AMERICAN BUSINESS BANK/CA AMBZ
February 19, 2020 - 12:52pm EST by
dennett44
2020 2021
Price: 36.05 EPS 3.17 3.54
Shares Out. (in M): 8 P/E 11.4 10.2
Market Cap (in $M): 283 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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Description

I am recommending a long position in American Business Bank.  An extremely well-run, under-earning business bank in an attractive market with take-out value likely ~$50 per share.  Difficult to see AMBZ remaining independent forever but also impossible to predict timing; book value will compound at least ~10% per year while you wait.  Buy today for ~10x 2021e EPS.

Apologies upfront for the size/illiquidity.  The stock trades OTC and there are no SEC filings.  Assuming this will save time for those not interested in traveling in such names.

The stock was written up in 2011 and, for the most part, the story remains the same, which is one of the reasons why it is a compelling investment.  Develop a strategy and execute on that strategy. Keep it simple. I will stick with that theme and keep the analysis simple.

 

History

The bank was founded in the late 1990’s by a small group of middle market commercial bankers in Los Angeles, CA.  Their bank was being acquired by a larger institution and they wanted to create a company that allowed them to focus on their clients; sounds good on paper and in the “Our History” section of a website.  Judging by results their strategy of clients first has translated into a very high quality commercial, capital compounding bank. The founders are no longer in day-to-day management but two, Robert Schack and Donald Johnson, remain on the Board as Chairman and Vice-Chairman, respectively.

 

Results

Bank financials can be pretty simple.  Gather deposits, invest in interest earning assets with credit discipline, generate non-interest income and manage expenses.  Franchise value for a bank is largely determined by the quality/stickiness of the deposit franchise. The easiest way to impair value is credit.  AMBZ has a very attractive deposit franchise and great credit; it checks both of the most important boxes.

 

Historical Financials:

 

 

2016

2017

2018

2019

         

Avg Interest Earning Assets

$1,647,931

$1,760,617

$1,964,616

$2,188,303

  Growth

13.0%

6.8%

10.9%

11.4%

         

Net Interest Income

$49,860

$55,223

$67,031

$78,293

  Net Interest Margin

3.03%

3.14%

3.41%

3.58%

         

Provision for Loan Losses

($100)

($600)

($3,811)

($3,279)

Non-Interest Income

$4,080

$924

$4,152

$5,722

Non-Interest Expense

($36,501)

($37,352)

($45,734)

($50,811)

  Efficiency Ratio

67.7%

66.5%

64.2%

60.5%

         

Pre-Tax Income

$17,339

$18,195

$21,638

$29,925

Taxes

($4,622)

($9,876)

($5,245)

($7,848)

         

Net income

$12,717

$8,319

$16,393

$22,077

Shares

6,734

7,800

7,861

8,083

         

EPS

$1.89

$1.07

$2.09

$2.73

Adjusted EPS*

$1.63

$1.09

$2.06

$2.72

         

ROE

7.8%

5.6%

10.3%

11.4%

ROA

0.6%

0.5%

0.8%

1.0%

         

Loans/Deposits

50.1%

56.1%

63.3%

68.7%

Charge-Offs

$0

$0

$0

$0

         

Deposits:

       

  Demand

$831,838

$863,410

$983,284

$1,083,705

  Money Market

$721,720

$563,611

$728,237

$827,713

  CDs

$45,718

$42,390

$50,443

$37,712

  Interest Bearing Transaction

$0

$170,326

$211,794

$215,730

Total

$1,599,276

$1,639,737

$1,973,758

$2,164,860

*Back out securities gains/losses

 

OK, more detail that helps tell the story:

 

 

2019

 

2018

 

Average Balance

Interest Inc/Exp

Average Yield/Rate

 

Average Balance

Interest Inc/Exp

Average Yield/Rate

Interest Earning Assets

             
               

Deposits

$77,077

$1,628

2.14%

 

$66,602

$1,420

2.16%

Investment Securities

$769,228

$16,620

2.16%

 

