implied to be an accurate representation of facts or otherwise guaranteed to be correct or complete. This material is not an offer to sell or a solicitation to buy any securities discussed herein or any interest in the Financial Edge Fund, L.P. or any other LP or Fund managed or advised by PL Capital (the Funds).
18+ Years
Managing Bank Stock Funds ($215 mil AUM)
Willing to Work with Realistic Management Teams And Boards Target Undervalued and Underperforming Banks/thrifts Fix It or Sell It
PL Capital
Over the Past 18+ years PL Capitals Brand of Shareholder Activism and Investing has Generated Higher Returns with Lower Volatility
.
PL Capitals Richard Lashley and John Palmer Have Unique Experience & Skill Sets
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Often quoted in national banking publications Experts at shareholder activism, proxy contests, and corporate governance Reputations as substantive and serious professionals
18+
years managing bank stock investment partnerships at PL Capital
Significant Experience as Bank Directors 1980s and early 1990s: CPAs focused exclusively on the bank and thrift industry
Over the Past 18+ years PL Capitals Brand of Shareholder Activism and Investing has Generated Higher Returns with Lower Volatility
.
Financial Edge Fund, LP Consistently Ranked Among the Best Performing Financial Sector Hedge Funds
5
Ranked among the Best Performing Hedge Funds in the Financial Services Sector: (Year 2013) #7 (Year 2012) #3 (Year 2011) #4 (Year 2010) #3
Topics
6
The Post-Financial Crisis Recovery Period Will be Among the 3 Best Periods to Invest in Bank Stocks in the Past 30 Years There Will be a M&A Boom Which Will Last for Another 3-5 Years
A Simple but Elegant Formula to Estimate Small/Mid-cap Bank Stock M&A Values (hint: Its all about the cost saves)
Actionable Ideas
The Post-Financial Crisis Period Will be One of the 3 Best Times to Invest in Bank Stocks
7
Bank Stocks are Cyclical--The Downturns are Sharp and Short While the Recoveries/Upturns are Longer
SNL U.S. Bank and Thrift Index Total Return
DOWNTURN S&L Crisis LTCM Crisis Financial Crisis 1989-1990 (14 months) 1998-2000 (21 months) 2007-2009 (22 months) -49% -27% -82%
2000-2007 (7 years)
2009-Present (5 years+)
Source: SNL Financial LC; Financial Crisis Recovery period defined as 3/6/09 to 2/28/14
The Banking Industry is in Much Better Shape Than Commonly Believed IT WAS WORSE in the RTC Period of the Early 1990s
8
1,800
1,600
1,400
1,492 1,426
1,109
1,063
884 702
1,000
813
651 467
800
600
470 400 204 262
572 318
181 50 15
200
193
8
92
51
24
2013
2012
2011
2010
2009
2008
2007
2006
Despite the Rebound Since 2009 Small/Mid-Cap Bank and Thrift Stock Valuations Are Still Historically Attractive
10
300%
Average Price/TBV of SNL Thrift Indexes and SNL Bank Indexes ($500Mil $5Bil)1 (12/31/92 - 2/28/14)
250%
200%
150%
100%
50%
Source: SNL Financial LC (1) Includes SNL U.S. Thrift $1B-$5B, SNL U.S. Thrift $500M-$1B, SNL U.S. Bank $1B-$5B, and SNL U.S. Bank $500M-$1B
Bank Stock Valuation Curve Small Caps and Large Caps Most Attractively Valued
11
Market Capitalization
Asset Size
150%
100%
50%
0%
The Banking Industry Has Been in a Secular Consolidation Wave for 30+ Years and Now There Will Be a Cyclical 3-5 Year M&A Boom
12
20,000 18,000 16,000 Number of Banks 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Year
Source: FDIC Quarterly Banking Profile (www.fdic.gov)
There Will Be a Cyclical M&A Wave That Lasts for Another 3-5 Years
13
600 Number of Mergers Average Price/Tangible Book % 500 250% 300%
400
200%
300
150%
200
100%
100
50%
6%
0%
4% 2%
Ratio of Mergers Per Year to Total U.S. Banks/Thrifts
0%
Source: SNL Financial LC and FDIC Quarterly Banking Profile (thru 3/24/14, using Announcement Date) *1/1/14 to 3/24/14 Annualized
Number of Deals
Pent up supply of both sellers and acquirers due to lack of deals during the Financial Crisis Acquirers cant grow organically Smaller banks cannot cost justify remaining independent there is real economics in M&A due to large cost savings
