market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Richard Lashley of PL Capital who pitched TARP Warrants, Metro Bank (METR), Horizon Bancorp (HBNC), and Intervest Bancshares (IBCA) .


Richard Lashley's Value Investing Congress Presentation

•    $200MM asset manager – 18 years of history, specialized in small cap banks. Shareholder activists in banks – which surprisingly is the third most active areas for activist investing. Former CPAs at KPMG – also did M&A at KPMG. One of the top ranked financial services hedge funds. Primarily long only.
•    Three crises in banking –early 90’s, LTCM and from 08-09. 
•    Average P/TBV – not back to the mid-point or average since 1992.  Believe we can get to 1.75x – 2.0x TBV average.
•    Average bank in their portfolio is at 1.09x – strategy is to sell their banks to a mid-cap bank at greater than 1.5x TBV.
•    A lot of acquisitions, generally one acquisition per day. M&A is going to happen in banking no matter what happens in the market.
•    Most banks sell for 10x post cost save earnings – as the acquirer can redeploy excess capital.


•    Idea 1: TARP warrants many are deep in the money. First warrant is JPM, strike at 42 - $18 in the money, and expire in 2018. What will happen? Book value will grow from earnings. JPM TBV today is 40, by FY18 will be around ~$64. Warrant trades for $20. Thinks it will trade for higher than 1.2x BV – should be at least a 16% IRR through 2018. Further, treasury has an anti-dilution clause, meaning the exercise price declines with a big dividend.
•    Capital One Warrants – 7% earnings growth, 30% payout, 20% IRR in the capital one warrants. For a 17% ROTCE business, thinks it is worth more than 12x PE.
•    Another warrant idea includes PNC warrants – minimum 25% IRR, with 7% earnings growth and assuming 13x PE multiple.


•    Small cap bank ideas: Metro Bank (METR) – filed a 13D, started buying a year ago, actively buying all three names. Has low cost deposits, 2.8B franchise, will benefit from higher rates. CEO is 73 years old – is going to meet with the CEO next week. The bank is located in PA. They are spending too much money, very expensive model being open 7 days a week. Efficiency ratio is 73% -very high, should be 60% - 65%. Value will grow regardless at $2 per share if nothing else happens. Assures us that the bank will be sold.


•    Horizon Bancorp (HBNC) – in the Russell 2000, located in Indiana and Michigan. Trading at 1.48x TBV, while peers trade much higher for high ROTCE banks. Stock is $22 – going to earn $2 per share. Filed a 13G but they like a CEO – could be a buyer or seller.


•     Intervest Bancshares (IBCA) in NYC/Rockefeller. It is a wholesale bank – gathers wholesale deposits. Very lean and mean, trading at 83% of TBV. Will benefit from margin expansion as high costs will run off. The Company may be booted off the Russell- will be buying hand over fist if that happens.
•    Generally buy MHC after the conversion occurs as it is difficult to set up deposits.
•    Look for second-step conversions- after the three years are up look for the sale of the business. 

Be sure to check out the rest of the Value Investing Congress presentations.