2006 | 2007 | ||||||
Price: | 31.64 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 5,876 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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# | AUTHOR DATE SUBJECT |
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43 | |
1) No particular reason to expect them to sell, but probably a more receptive group to listen to someone absent Hill. 2) Never underestimate the abilities of acquirers to believe they can manage the issues of their acquisition. I have no dog in the fight of whether a sale of Commerce is a realistic scenario. This investment was always based on the business operation itself. Any M&A event would just be icing. I'm much more interested in now seeing a little slope in the yield curve, and the easing of the regulatory cloud. Met | |
42 | |
Just curious what some of the bulls think about his exit. #1, I don't understand why people think CBH will sell. #2, I think it is an unacquirable franchise. Anyone who acquires them will almost certainly destroy the unique culture. Sure, an acquiror could probably cut some of the costs and numbers would look great for a quarter or two. But it won't be very long until the customers start walking out the door. And who will acquire them? Will it be someone like Wachovia or Citigroup? Are you telling me that Wachovia is going to rip Commerce's nameplates off and put up their own. I can't think of a faster way to cause CBH employees to leave en masse. Will it be some foreign bank without a presence on the East Coast. The employees will probably leave even faster if they have to report to Toronto or London or Madrid. CBH is unacquirable. | |
41 | |
Hi Skyhawk, Sorry I've been off a few weeks. My guess would be perhaps the increase in deposit rates paid flattens, and maybe a little more shift to loans helps. That's off the cuff...no deep analysis. Been a couple weeks since the CC. I'm actually not terribly conerned with Q4 '06. I have a longer time horizon, as evidenced by the statement on catalysts in the original report. Yield curves will go towards a normal slope, and on a higher deposit base from the continuing roll out of branches, the earnings and stock price return will come. I can wait, and wouldn't object to another low entry opportunity. Better return on those funds on a time basis. Met 99 | |
40 | |
Was wondering if you had any thoughts. I don't understand how management can say they expect the NIM to expand in Q4. A quick look at the balance sheet asset yields and funding costs indicates this will be highly unlikely given the intense deposit competition that is still raging on the eastern seaboard. The yield on the securities portfolio which constitutes 62% of earning assets increased only 4 basis points. And with the decline in the 10 yr., there is a chance the increase could be even less in Q4. Loan yields only increased 14 basis points. Meanwhile, rates paid on savings accounts increased 14 basis points, interest bearing demand increased 27 basis points, time deposits increased 51 basis points, and public funds increased 33 basis points. (Does anyone know why the heck they are paying above Fed funds on public money?) I bet the NIM compresses another 5-10 basis points in Q4. Combine this with the added expense from 30 new branches and EPS could come in at $0.39. But I'm sure Vernon will pull something out of his sleeve to prevent that from happening. In any event, it looks like the "coiled spring" will have to wait. | |
38 | |
Skyhawk, You said, "I think my analysis is simple: if you grow assets at 20%+ but your ROE is only 13-15% and capital levels are already somewhat constrained, you will need to raise capital. That's it." I thought the issue was whether or not a significant follow on equity sale was in the cards. I agree capital has to be raised. Like it or not, CBH has options, other employee stock plans, and a DRIP program. The equity raised from these ongoing equity sales has been part of my model and report from the start....and so has the dilutive effect with respect to EPS. This may well be sufficient capital to make up the difference from the lagging ROE on a compressed NIM. Further, I think using your criteria as best I could, I demonstrated that a significant additional share sale can be avoided...certainly nothing in the neighborhood of 10-20MM (to use the amount you suggested) is needed. Approaching it from David's methodology, albeit on a longer time frame to match his approach, the worst case scenario was perhaps 3MM shares...and under his criteria regarding comprehensive income nothing at all. So if my analysis already has sufficiently compensating equity capital, then the concern over a significant further equity sale is overblown. I'm not saying non-existant, but it would seem you have to have pretty harsh NIM assumptions to force it. Mine are not wildly optimistic. I certainly won't attempt my own interest rate forecast. It's why this was never presented as a near term turnaround. But your concern about repricing CDs is limited for CBH. As I mentioned earlier, time deposits are only 12.5% of deposits, and already 'cost' about 3.82%. Met99 | |
37 | |
David, I'm not sure if I understood your comment, but I think short rates go to 5.50% and the 10 yr. stays below 5.50%. In general, I think several analysts believe the pressure on bank margins will magically stop the day the Fed announces it is basically done. But if you look at the funding costs of a lot of banks, they are paying near 3.50% on average for their rate sensitive cd's. Since these have maturities of 9-15 months, I think they will continue to reprice upwards (to 5% or so) for several quarters after the Fed is done, hurting the NIMs at many banks, CBH included. Met, I didn't comment on CBH's Tier 1 capital because it is comfortably above the guidelines. But regulators care about ALL of the ratios. As far as rapid growth, there is a difference between profitable growth and marginally profitable growth. I think my analysis is simple: if you grow assets at 20%+ but your ROE is only 13-15% and capital levels are already somewhat constrained, you will need to raise capital. That's it. I assume AOCI and other variables stay basically the same. | |
36 | |