$3 billion in assets is the new $300 million Regulators want smaller banks to merge
to establish appropriate risk management and compliance processes
The FDIC is not granting new bank charters so the only entry to banking is to buy
Mid-cap acquirers have stronger stock price currency to do deals (see page 11) Recent merger announcements have been at 30% to 150%+ market premiums which shows how undervalued these stocks are (see page 17)
Cost Save Adjusted M&A Multiples are Historically Attractive This Will Drive More Good M&A (Good for both buyer and sellers)
15
26x 24x 22x 20x 17.9x 18x 16x
14x 17.6x
Median
26x 24x 22x 20x 17.0x 18x 16x 14.7x 13.3x 12.2x 11.1x 9.8x 9.0x 9.8x 10.1x 8.0x 15.3x
11.7x
18.6x
19.2x
15.9x 12.6x
13.1x
12.4x
14x
14 2000-2002
32 2003
35 2004
24 2005
41 2006
37 2007
12 2008-2010
52 Post 2011
0x
Includes transactions with deal values > $50 million and excludes targets with LTM ROAA < 0.25%. Cost Savings: Based on announced cost savings, assuming LTM noninterest expense base and tax-effected at 35%. Capital Adjustment: Purchase price adjusted for excess tangible capital above 8.0%, in which excess capital is removed from purchase price at 1.0x book value and earnings are adjusted assuming pre-tax opportunity cost of 2.00%.
Source: RBC Capital Markets presentation dated March 6, 2014 (using SNL Financial LC data)
A Simple but Elegant Way to Estimate a Banks M&A Value (the Cost Saves Drive M&A Value Even for Banks that Lose Money or Make Low Returns)
16
Can be obtained from Street estimates; if no Street estimates, use the run rate of net income to project the next 12 months
Put a 10x to 11x PE ratio on those cost save adjusted earnings to get a range of M&A value (recent deals average 10xthis will increase over time)
(in $millions) Net Interest Income Credit Losses Noninterest Income Noninterest Expense Pretax Net Income Tax After Tax Net Income
Caveats:
Year 1 Estimated Net Income + 27.0 - 1.0 + 13.0 - 33.0 + 6.0 - 2.0 4.0
Year 1 Post Cost Saves Net Income + 27.0 - 1.0 + 13.0 - 21.4 + 17.6 - 6.0 11.6
EXAMPLE
x 10 x 11
= =
This does not take into account extraordinary balance sheet adjustments (e.g. credit marks, interest rate marks) that might be necessary for banks with issues. Banks with significant excess capital and low earnings often sell for tangible book value (adjusted for extraordinary marks) plus a deposit premium rather than the above formula
Large Cost Saves Drive Attractive Merger Premiums As Shown by PL Capital Owned Positions Acquired in Mergers Since 2010
17 Date Announced 6-14-13 5-13-13 12-20-12 7-19-12 5-31-12 5-1-12 3-12-12 2-9-12 1-25-12 * PL CAPITAL 13D POSITIONS IN BOLD Selling Bank BCSB Bancorp (BCSB)* CFS Bancorp (CITZ)* Roma Financial (ROMA) Fidelity Bancorp (FSBI)* Beacon Federal (BFED) Central Bancorp (CEBK) North Central (FFFD)* Heartland (HRTB)* VIST Financial (VIST) ST MD IN NJ PA NY MA IA IN PA Total Assets ($) 642 mil 1.2 bil 1.9 bil 665 mil 1.0 bil 523 mil 433 mil 235 mil 1.4 bil Deal Price/Share ($) 23.77 10.49 15.00 22.85 20.50 32.00 30.58 9.72 12.50 Fin. Edge Funds Average Cost ($) 12.79 3.25 9.03 6.21 14.00 10.76 12.51 6.88 8.76 Deal Price/TBV 138% 102% 212% 147% 117% 152% 100% 96% 117% 1 Month Deal Premium1 +43% +28% +81% +110% +55% +77% +59% +152% +98% Deal Premium vs. Financial Crisis Low2 +260% +500% +55% +353% +305% +941% +217% +224% +150%
1-24-12
12-5-11 6-20-11 4-28-11 4-19-11
IN
PA PA NY RI
1.0 bil
307 mil 2.6 bil 1.6 bil 1.6 bil
24.06
14.50 28.00 13.51 48.25
19.21
5.89 21.38 15.91 34.76
120%
122% 142% 188% 193%
+63%
+245% +36% +30% +57%
+245%
+245% +53% +216% +211%
Source: SNL Financial LC and PL Capital (1) % increase in stock price from one month prior to the deal announcement (2) % increase in stock price from the lowest price the stock traded for during the financial crisis Past performance and merger pricing/premiums do not guarantee future results or merger pricing/premiums.
