the consensus view on this board seems to be that a converted bank's mgt team will do us all (themselves included) the best service if they (in no particular order);
1) buy back shares as early, often and in largest size as they can, given regulator(y) constraints;
2) pay a divvy soon and keep increasing it;
3) pay a special divvy if there is not an immediate better use for the money;
4) do nothing stupid (like overpay for an acquisition of another bank or a broker or an insurance agency, etc);
5) do 2nd step (if an mhc) ASAP;
6) ask to do buybacks even if the "nominal" regs say no;
7) grow into excess capital raise (when forced to raise $ at too high a valuation by regulators) as well and quickly as possible
by growing their deposit base;
8) have BOD and mgt show they are aligned with s'holders by "buying" with their own $ at each offering step as well as in aftmkt and holding all other grants and option stock;
9) sell out to a greater fool as soon as the opp is presented.
finally, there appears to be agreement that signalling intentions correctly on any of these points (i.e. filing for permission to do an early buyback or special divvy is a positive, even if ultimately unsuccessful) is considered a positive when evaluating mgt and the bank.
i think the foregoing provides a good framework for analysis, so;
herewith, the case for ABNJ.
1) immediately after step 2 offering, when the stock broke issue, they presented a request to commence an early buyback to the "reggors" just as had been done by HCBK (successfully). didn't get the ok despite what many of us considered a stronger argument than mounted by henry hudson, but get points for the effort;
2) they immediately announced a divvy, and tho not as large as i would like (and advised them) it is a divvy and some of their contemporaries have not yet declared divvy (see ISBC, for ex);
3) haven't done it since 2nd step (not so long ago) but paid a $0.75 special in 12/04 and started quarterly at 9 cents in 6/05;
4) so far so good on avoiding stupid moves- keepin' my fingers crossed;
5) they did 2nd step in 2 years (vs "normal min" of 3 yrs);
6) see #1 above;
7) this is where i am impressed as hell by these guys. until 2001, they were a 1 branch operation (albeit a large branch with deposits of $180mm +/-. then they opened a new branch in 6/01 and THAT BRANCH HAS GROWN TO $100mm SINCE OPENING! this in the crowded, highly competitive, northern NJ mktplace. looking at the bank as a whole, they have doubled the deposit base, while adding only that 1 new branch, in the period from 9/00 to 9/05. this performance is as good as i have seen anywhere in the country for a thrift. this demonstrated ability to grow deposits will, IMHO, be the key to outstanding returns to s'holders. the company has announced that it plans to open 5 new branches and is well along to completion on 2 of them (tho, admittedly, details are lacking at this point). more about the impact of projected new branch contribution to the total deposit base a bit further on;
8) on a pro forma basis, insiders were expected to buy an additional 351,000 shs in step 2, bringing their total to 7.9% of outstanding shs post offering. 2 of the directors ordered > 90,000 shs and several others ordered 40,000 shs in the offering. this level of orders in a 2nd step is rather extraordinary (for comparison, the NEBS insiders ordered a total of 41,000 shs and only one individual ordered more than 10,000 shs. pro forma ownership of insiders post offering for NEBS was listed at 4.9%);
9) can only speculate re desire and willingness to sell early. the CEO is in his 60s and the heir apparent and COO was hired before the 2nd step. he is the former CEO of warwick savings, where he engineered a sale not long after taking over as head honcho (and less than 5 yrs after joining that bank).
so there we have it. seems to me we have a confluence of motive and opportunity. only need to determine if they have the ability to "burn equity" efficiently enough to make a sale in 3-4 years worthwhile for s'holders. the starting point is 12/31/05 deposits, shs outstanding and equity. total dep were $327mm (~40% CDs and 60% core), tang BV = $126mm and total shs = 14.16mm. now, the problem is clearly that the equity is excessive for the asset base of ~ $525mm and deposits of only $327mm. mgt's job is to grow deposits (anyone aware of other thrifts able to grow by 113% in the 5 year period to 9/05?) while shrinking the share base (i assume by 20% in 3-4 years, to 11.3mm shs).
now, to determine "reasonable takeout price/sh", we need to start by estimating sale date, shs out at that point, deposits and equity, all at that time. clearly, a range of estimates for each parameter (as well as deposit premium a buyer will pay) can be considered reasonable. each of us will have a different opinion as to what is reasonable for each of these measures and will come to a different number for expected sale price at the end point. as a certain prolific poster on this board is wont to say, "that's what makes horse racing interesting."
as for me, i will make a single point estimate by assuming the following (others more facile with simulation and other techniques of modeling may use more sophisticated approaches- hopefully, my results won't be much different regarding sale price/sh);
shs out at sale date (3-4yrs out)= 11.3mm shs
tang BV at sale= $120mm (vs $126 pro forma at step2)
deposits at sale date= $500mm (~ 54% > than 12/31/05)
deposit premium payable by buyer = 17.5% (a bit aggressive, but it is a nice little northern NJ shop and would fit the existing branch network very well for a number of "natural buyers" (read ISBC, art, HCBK, ocean, PFS or any newbie now in the wings).
crunch this all together and what do we get? wahla! $18.36/sh in 3-4 years. now, when JJR and i first "discussed" this piglet, it could be bot for $9.80-9.90/sh. now trading at $10.25+/- so i guess we have to use the latter #. as far as compounding period, conservatism dictates we use 4 yrs, tho 3 1/2 yrs possible. i get about 15 1/2% IRR for a sale in 4 yrs and about 18% if it takes 3 1/2 yrs.
could it be higher? yes, especially if they grow deposits at a rate closer to historical performance. also could be higher if they sell at a 2X multiple of TBV or greater (which is much closer to prices paid in NJ (see PFS's last purchase in NJ)- in fact, $18.36 is ONLY 1.73X my estimate of TBV= $10.62/sh at sale date and is quite conservative from that perspective). could it sell for less- possibly, but i doubt mgt would do the deal at a lower price but rather would wait a longer time for its price. i think my price/time is a minimum mgt would do.
are there things i don't like about this bank- sure- they earn 50bp on assets and should have announced the first 1 or 2 new branches by now. i also think they should have declared a much bigger divvy, after buyback turndown by regulators (i argued for 10 cents/sh/Q to start). that having been said, all-in-all, i think 15-18% IRR, with relatively conservative assumptions is pretty good, especially given that i don't see much risk involved in this name. on the positive side, i love mgt's attitude and behaviour, as evidenced by the facts spelled out above. i also love the fact the COO and heir apparent has already demonstrated his willingness to sell (warwick savings in 2004).
good luck to all in this name. disclosure- my monkey and i are loaded with this oinker!!
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said yes (of 6 -- 100.00%)
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