Hi David, I missed your equity raise analysis while writing up mine for Skyhawk. Let me walk through our differences. 1) You accepted Skyhawks asset growth rate at 25%. That gets you to 67.9B in total assets by mid year 2008. However, by year end 2008, my model is at 64.2B on a flat NIM run and 64.3 on my original NIM asumptions. The discrepancy of my lower number 6 months further along is simply due to modest nominal asset growth rate increases, instead of a hard percentage driver. 2) If they need 6.2% of asset growth as equity growth, then they need 6.2% of (64.3-43.4=20.9), or 1295MM in higher equity, and I have 6 months longer to achieve it than in your analysis. Equity now is 2526. The flat NIM model shows raw equity output at 3908 by the end of 2008. I should adjust this down by 200MM to account for H206 and 2007 marketable securities writedowns, so model equity is 3708. The change is 1182, so I'm short 113MM to meet your specifications. However, that is well inside the comprehensive income adjustment I've made, and that you argue against. So, I can't say there won't be a small equity sale (~3MM shares), but no one can say there will HAVE to be some additional equity sale. In fact, given a NIM recovery is possible along the lines of your interest rate argument, and that it brings in an additional 96MM of equity by 2008....well, my case for no equity raise just gets stronger. We may be hung up in semantics but on the tables for options, option exercise have been on the order of 3MM/yr. There are additional benefit plans plus the drip. These three combined have been around 7.5MM/year over the last 3 years in share count, and determining the correct price on all 3 is a challenge. For 2005, the average on all three was $24.33. My model accounts for all the share sales at reasonable prices...$28.73 in '06, 29.85 in'07, 34.77 in'08, and 41.23 in 2009. These are how they average...the model treated options and all other shares differently. Bottom line, I'm issuing shares at significantly below market in the model. It can be reasonably argued no additional equity raise will be needed, but I won't say that's an absolute sure thing. So the trust preferred issue may be moot. I think your point about risk capital against the more conservative portfolio is well taken. Met99 | |
35 | |
Neo, I am not ignoring your post...I think we hold similar long term views. Obliquely I get to your point about the branch economics by mentioning the payback time on investment in new branches in the original report. Your coverage of the branch economics in more detail is appreciated. Skyhawk, 1) I don't want to put words in your mouth, but I do conclude from your most recent post you don't disagree with my cash flow analysis which indicates expansion cash cost is and will be funded internally. I was examining (from the beginning) the narrower issue of whether putting up new branches was funded internally. I'm satisfied that it is. I agree that regulatory capital issues are not so simple. More below. 2) As I am not pushing CBH as a buy out candidate, I won't comment further on your Kanas/NFB thoughts. 3) I also would not approach CBH with the idea of monetizing the real estate. But with AFR out there trying to do that job for other large financial institutions it isn't an utterly absurd concept. It's one of those thoughts to keep in the back of one's mind in looking at CBH...even if one doen't want to ascribe any value to it for justifying an investment. It certainly isn't a negative. 4) To paraphrase your comment: past success is not indicative of future results. That's a glib, throwaway comment particularly juxtaposed against an expressed concern of too much deposit growth creating regulatory capital issues. Certainly competitors are responding, but who is the master of this business model? 5) I don't doubt a tougher economic environment would create higher loan losses. I incorporate that concept in my net charge off numbers used in the cash flow detail. But if the portfolio is knocked for being poorly allocated, one cannot also imply loan loss impacts will match the levels of other more typically invested banks. 6) I don't have access to Morgan Stanley, so can't comment directly. I have not posted this as a 2007 turnaround. 7) As to regulatory capital, the whimsical response is 'there's just too much growth goin' on here!', LOL. But seriously, it doesn't take a rocket scientist to understand the subtext when Hill says no equity raises are contemplated THIS YEAR. That said, I'm not so certain equity raises are a given. I can't tell from your latest post #33 what assumptions you use to get to your (presumed) mid 2007 tangible equity and tangible assets. I do believe we're on the safest ground trying to project that ratio rather than the regulatory leverage ratio itself. Still there are several pitfalls. I approached this from the opposite side of the balance sheet. In essence total assets are exactly equal to total deposits (in the model), plus equity (derived in the model...with caveats), plus other borrowed money and other liabilities. Those last two are numbers you could move all over the waterfront. Not sure how you could accurately project them. However, I'll use 2500MM for those two in my discussion. I'll also use the present 150MM in intangibles as a permanent adjustment going forward. So I can get a tangible equity and tangible asset amount as a function of model output......except, the model doesn't do comprehensive income which of course ultimately drives equity. What I'm missing there is unrealized gain or loss on the marketable securities, after tax provision. Now YTD, that's 100MM, so we're not talking about something that can be ignored (except maybe in the long run as securities pay off...but that doesn't bridge an interim ratio issue). So what I've done for this discussion is knock 200MM off the tangible equity my model shows at the end of 2006, and an additional 100MM during 2007. Thus, my tangible equity at the end of 2007 is 300MM less than suggested by my model which does not incorporate mark to market for securities held for sale. I'm slowing the decline in value of the portfolio on the assumption rate increases slow and then halt. Beyond 2007, I've no idea what debt pricing might do so I just go neutral - no change, or a continued downward adjustment to the model equity of 300MM. Here are year end outputs for the flat NIM model at 3.4% for tangible assets, tangible equity, and the ratio: 2006_47283_2456_5.2% 2007_55475_2848_5.1% 2008_64085_3458_5.4% 2009_73297_4170_5.7% Obviously the 'NIM recovery' run does better. You indicated sub 5% was a problem area. Undoubtedly the backdoor DRIP and benefit share sales are a factor here...but those have always been accounted for in my EPS based valuation. Even in a flat NIM world, the deposit growth sufficiently drives net income to boost ROE. The other factor is the law of large numbers again...assets do not continue to grow at 25% annually, even if nominal growth still gradually climbs YOY. I can't guarantee a follow on offering is not going to happen. But I don't think bears can claim its a sure thing either. It doesn't appear it would have to be particularly large and dilutive to move the regulatory capital needle sufficiently. Met99 | |