$825,689

$19,007

2.30%

               

Loans Receivable:

             

CRE

$897,530

$42,135

4.69%

 

$722,717

$32,851

4.55%

C&I

$374,634

$19,146

5.11%

 

$282,141

$13,380

4.74%

RRE

$64,769

$3,381

5.22%

 

$63,688

$3,171

4.98%

Other

$5,065

$173

3.42%

 

$3,779

$338

8.91%

Total Loans

$1,341,998

$64,835

4.83%

 

$1,072,325

$49,738

4.64%

               

Total IEA

$2,188,303

$83,083

3.80%

 

$1,964,616

$70,165

3.57%

               

Liabilities

             
               

Non-Interest Deposits

$1,045,715

$0

0.00%

 

$941,057

$0

0.00%

Interest Transaction

$205,551

$516

0.25%

 

$188,101

$374

0.20%

Money Market

$757,833

$3,918

0.52%

 

$650,134

$2,100

0.32%

CDs

$55,673

$339

0.61%

 

$63,085

$331

0.53%

Total Deposits

$2,064,772

$4,773

0.23%

 

$1,842,377

$2,805

0.15%

               

FHLB and other

$552

$15

2.63%

 

$20,037

$329

1.64%

               

Total Deposits and Other

$2,065,324

$4,788

0.23%

 

$1,862,414

$3,134

0.17%

               

Net Interest Income/NIM

 

$78,295

3.58%

   

$67,031

3.41%

 

Quick recap: develop deposit relationships with middle market businesses.  Make loans to those businesses; owner occupied (majority of CRE loans) and C&I.  Manage credit. Shift interest earning assets from lower yielding investment securities to higher yielding loans.  Manage non-interest expenses to generate operating leverage. The above financial information corroborates the story:

 

  1. Non-interest deposits represent ~50% of total deposits and borrowings.

 

  1. Commercial Real Estate and Commercial & Industrial represent nearly all of loan portfolio

 

  1. Loan to deposit ratio increased from 50.1% in 2016 to 68.7% in 2019 while net interest margin increased from 3.03% to 3.58% over the same period

 

  1. Non-interest expenses increased 39.2% from 2016 to 2019 while revenue (net interest income plus non-interest income) increased 55.7% generating 52.4% incremental operating margin

 

Forecast:



 

2020

2021

     

Interest Earning Assets

$2,400,000

$2,600,000

  growth

9.7%

8.3%

     

Net Interest Margin

3.65%

3.70%

     

Net interest Income

$87,600

$96,200

Provision for loan losses

($4,000)

($5,000)

Net interest income after provision

$83,600

$91,200

     

Non-Interest Income

$6,090

$6,688

  Percent of total income

6.5%

6.5%

     

Non-interest expense

($54,809)

($58,646)

  Efficiency Ratio

58.5%

57.0%

     

Income before Income Taxes

$34,881

$39,242

     

Taxes

($9,244)

($10,399)

  Tax rate

26.5%

26.5%

     

Net income

$25,638

$28,843

     

Shares

8,100

8,150

     

EPS

$3.17

$3.54

     

Incremental Operating Margin

58.7%

58.3%

 

Trading for ~10x a reasonable 2021 earnings estimate with ROE likely approaching 15% over the next few years is more than reasonable.

 

One way to assess acquisition value for a bank is deposit premium - tangible book value plus a percentage of deposits.  The more valuable/sticky the deposits the higher the deposit premium. Historically deposit premiums range from low single digits to low double digits.



Acquisition Analysis

     

Tangible Book Value

$206,665

   
       

Total Deposits

$2,164,860

$2,164,860

$2,164,860

  Premium

5%

10%

15%

Value of Deposits

$108,243

$216,486

$324,729

       

Acquisition Value

$314,908

$423,151

$531,394

Per Share

$40.12

$53.91

$67.70

 

As is pretty clear from my past write-ups, I like banks.  It’s been a slog but over time value is recognized and I like the value and risk/reward of AMBZ.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

No specific catalyst

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