Description
1st Colonial Bank represents an opportunity to buy $500 million asset bank that I feel would fetch a 40% premium to its current price in a takeout. The bank is dark and a nano-cap, so probably only suited for small funds and personal accounts.
Overview: FCOB is not your typical bank or bank investment. It does trade at 126% of TBV and 11.4X pro forma 2017 earnings. However, it has $463 million in deposits and only two branches. The Collingswood branch has almost $400 million in deposits. There is a third location, which is an administrative office. The bank operates in Camden County, New Jersey, which is part of the Philadelphia market. It is a market that has been quite active in bank deals:
FCNCA bought failed NJ bank Harvest Community Bank in 2017
Bryn Mawr Trust buys Royal Bank in 2017
Prudential Bancorp acquired Polonia Bancorp in 2017
OceanFirst Financial buys Cape Bancorp in 2016
Univest bought Fox Chase Bank in 2016
DNB buys East River Bank in 2016
BNCL buys Conestoga Bank in 2016
WSFS buys Penn Liberty in 2015
FCNCA bought failed First Cornerstone Bank in 2015
ESSA Bancorp buys Eagle National Bancorp in 2015
Bryn Mawr Trust buys Continental Bank Holdings in 2015
WSFS buys Alliance Bancorp in 2015
BB&T buys Susquehanna Bancshares in 2015
Granted, most of the activity has been in Pennsylvania, and Cape Bancorp only had a few branches in Camden County. There are a number of NJ banks walking around with lots of capital and stock trading at nice premiums.
Deposits: FCOB ranks 9th in deposits for Camden County, NJ, and is the top NJ bank in terms of deposits in the county. The bank has about $100 million in CD deposits of which about 40% are brokered, which is good for a bank this size. The one knock on the deposits, though, is that $200 million of deposits are government related.
Loans: The loan book currently is $358 million and reflects the commercial bank that FCOB is. About $208 million of the loans are backed by 1-4 family residential family buildings, $78 million to commercial business property, $37 million to new construction, $26 million to C&I loans, and the remainder to various other categories. Note that the loan book is significantly smaller than the deposits.
Management: Gerard Banmiller, 68, is no stranger to banking. He helped found a de novo New Jersey bank in 1987, Community National Bank, that was sold to Hudson United Bank in 1998. He stayed with HCBK until 1999 and left to start FCOB in 2000. The chair person is Linda Rohrer, who is also 68, head of a real estate firm and trustee of Rowan University. She is also the daughter of Bill Rohrer, mayor of Haddon Township for 36 years and who founded First People's Bank in the 1950's. Her father grew the bank to 55 branches. When FCOB went dark, she was listed as owning 5.0% of the stock. Age of the directors:
Linda Rohrer - 68
Gerard Banmiller - 68
Mary Burke - 64
Thomas Clark - 63
Letitia Colombi - 72
John Donnelly, IV - 62
Eduardo Enriquez - 59
Michael Haydinger - 49
Harrison Melstein - 74
Stanley Molotsky - 81
All of these directors were directors in the last DEF 14A filed with the SEC in 1994.
Institutional Ownership: Despite being dark, two firms have filed 13G's in recent years.
First Manhattan Co. 9.1%
Banc Funds 6.1%
Valuation: From the 1st Quarter 2017 earnings, I project that net income will be $3.9 million and non-interest expense will be $12.8 million. Current efficiency ratio is 65%, and there is no excess capital. I calculate the cost savings as 26% of the non-interest expense. The 26% comes from multiplying the efficiency ratio by 40%. I have found this helpful in normalizing savings across different banks. In a perverse way, inefficient banks can be more desirable because an acquirer can realize more savings. An efficiency ratio of 65% is good but means there is less to cut. I calculate the after-tax cost savings as:
$12.8 million X (65% X 40%) X (1 - 35% tax rate) = $2.1 million.
Add cost savings to earnings and $3.9 million + $2.1 million = $6.1 million
Multiply $6.1 million X 10.5 earnings multiple = $64.1 million
Divide that by 4,080,324 shares and you get $15.70/sh, which is over 40% higher than the current price.
Financials: The bank does provide some basic financial information on its web site, and there are more details in the FDIC web site.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Bank is sold.