33 | |
Thanks for the detail, but you didn't address my concern in my last post. CBH's leverage ratio (the way regulators define it) was 6.0% at Q2. The tangible equity to tangible assets ratio was 5.5% ($2.378Bin equity/$43.287B in tangible assets). Regulators also pay attention to this ratio and get nervous when it goes below 5%. CBH's ROE was 13%. It pays a $0.48 annual dividend for a pay-out ratio of roughly 25%, meaning that internal capital generation is only around 10%. CBH's assets grew 7% from Q1/06 and 30% from a year ago (although that includes the Florida deal.) But assets are growing at a core rate of around 25% annually. A year from now tangible assets could be $54B and tangible equity could be $2.615B, putting the E/A ratio at an uncomfortable 4.8%. Perhaps with a DRIP and options, they will raise enough equity that they don't need to do a formal equity raise. And maybe another relatively small 10-20M share secondary won't really impact the stock. | |
32 | |
Skyhawk, Here are details on my initial approach: My EBITDA calculation is fairly straightforward: Net income with the following add backs: tax provision, D&A as listed on the cash flow statement, and interest expense *solely related to long term debt* which was the 200MM convertible issue the last couple of years. To get to after tax cash flow, I reduce EBITDA by the tax provision, the long term debt interest expense, and then further modify by adding back the provision (non cash) for loan losses and take out net investment gains. Cash tax payments have been lumpier than the provision, and over time a little less than the provision. But I prefer the more conservative reduction. There is no specific tax shield here. The loan loss provision of course is non cash. In anticipating your objections to this approach, it occurs to me I should also apply the net charge-offs in the formula. Those are real losses, so the figures I present below include that change. Finally, I modify EBITDA by taking out net investment gains. I believe this to be valid for a couple of reasons. 1) While there are unrealized losses at present on the portfolio, these will be made whole if held to maturity. 2) Over the last 7 full years of my data on this specific item, it would be a wash if included. From this after tax cash flow amount as calculated, I deduct all capital expense. So I not only capture expansion costs but also maintenance costs. Here are the Cash Flow, Cap Ex and After Tax Free Cash flow amounts: 1999__99__73__25 2000_120_110__10 2001_165_134__31 2002_239_220__19 2003_344_300__44 2004_428_340__88 2005_464_424__39 _TTM_462_440__22 Q2'05 thru Q1'06 (last complete data) On this basis I believe it fair to say expansion is sustainably supported by operations. Going forward, the key issues are when does NIM stabilize, and then recover; and how much do cap ex costs increase YOY. I held cap ex flat for 2006, and moved cap ex up 50, 50, 60, and 60 in 2007-2010. One might argue these incremental increases are too low. That's a fair comment. On the other hand ATCF moves up substantially on the expanded deposit base and a slowly recovering NIM. On my Low case NIM run from the sensitivity test (NIM permanently flat at 3.4%), the deposit base growth alone drives ATCF substantially higher to 825MM in 2009, assuming a net charge off of 30MM. My modest cap ex growth assumtions peg cap ex at 580MM in 2009. Even if cap ex increases 75MM/year each year after 2005, then 2009 cap ex is 725MM in 2009, and is STILL covered by a low case cash flow with 100MM to spare. The final objection in a cash flow analysis is that the dividend is not covered after cash flow (as I modified it by using net charge offs) less cap ex. The 1999-2005 cumulative 'excess' dividend is 51MM. This is quite small compared to a cumulative cap ex outlay of 1.6B. Again, going forward is critical to examine. On a run of flat NIM at 3.4% out through 2009, cap ex increase assumptions lifted to 40, 60, 60, and 65 for 2006-2009, the dividend is not covered in 2006, but is covered in 2007-2009 by expanding margins. The cumulative ATFCF surplus after dividends 2006-2009 is 91MM under this scenario. However, this is before any net charge offs are incorporated in the model. One can put together any set of numbers for the next 4 years for net charge-offs, but I think it fair to say this covers most if not all of that element thru that period, and remember this is a flat NIM run. This run allows (as my original runs did) for an average annual dividend increase of 10%, and expands the share count under my original assumptions. [The effect of these two items combined is a cash dividend outlay rate of increase around 15% annually.] It does not allow for any one time additional share issuance. There was a one time 10MM share issuance in 2003, none in 2004, and in 2005 7.576MM shares were issued to convert the 200MM in long term debt, and 3.325MM were issued to purchase the foothold in SE Florida. The latter acquisition is probably a one time deal. There were no extraordinary share issuances in 2001 or 2002. The 209MM raised in 2003 from the offering is not peanuts, but it was not necessary for outright funding the capital cost of expansion. I think this covers all the elements of the EV/EBITDA - cash flow approach for CBH. Met99 | |
31 | |
Legitimate points. I should have been more specific in my belief that the equity issuance via options has been used to fund at least PART of the expansion. I haven't done the math yet on exactly how much money CBH raised this way. I don't know if you read Peter Eavis' (of thestreet.com) notes on the accounting for the branches, but I thought they were complete garabage. Tom Brown skewered him. I don't think CBH is a sham at all, but with the current and foreseeable ROE below 13% (despite high leverage), the leverage ratio at only 6.0% (regulatory definition for well-capitalized is 5%), and asset growth running at 20-30%, they do not generate enough return to fund future expansion on operations alone. | |
30 | |