Banking Sector Activism is Robust Despite Only a Handful of Activists Such as PL Capital This Also Accelerates M&A
18
Source: J.P. Morgans Eye on the Market published February 18, 2014.
19
TARP Warrants
TARP Warrants are an Attractive Way to Invest in Some of the Larger Banks
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The 2008 TARP preferred issuances included warrants The Treasury has auctioned off several bank warrants which are now publicly traded (e.g. Capital One, Bank of America, PNC, Citigroup, Zions, Comerica, et. al.) Most of these warrants expire at the end of 2018 The warrants contain attractive anti-dilution protection for any dividends paid out in excess of dividend level paid when the TARP was issued The out of the money time premiums are very low, particularly compared to the likely growth in tangible book value and earnings through 2018
PL Capital Likes the JPM, COF and PNC Tarp Warrants the Most.
BAC, ZION and C Tarp Warrants are Less Attractive.
X X
JPM.WS Price (3-20-14) Expiration Date Strike Price LTM Avg. Daily Volume JPM Price (3-20-14) Total Assets (trils) Market Cap. (bils) Shares o/s (bils) 2014 EPS Est. Dividend Yield
$20.15 10-28-18 $42.42 146,891 $60.11 $2.4 $228 3.8 $5.92 2.5%
Projection Assumptions Stock and warrant price as of 3-20-14 2013 Operating EPS of $5.65 used as a baseline for EPS growth rate and Current Price/LTM EPS 2014-2018 EPS Growth Rate: 6% 2014-2018 Dividend Payout Ratio: 30% 2018 Price/Tangible Book Value (131%) shrinks vs. current Price/TBV (150%) 2018 Price/LTM EPS of 11.0x remains consistent with 10 year median (11.0x) and current (10.6x) No stock buybacks incorporated in TBV/share IRR noted above does not include any benefit from the anti-dilution excess dividend adjustment which for JPM would add approximately 2% to the IRR ROTEs remain fairly steady from 2013 (actual = 14%) and 2018 projected = 12%)
The current time premium in the warrant is only $2.50, which is extremely low for a 4 year warrant considering that JPMs tangible book value per share is projected to grow $24.00 (net of dividends) by October 2018.
JPM Tarp Warrant IRR Sensitivity Matrix (using a range of EPS growth rates and terminal 2018 PE ratios)
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Note: Using PE rations to project the stock price in 2018 may understate the potential stock price and warrant value (IRR) in the no growth or negative growth scenarios because there will still be substantial TBV growth, which over time should increase the stock price and warrant value (IRR).
COF.WS
Price (3-20-14) Expiration Date Strike Price LTM Avg. Daily Volume COF Price (3-20-14) Total Assets (bils) Market Cap. (bils) Shares o/s (mils) 2014 EPS Est. Dividend Yield
$32.64 11-14-18 $42.13 11,153 $74.28 $297 $43 573 $6.81 1.6%
Projection Assumptions Stock and warrant price as of 3-20-14 2014-2018 EPS Growth Rate: 7% 2014-2018 Dividend Payout Ratio: 30% 2018 Price/Tangible Book Value (148%) shrinks vs. current Price/TBV (161%) 2018 Price/LTM EPS (11.0x) remains consistent with 10 year median (11.0x) and current (10.7x) No stock buybacks incorporated in TBV/share IRR noted above does not include any benefit from the anti-dilution excess dividend adjustment which for COF would add approximately 3% to the IRR ROTEs shrink from 2013 (actual = 15%) to 2018 (projected = 13%)
The current time premium in the warrant is only $0.50, which is extremely low for a 4 year warrant considering that COFs tangible book value per share is projected to grow $30.00 (net of dividends) by November 2018.
COF Tarp Warrant IRR Sensitivity Matrix (using a range of EPS growth rates and terminal 2018 PE ratios)
25
Note: Using PE rations to project the stock price in 2018 may understate the potential stock price and warrant value (IRR) in the no growth or negative growth scenarios because there will still be substantial TBV growth, which over time should increase the stock price and warrant value (IRR).
