The Collins Amendment and the Federal Reserve
For starters, Cullen/Frost saw fit to issue non-cumulative perpetual preferred shares to lock in some relatively low-cost regulatory capital. Under the Federal Reserve's new capital rules proposed last June, about 1.5% of most banks' regulatory Tier 1 common equity ratios can be made up of non-cumulative perpetual preferred shares. KBW analyst Jefferson Harralson on Thursday said in a report that "CFR likes swapping out 12% cost of capital for sub-5.5% cost of capital."
Harralson rates Cullen/Frost "underperform," with a price target of $54, even though he considers the company to be a "high-quality bank." The analyst said in a report on Jan. 31 that he saw "minimal near-term negative catalyst to send the stock materially lower," but that he also expected the shares to underperform the market because of their high valuation.
- Bank of Hawaii (BOH) of Honolulu. The shares closed at $49.14 Wednesday, trading for 2.2 times tangible book value, and for 14.1 times the consensus 2014 EPS estimate of $3.47. KBW analyst Jacquelynne Chimera said in a report on Thursday that "we do not see BOH as likely for this transaction, although its non-common Tier 1 slug is not filled out as of yet." This means the company can still issue trust preferred shares and have them count toward Tier 1 common equity. Chimera also said Bank of Hawaii's capital level is "healthy" and that she expects the company to "continue paying out 75% to 100% of net income to shareholders." The bank pays a quarterly dividend of $0.45, for an attractive yield of 3.66%.
- Bok Financial (BOKF) of Tulsa, Okla. The shares closed at $57.90 Wednesday, trading for 1.5 times tangible book value, and for 12.5 times the consensus 2014 EPS estimate of $4.62. KBW analyst Brady Gailey in a report Thursday called the company "another high-quality bank with significant Tier 1 common that could consider such an optimizing transaction," and added that "with its relatively cheaper-on-book stock price at 1.5 times, the deal would by 2% accretive to EPS." On the other hand, "BOKF is also sensitive to taking away float from its relatively thinly traded shares and has historically not been active repurchasing its stock at today's high $50 per share level," according to Gailey.
- Commerce Bancshares (CBSH) of Kansas City, Mo. The stock closed at $38.77 Wednesday and traded for 1.7 times tangible book value, and for 13.2 times the consensus 2014 EPS estimate of $2.94. KBW analyst Christopher McGratty on Thursday wrote that a transaction similar to Cullen/Frost's "could look good on paper, but management prides itself on the transparency of its all-common capital base and has never had non-common capital."
- Hancock Holding Co. (HBHC) of Gulfport, Miss. The shares on Wednesday closed at $31.61, trading for 1.6 times tangible book value, and for 12.1 times the consensus 2014 EPS estimate of $2.62. According to Harralson, the company "is perhaps the best positioned to execute a CFR-like transaction -- especially given the relative valuation of the shares." The analyst also thinks that Hancock could wait for an acquisition opportunity to issue preferred shares.
- Signature Bank (SBNY) of New York. The bank's shares closed at $76.15 Wednesday, trading for 2.2 times tangible book value, and for 15.8 times the consensus 2014 EPS estimate of $4.82. McGratty wrote that "while Signature looks like a candidate on paper, SBNY is a growth company that has never paid a dividend, let alone repurchased shares."