Skyhawk, Your comment on the EBITDA/cash flow analysis reminds me of the discussion of BDC dividend funding by longs and shorts. You are adamant that expansion has not been paid for by after tax cash flow. Have you worked through the analysis? I'll put up more numbers late today. We agree that share counts have grown through options and dividend reinvestment. The latter at least is being addressed by a reduction from add-on investments by owners from 10K down to 2.5K. But that doesn't change the fact that if one works the cash flow, one can see that equity sales haven't been necessary to fund expansion. Operations have managed that. I'll look at the other issues late today as well. Met99 | |
29 | |
Morgan Stanley has been a big bear on the name, but his most recent report should be required reading for anyone considering an investment. Basically, he is 1) lowering his NIM and EPS in 2007 because the futures market is signalling a sustained flat yield curve. 2) He is highlighting the concern of holding a large portfolio of fixed rate bonds in a rising rate environment-- i.e. unrealized losses have picked up significantly and he suspects the relatively low leverage ratio may need to be supported with a capital raise. | |
28 | |
I believe the real estate angle is questionable. Eddie Lampert made a brilliant move. It was a good insight for analyzing a struggling company that many others had just left for dead. But with a fast growing, rapidly expanding bank with a healthy PE multiple, I think the real estate analysis on CBH adds very little value support. That's not why people should buy the stock. And just because CBH was successful in the past does not mean it will remain so. I think CBH is still unique, but without a doubt, their competition has gotten much better-- offering more locations, better hours, competitive rates... And let's remember, CBH has virtually NO BAD LOANS, (nor do basically any other banks for that matter). While CBH is better off than most given its large amount of AAA mortgage backed securities, their loan growth over the past few years has been extremely high (its just that deposit growth has been higher). Could there be a few bad loans in there that will show up if we have an economic slow-down? | |
27 | |
CBH is fun to debate. Once again, I gave a low rating because the CBH story has already been covered in depth by a number of sources prior to VIC, not because I thought it was a bad idea. As far as the EV/EBITDA analysis, CBH has used equity to fund its expansion. How else do you explain the share count going from 128M to 183M over the last five years? Option issuance is an expensive and back door form of raising equity. So I disagree with the conclusion you took from your analysis. Sure, Kanas and NFB sold, but that was with a stock trading at an 11 PE multiple (with minimal EPS growth), not CBH's much pricier 17 forward and 21 trailing multiple. By the way, I am sure Kanas is happy with his new COF currency. | |
26 | |
Met, This is a fair writeup and agree with others that rating this anything lower than a "4" really seems unfair. CBH is interesting. Its probably likely to get uglier in the near term (story of our lives as longer-term investors). Appreciated the back and forth on the thread as it was interesting to think about both sides of the arguments. CBH is considered controversial, but I really dont see what. Fundamentally, the bank has been growing since the 1970s (from one branch) using almost the exact same business model. The founder is very actively involved and whatever you think if him, he is long-term focused, fairly detail oriented and shrewed and arguably loves his company. Commerce has concepualized its business differently (I.e. we are a retailer). This is a simple but powerful change in perspective that has allowed them to create impressive value (organically) and this is likely to continue for the intermediate to long-term. Some other comments: 1.) They own almost all their branches (i.e. the underlying real estate). If Vern were to do financial engineering (a la Bill Ackman), they could monetize this value at some point. I know that Vern thinks this would be stupid because he commented along these lines when the MCD stuff was going on. 2.) I did not see any discussion of the per branch profitability. I always found these economics compelling. I believe that basic math is that they spend between $4.0 to $5.0 per branch (including land) for branches outside New York City (when they generally have to lease space). Exclusing New York City, Branches on average approach $90M in deposits in 5 years. Assume a normalized Net interest margin and take out branch operating costs, and you have solid operating profits on that investment 4 to 5 years out. Then overlaying all the corporate and other overhead is what is powering the growth. The nice thing about the above economics is the scalability. This is why the company talks about going from 400 branches to 900 branches. The nice thing about the model is that it has been proven to work in every market they have tried so far. In Metro Philly, they have more than 10% market share (versus 3% in metro new york) and 0% in Wash and Florida. There is no good reason that they can approach 5 to 10% share in all their market in the next 10 to 15 years. All the concerns cited are basically legitimate, and probably credit quality will decline, etc. Earnings may surprise on the downside and create a better buying opportunity (but it also may not happen). The long-term economics, however, are very attractive and make this an interesting investment if you have a 3+ year horizon. | |
25 | |