PNC.WS
Price (3-20-14) Expiration Date Strike Price LTM Avg. Daily Volume PNC Price (3-20-14) Total Assets (bils) Market Cap. (bils) Shares o/s (mils) 2014 EPS Est. Dividend Yield
$23.40 12-31-18 $67.33 35,668 $86.63 $320 $46 533 $7.03 2.0%
Projection Assumptions Stock and warrant price as of 3-20-14 2014-2018 EPS Growth Rate: 7% 2014-2018 Dividend Payout Ratio: 30% 2018 Price/Tangible Book Value (157%) consistent with current Price/TBV (160%) 2018 Price/LTM EPS increases to 13x (10 year median) from 11.7x currently No stock buybacks incorporated in TBV/share ROTEs remain fairly steady between 2013 (actual = 14%) and 2018 (projected = 12%)
The current time premium in the warrant is only $4.00, which is extremely low for a 4 year warrant considering that PNCs tangible book value per share is projected to grow $31.00 (net of dividends) by December 2018.
PNC Tarp Warrant IRR Sensitivity Matrix (using a range of EPS growth rates and terminal 2018 PE ratios)
27
Note: Using PE rations to project the stock price in 2018 may understate the potential stock price and warrant value (IRR) in the no growth or negative growth scenarios because there will still be substantial TBV growth, which over time should increase the stock price and warrant value (IRR).
28
(1) PL capital owns 5.2% of METR as of March 21, 2014 per schedule 13D. (2) PL capital owns 6.1% of HBNC as of March 24, 2014 (Schedule 13G position). (3) PL capital owns 7.4% of IBCA as of March 24, 2014 (Schedule 13G position).
Key Facts Metro Bancorp, Inc. (METR) Total Assets $2.8 Billion METR uses the Commerce Bank retail banking model (open 7 Harrisburg, PA Location days a week; late hours; focus on checking accounts; high touch (Central PA) and high cost) Common Shares 14.2 million Outstanding Low interest rates have hurt EPS because they are geared for Market Cap $291 million higher interest rates Recent Stock Price $20.41 Numerous other banks want to buy METR, but have been % Institutional rebuffed by METR; METR is instead pursuing new branches in 72% Ownership the Philly suburbs % Insider 8% Ownership METRs 70 year-old CEO owns 300,000 shares Tangible Book $16.19 PL Capital believes the burden of proof is on METR to prove that Value/ Share growing rather than selling now would produce more shareholder 2014 EPS Est. $1.25
This former affiliate of Commerce Bank has a valuable deposit franchise in Central PA
value
$1.30
0.0% 2.03%
METR
Return on Average Assets (%) Noninterest Expense/ Avg Asset (%) Loans/ Deposits (%) Avg. Earning Assets/ FTE Net Interest Income/ FTE Noninterest Income/ FTE Total Revenue/ FTE Efficiency Ratio (%) 0.64% 3.3% 78% $2.9 mil $105,000 $30,000 $135,000 73%
Source: SNL Financial, LC and Sterne Agee (1) Includes all publicly traded banks/thrifts in the U.S. between $1-$5 billion in assets (as of the last 12 months)
Cost Save %
30% 35% 35% 35%
Tompkins (TMP)
Community Bank (CBU) Northwest (NWBI) WesBanco (WSBC)
30%
30% 30% 30%
10x-11x
11x-12x 10x-11x 11x-12x
30%-40%
60%-70% 100%-120% 20%-30%
$26.53 - $28.57
$27.35 - $29.06 $26.10 - $28.70 $27.55 - $29.84
$27 - $30
PL Capital Believes that One or More of These Buyers Would Pay More than These Projected Amounts
Source: PL Capital, LLC
Even if Metro (METR) Delays a Sale the Projected M&A Values and IRRs are Attractive
33
The upside potential and IRR1 is attractive even if METR waits to pursue a sale (particularly if interest rates rise)
METR believes they will grow loans >10% per year (without the need for a capital raise) If interest rates rise METRs EPS and TBV should exceed the amounts projected below
EPS Est.2
$1.20 $1.21 $1.29 $1.40 $1.65
Upside Potential
+37% +47% +57% +67% +76%
IRR1
+74% +29% +20% +16% +13%
(1) IRR based upon a buy price of $20.41 (recent price) and a 6 month period between announcement and closing (2) 2013 (Actual); 2014-2015 (street estimate); 2016-2017 (PL capital estimates); assumes no dividend paid or capital actions
Small-cap Bank Stock Investment Idea: Horizon Bancorp (HBNC) Potential R2000 Delete Worth Owning Whether They Get Deleted or Not
34
Shares Mkt. Total o/s Cap. Assets Location 8.6 mil $188 mil $1.8 Bil IN, MI