"I do not want to buy something on the very slight chance that it may get bought. I don't think that is value investing. I think that is hoping and praying." Skyhawk, I thought I was clear on this, but I guess I wasn't. With virtually every bank/thrift I own, I often go through the intellectual exercise of trying to determine what its private market value is 3-5 years out and seeing if there is a disconnect to the current price. I have no idea if they will sell out, but I like to know what acquisition prices are (PMV) and it becomes another data point in my model. It's been my experience that yawning gaps in present values usually close. I like convergence plays when they aren't well recognized. With shrinking margins and its impacts on EPS likely, maybe Commerce becomes a better value over the next year, but it won't really impact what it is worth in the out-years, if they continue to grow the franchise. If Hill decides to pack it in in 5 years at 65, I doubt he has a hard time finding a buyer. Kanas, at Northfork, surprised everybody with his timing in selling out to Capital One. Northfork was always well run and I doubt Fairbank does too much meddling with the way Kanas continues to run the bank. Any potential acquirer of Commerce will likely do likewise because it's a unique operator. We've also seen foreign interest in US regional banks/thrifts (TD/Banknorth, Citizens/Bank of Scotland, Sovereign/Santander, etc..), so if Commerce is ever inclined to sell out, it would be a nice franchise and foothold for some foreign financial institution. Once again, not saying this is going to happen, just that it is possible to monetize the value in 5 years if Vernon were so inclined. "As far as your operationally poor thrifts that you bought because of their core deposits, I think the steep yield curve of the previous 5 years aided the M&A activity (and their stock prices) in a major way. I think an inverted yield curve sends most of them back to 1.0 times book or less within the next year. They still may get bought, but it will be at much lower prices." That could very well happen, but I'm not as sure as you. I have friends who have anticipated a thrift/bank swoon for years -- all for very good reasons. They've been long out of the sector and are surprised how well it has performed, but their predictions keeps coming that the end in near. Cycles haven't been repealed, so we know we are headed lower at some point. I was investing in these in '90,'94, and '98, so I know these downdrafts can be stomach-churning while they are free-falling. Ironically, the investors I personally know with the best long-term investments records, have been 'buy and hold' collectors in this sector. They read about Nygren's, Whitman's, and Miller's investment records and wonder what the big deal is. They'll pull out long-term charts of Hudson City (HCBK), Harbor (HARB), People's (PBCT), and while recognizing that not every year is a winner, 'buying and holding' has produced off-the-charts total returns. I have a few legacy bank/thrifts that I have no intention of ever selling (cheap and thinly traded), but I admit to sometimes getting caught up in trying to avoid the next big slide. I also admit to buying some real cheap operational clunkers because often 'bad is good' in thrift world. You and I may approach analysis of this sector differently, but there are plenty of ways to make money here. Good Luck, Jim | |
24 | |
Grumpy, there isn't a great deal to add to David's response to you on the facts. But let me comment on some of your points as they relate to my thesis. Catalyst timing: I recommended 'buy on weakness', given none of my catalysts are near term (as I also indicated up front). You agree, it seems, with the long term inevitability of the yield curve steepening. I don't know where this stock goes over the next 6-12 months. If the NIM stabilizes as managment is guiding, does the stock price fall? You are concerned EPS get hammered further near term. Yet net income is essentially flat for the last 6 quarters despite the sharp drop in NIM, and EPS on outright shares at the end of the quarter actually went up a penny sequentially. CBH is responding to their environment. I wouldn't assume their EPS will crater dramatically, and I'm not going to try to project (or call) some future price bottom in the stock. I think I can make money on the investment at the price level at which I posted it with the 2009 time horizon. I might make more if it falls further (and I wouldn't object), but I don't know it will. Risks: Regarding PE valuation, a high PE over trough earnings doesn't mean THAT much. If NIM stabilizes and starts to turn, we may be near some of the highest PE numbers. Deposit growth can support the story as well. Those new stores are coming on line. Asset quality: perhaps the market will appreciate CBH's conservative assets if aggresive lenders show credit problems. Management risk: I'm not completely ignoring that issue, but I think the overall demonstrated managment ability to execute the business plan is much more important. Others selling: That's what makes markets. Met99 | |
23 | |
We disagree on the value of my write up...'nuff said. I think the EV/EBITDA & cash flow examination were important to 1) demonstrate the expansion is funded without resorting to new debt or more equity, and 2) served as a sanity check on the other valuation methods. The core deposit premium valuation (using the low historical rate) also served as a value confirmation. I agree with you that no investment should be made in CBH on the basis of an ultimate takeout. As indicated in my prior post, the implications might be nice, but that is 100% speculation, nothing more......and waaaay out there in the future. Met99 | |
22 | |
Sorry to be AWOL. Post dental visit yesterday I was a little flat, LOL. First, I'll call low cost deposits your 'core deposits' as defined as total deposits less all time deposits. Trying to keep this simple. In the last 2.5 years CBH has had core deposits (defined this way)at about 88.5% of total deposits. If that 'share' continued, then under my model assumptions, the growth rate would be about ~15% in 2009. This is in principally the law of large numbers kicking in. As to a cost comparison, I looked at BBX, since there are at least some similarities in approach now. BBX's deposits costs were higher in 2003 and 2004, but are now lower. NIM was significantly lower through 2005, but is now higher, most likely due to a more aggressive loan portfoli. It makes up 82% of earnings assets vs 36% for CBH at 3/06 (most recent 10Q). CBHs relatively high efficiency ratio demonstrates the labor cost of expansion and longer hours...but these are effective in deposit gathering. Would Hill sell? I've no idea, but I doubt any time soon. He has a well laid out plan through the end of the decade. I wouldn't invest with that as a premise for value realization before 2010. In your second post you mention a 30% deposit premium. Using your definition of core deposits, and an 88.5% share of total deposits, my model suggests a take out value of $107.34. Nice payday, but I won't hold my breath, LOL! Met99 | |
21 | |
I think measuring deposit premium is ONE of several metrics to look at. I look at ROA and it was 0.76% in the last quarter. For the past decade, ROA has been around 1.0% for Commerce. ROE has been steady around 15%-16% but dipped below 13% this year. NIM hit a new low at 3.39%. Collectively, I view the current circumstances as trough earnings. We know the culprit is the inverted yield curve. Seems like that should be the main issue to discuss. From this point, it becomes a question of whether the Fed is more likely to raise rates or lower them. David | |
20 | |
Name me one high performing bank that still managed to retain its high performance after getting acquired. What is the precedent for a holding company to acquire CBH and leave it alone? Most multi-branded bank holding companies are much smaller (ALAB, FULT, SUSQ, GCBI) because this business model tends to breaks down after you get to a certain size. Who will buy CBH and run it in such a Warren Buffett way? Maybe Buffett will buy it. Or maybe Prince Alaweed will sell his $10B stake in Citi and buy CBH instead. I find these scenarios unlikely. I do not want to buy something on the very slight chance that it may get bought. I don't think that is value investing. I think that is hoping and praying. But as I said, I own CBH and it isn't for take-out speculation. They are superb operators. If it gets 20% cheaper, I will seriously consider adding more. As far as this buzz word "core deposits", Vernon Hill isn't stupid and is trying to play the Street as best he can while earnings remain weak. As far as your operationally poor thifts that you bought because of their core deposits, I think the steep yield curve of the previous 5 years aided the M&A activity (and their stock prices) in a major way. I think an inverted yield curve sends most of them back to 1.0 times book or less within the next year. They still may get bought, but it will be at much lower prices. Cheers. | |
19 | |
I don't agree with skyhawk who says, "I think analyzing banks on core deposit premiums is questionable (it only matters for banks that will be sold)....or grumpy who said, " CBH is one of the most expensive banks in the US on a P/E basis at 20.4X '06, and 17.1X '07." While both statements may be true (and related), they can lead you to the wrong conclusion. I invest in a lot of thrifts that have P/E's much higher than Commerce's because the market isn't valuing them on a P/E basis. Many banks/thrifts are operational duds, but have intrinsic value that is somewhat recognized by the market. I think the deposit premium metric is really important when analyzing the less than optimum earners even if they aren't going to be sold for years. Commerce is a unique situation because "IF" they can continue to grow low cost deposits at close to their historical rate (I'm not sure they can), value is accreting at a very interesting pace regardless of current earnings and the flatness of the yield curve. Now having said that, I'd obviously like buying it at $23 instead of $33, but at current levels, it's time to at least take a good look at it. Skyhawk noted, "I think buying CBH on a potential take-out speculation is ill-advised. A take-out would completely destroy their very unique culture. How on earth could you blend their culture (think of the WOW! awards at Radio City Music Hall) with RBS's Citizens or BankNorth's or JPM's or Citi's. CBH employees would leave in droves and the unique culture would be destroyed. Additionally, although Vernon Hill is 60 years old, he loves running the bank and has frequently insulted the big bureacratic banks that he steals market share from. I find the prospect of a sale very dim." Since I own several bank holding companies that own numerous and separate banks under the holdco umbrella, I don't see why that couldn't happen with Commerce in time. Nobody is going to want to buy Commerce to see it destroyed or wither away. They will do everything possible to see the model preserved. I also don't think Commerce should be purchased based on take-out speculation, but I disagree than take-out multiples a few years out should not be employed in at least part of someone's valuation models. Northfork was taken out at a 34% 'core deposit premium' (definition: all deposits minus jumbo and brokered CD's...zzz, Commerce doesn't have a large percentage of these, but an adjustment would probably have to be made for government demand deposits that look to track fed funds closely). In that deal, CEO, Kanas, stayed on. I believe he looked at the handwriting on the wall and decided pairing up with CapOne made more sense than remaining independent. With Commerce, Vernon Hill will be calling the shots because he has to want to sell the bank or no deal is ever going to happen. If he believes more shareholder value can be achieved by remaining independent, I hope he doesn't sell out and continues to build the franchise. If like Kanas, he sees pairing up as a better option, I think he will do it. He may be a slippery character, but he sure doesn't appear stupid. Jim | |
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"Jim, how do you define "core" deposits. I have always believed that CBH is extremely aggressive with their definition. Typically, I have seen other banks exclude both commercial deposits (presumably because they're inevitably very rate sensitive), as well as time deposits (also rate sensitive), which leaves effectively consumer deposits ex-time. CBH pretty much includes all their deposits - in the most recent quarter of $38.1bn in total deposits they classified $36.8bn as "core", although by my estimate only $14.4bn were consumer non-time deposits. The takeout premium clearly depends heavily on what you define as core. Input would be appreciated." zzz, I'm not so sure it really matters how Commerce defines the term "core deposits' in their situation. It's a squishy term that has different meanings to different people. I had asked 'met' privately how he defined it when he mentioned to me Commerce's historical core deposit percentages have been in the mid to high 90 percentile because I had never seen ANY bank with such a high percentage of 'core deposits'...and always thought such a number was impossible to achieve. When I learned how CBH defined the term, I smiled as the term was used in a manner I had never heard before. My definition of operational 'core deposits' are all deposits minus ALL time deposits. My definition of 'core deposits' in a buy out transaction are all deposits minus jumbo and brokered CD's (so in a buy out, non-jumbo CD's are considered 'core deposits'). It always seemed silly to me to have a term mean different things in different contexts, but that's generally the way they are defined. I believe the way I use the term is the way most people use the term, but there is