12/31/13 2013 2014 2015 TBV/ Price/ EPS EPS Est. EPS Est. share TBV $2.17 $1.94 $2.09 $14.94 146%
NPA % 1.2%
Valuable, high performing bank in Indiana and Michigan Consistently ranked as one of the top performing community banks in the US One of only 6 Nasdaq or exchange listed banks between $1-$5 billion in assets that earned over 15% ROTCE in both 2012 and 2013, yet it trades at only 148% of tangible book value vs. 318% for the other 5 high performers (see page 36) Not widely followed by analysts or owned by institutional investors (excluding PL Capital, instl ownership is only 25%) HBNC has been a disciplined M&A acquirer which could become a M&A seller if they cannot continue to find growth Worth $30+ in a deal if they decide to sell PL Capital is supportive of HBNCs management and business model (13G positionPL Capital owns 6%) Buy HBNC regardless of whether it gets deleted from R2000 and add more if it gets deleted (at current prices HBNC is not likely to be deleted but that could change)
Horizon (HBNC) is the Lowest Valued High Performing $1-$5 Bil Asset Bank in the U.S.1
36
Price/TBV %
HBNC Price/TBV = 148% vs. 318% (average) for the Other High Performers 450 Horizon will likely not trade at the same levels as 400 its high performing peers (average 318% TBV), but 350 it should trade in line with other banks with similar 300 ROTCEs. 250 Horizons 2014 estimated ROTCE is 13%. Banks with 13% ROTCEs currently trade at approximately 180-200% TBV (or $27-$30 HBNC), a 24% to 37% increase from HBNCs recent price.
200
150 100 15 16 17 18 19 20 21 2012 and 2013 Average ROTCE %
Source: SNL Financial, LC and PL Capital LLC (1) Includes NASDAQ and exchange listed banks/thrifts between $1-$5 billion in assets with over 15% ROTCE in both 2012 and 2013
Small-cap Bank Stock Investment Idea: Intervest Bancshares (IBCA) Potential R2000 Delete Worth Owning Whether They Get Deleted or Not
37 Recent Price $7.42
Locations NY, FL
2014 12/31/13 EPS Est. TBV/ (PL Capital) share $0.65 $8.99
NPA % 3.8%
Wholesale deposit gatherer and CRE lender with branches in NY and FL (lends in numerous states)
One of only 6 Nasdaq or exchange listed banks that trade below 100% of tangible book value (IBCA=85%) out of all banks/thrifts with over $1.0 billion in assets and over 5% ROTCEs (n = 99) IBCAs net interest margin and EPS should continue to improve as higher cost deposits roll over, legacy credit costs subside and low yielding excess liquidity is invested in higher yielding loans Most of the NPAs are TDRs which will not have significant losses Equity capital is more than sufficient and TARP was repaid in 2013 No research analysts follow the company IBCA is a franchise that will likely not be sold nor will IBCA be an acquirer Family run/partially owned by Dansker family
PL Capital is supportive of IBCAs management and business model (13G positionPL Capital owns 7.4%)
Buy IBCA regardless of whether it gets deleted from R2000 and add more if it gets deleted
The projected R2000 cutoff is approximately $165 million (IBCA market cap is approximately $163 million)
John Palmer, Principal The PL Capital Group 47 E. Chicago Avenue Suite 336 Naperville, IL 60540 630-848-1340 630-848-1342 (fax) jpalmer@plcapitalllc.com
Rich Lashley, Principal The PL Capital Group 67 Park Place East Suite 675 Morristown, NJ 07960 973-539-5400 973-539-5404 (fax) rlashley@plcapitalllc.com
Curt Thompson, Managing Director The PL Capital Group 47 E. Chicago Avenue Suite 336 Naperville, IL 60540 312-560-2675 630-848-1340 cthompson@plcapitalllc.com
www.plcapitalllc.com
(1) The PL Capital Group includes PL Capital, LLC; Goodbody/PL Capital, LLC; PL Capital Advisors, LLC; Financial Edge Fund, LP; Financial Edge-Strategic Fund, LP; Goodbody/PL Capital, LP; PL Capital/Focused Fund, LP; Richard Lashley and John Palmer; Lashley and Palmer are managing members of PL Capital LLC and Goodbody/PL Capital, LLC; PL Capital, LLC is the general partner of Financial Edge Fund, LP, Financial Edge-Strategic Fund, LP and PL Capital/Focused Fund, LP; Goodbody/PL Capital, LLC is the general partner of Goodbody/PL Capital, LP; PL Capital Advisors, LLC is the investment advisor to all four LPs