obviously wiggle room in how one defines it, as Commerce clearly proves. The more important point is the value of Commerce's deposits, not how they themselves define portions of it. From a very superficial point of view (I just started looking today), I would classify Commerce's 'core deposits' (as a percentage of total deposits in any transaction) as at least as high as any bank I've seen. Most transactions in bank's this size have been done around 30% core deposit premiums and most banks have higher percentages of jumbo and brokered deposits and are growing deposits much more slowly. So that 30% core deposit premium valuation looks to me to be more of a floor than a ceiling in any buy-out transaction. I'm not really all that familiar with Commerce, yet. I remember when they converted to stock ownership long ago and watched how they began to dominate their markets by stealing market share. But every time I took a look at them they either seemed too expensive or too controversial. Like Buffett, I prefer jumping over 1-foot hurdles and it hurts too much if have to think too much. If the price is right, though, I don't mind rolling up my sleeves and have been known to step into a 'cheap' controversial situation or two. | |
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Grumpy, To further the discussion, I'd like to respond to your comments: < Can you guarantee that I can buy it 20% cheaper?!?!? It may get cheaper, it may not. If it does, average down like Bill Miller. << Does the Mr. Market care if CBH misses numbers? I think the answer is yes.>> But does it change the story? No. <<1) the housing boom led to fast increases in home prices, mortgage lending and deposit growth in CBH's market area along the Bos-Wash Corridor. The housing boom is over = deposit growth rates will slow>> First, can you provide some rationale, and maybe a data point, that links lower home prices to lower deposits? Second, only 43% of Commerce's deposits are consumer, and their fastest growing deposits are commercial and government. <<2) Online banking is here to stay and it is growing rapidly. CBH's direct competitors in the NYC area such as Citigroup, HSBC and Emigrant all have strong online bank offerings +5% on money market accounts. Scores of other banks are doing the same. ING Direct has more than $25B in such deposits now and is growing $1B per month -- the era of 'free' money for banks like CBH may be coming to a close. >> No doubt that online transactions make a difference, but the Internet can't count coins, can't dispense cash like a teller or an ATM, can't cash or deposit birthday checks as quick. But online banking for deposits mainly applies to individuals looking for CD's and money markets. Commerce gets 57% of its deposits from commercial and government, and is not a CD shop. <<3) CBH's fast growth years came during a time of major disruption in its market areas as big competitors were acquired and clients were easy to pick up. Fleet, Corestates, Mellon, UJB, Summit and many other franchises are now gone. There are no deals of similar size now in CBH's marekt area.>> How do you explain that they grew deposits 13% in greater Philly in 2nd Qtr 2006? <<1) CBH is one of the most expensive banks in the US on a P/E basis at 20.4X '06, and 17.1X '07. Can it maintain this premium valuation at the same time its EPS is under pressure?>> How many banks are growing branches 15% per year and deposits in double digits? <<2) Asset quality for most banks is amazingly good. Charge-offs are at all time lows. A slowing economy, higher rates and oil prices and an end of rapid home price increases will likely lead to more loans going bad. What happens when Mr. Market 'remembers' that banking is a cyclical industry?>> Tying lower credit quality to lower home prices has to be one of the biggest fallacies out there. The biggest influence of credit quality is unemployment. <<3) The CEO of CBH, Mr. Vernon Hill, pushes the envelope of acceptable behavior on a regular basis. From personally owning some of the real estate where CBH branches are located, to employing his wife's outside firm to do interior design on branches where the 'look' hasn't changed for a decade, to personally building himself the largest home in New Jersey, to being recorded on the phone with CBH loan officers discussing paying bribes in what became a criminal investigation in Philly, there is real management risk here. >> Not going to defend Vernon. <<4) TCW and Putnam own more than 20% of the stock and they've started selling.>> And Capital Research Management, Davis Select and Fidelity were buyers. David | |
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Jim, Quick question for you. How do you define "core" deposits. I have always believed that CBH is extremely aggressive with their definition. Typically, I have seen other banks exclude both commercial deposits (presumably because they're inevitably very rate sensitive), as well as time deposits (also rate sensitive), which leaves effectively consumer deposits ex-time. CBH pretty much includes all their deposits - in the most recent quarter of $38.1bn in total deposits they classified $36.8bn as "core", although by my estimate only $14.4bn were consumer non-time deposits. The takeout premium clearly depends heavily on what you define as core. Input would be appreciated. | |
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I have no problem with write-ups that are covered by the sell-side. In fact, I think too many VIC write-ups are too small to be bought in anything other than a PA and too obscure and don't have enough info out there on them to help VIC members challenge the VIC author. It's just that CBH gets way more than average analysis and there are already many who are arguing your viewpoints. Secondly, I don't think analyzing CBH on EV/EBITDA adds any real value. The stock will go up if they continue to grow deposits and the NIM expands. Nothing else matters. I also think analyzing banks on core deposit premiums is questionable (it only matters for banks that will be sold), although this too has already been sufficiently examined by the sell-side. I have already written WTNY up--twice actually. My earlier comment was confusing--I meant that I would be posting an additional comment in the Q&A section of the write-up I posted on July 7. It was regarding the Q2 results of HBHC--another bank affected by Katrina. As far as the fact that 8 analysts cover WTNY, I am predicting immediate catalysts (Q2 results next week and for the next several quarters) that are much different (and better) from what the sell-side is predicting. As far as BBX goes, CBH could easily pay a 10-15% premium and make it hugely accretive. BBX's stock price has gotten crushed because it upped its spending/build-out to combat CBH's entrance into Florida. By the way, to answer the other post, I think buying CBH on a potential take-out speculation is ill-advised. A take-out would completely destroy their very unique culture. How on earth could you blend their culture (think of the WOW! awards at Radio City Music Hall) with RBS's Citizens or BankNorth's or JPM's or Citi's. CBH employees would leave in droves and the unique culture would be destroyed. Additionally, although Vernon Hill is 60 years old, he loves running the bank and has frequently insulted the big bureacratic banks that he steals market share from. I find the prospect of a sale very dim. | |
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I'm afraid I have to agree with Jayhawk that this write-up adds very little to the CBH story, misses many of the risks, and your reasoning makes the stock more likely to be a short than a long at its current price. Let's start with your catalyst text: "Neither a steepening yield curve, higher NIMs, nor sustained deposit growth are short term catalysts. But all will occur with time, with positive results for the stock." The problem is that your catalysts are moving in the wrong direction right now and thus the stock will likely go down before it goes up. The stock may be higher in 2009 and a long-term investment horizon is the Buffet way, but why not wait if the stock is going to be 20% cheaper in 6 months? Yes, the yield curve will get steeper some day and that will be good for CBH. Howver, a flat yield curve (or the current -20bp inverted one) is very painful to CBH's EPS -- the curve seems set to get even more inverted over the next few months as the Fed raises rates by at least 25bps more and slower economic growth potentially leads to a rally in the 10 year bond. Are CBH's EPS estimates at risk? Does the Mr. Market care if CBH misses numbers? I think the answer is yes. And yes, as you write, the NIM could go up in the future for CBH and that will be good for the stock - but the NIM is under pressure right now. Between a flatter yield curve, tough competition and an expected increase in problem assets from extremely low levels, the NIM may well come in lower than expected. Again, this hurts EPS at CBH and Mr. Market hates to be dissapointed. Finally, you mention sustained deposit growth for CBH. The problem is that deposit gorwth is actually set to slow at CBH for the immediate future. Reasons being: 1) the housing boom led to fast increases in home prices, mortgage lending and deposit growth in CBH's market area along the Bos-Wash Corridor. The housing boom is over = deposit growth rates will slow 2) Online banking is here to stay and it is growing rapidly. CBH's direct competitors in the NYC area such as Citigroup, HSBC and Emigrant all have strong online bank offerings +5% on money market accounts. Scores of other banks are doing the same. ING Direct has more than $25B in such deposits now and is growing $1B per month -- the era of 'free' money for banks like CBH may be coming to a close. 3) CBH's fast growth years came during a time of major disruption in its market areas as big competitors were acquired and clients were easy to pick up. Fleet, Corestates, Mellon, UJB, Summit and many other franchises are now gone. There are no deals of similar size now in CBH's marekt area. So a flatter curve with a lower NIM, and slower deposit growth is the most likely outlook for the next 6-12 months for CBH. Time to buy? Or time to Short? You also fail to delve into some of the major risks in the CBH story. Allow me to at least mention them: 1) CBH is one of the most expensive banks in the US on a P/E basis at 20.4X '06, and 17.1X '07. Can it maintain this premium valuation at the same time its EPS is under pressure? 2) Asset quality for most banks is amazingly good. Charge-offs are at all time lows. A slowing economy, higher rates and oil prices and an end of rapid home price increases will likely lead to more loans going bad. What happens when Mr. Market 'remembers' that banking is a cyclical industry? 3) The CEO of CBH, Mr. Vernon Hill, pushes the envelope of acceptable behavior on a regular basis. From personally owning some of the real estate where CBH branches are located, to employing his wife's outside firm to do interior design on branches where the 'look' hasn't changed for a decade, to personally building himself the largest home in New Jersey, to being recorded on the phone with CBH loan officers discussing paying bribes in what became a criminal investigation in Philly, there is real management risk here. 4) TCW and Putnam own more than 20% of the stock and they've started selling. Could CBH end up on 15X the low on the Street estimate of $1.75 by next June? That would put the stock on $26, or down more than 20%. Maybe that's the price at which you recommend buying CBH. Regards, Grumpy - especially during earnings season | |
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Skyhawk, First an actual objective point of discussion. How much premium would CBH have to pay to acquire BBX? How would that create value for CBH shareholders? I have to ask, are you suggesting that reaching similar conclusions to other reports essentially nullifies the independent work done? If you demonstrated I plagiarized other work in the public domain you would absolutely be entitled to effectively ask 'who admitted this guy to VIC' with your rating. However, I built my database, generated my own model, developed my own assumptions, and gosh, got comfortable with a bullish outlook. By the way, how many bank analysts look at EBITDA and cash flow routinely? Do you? I thought that was critical to understanding how the expansion was funded. Is there a great deal written about deposit premium valuation with respect to CBH? I actually thought both were a bit of a different take particularly the former...sorry it confirmed my more traditional EPS/PE valuation. I look forward to your WTNY writeup. However, I note on their website there are 8 analysts following the company. In the spirit of your comments, I do hope you explicitly highlight the new information and approaches in what you report, and that these are no where covered by other analysts. But even if you don't, I'll assume your work is still original and won't drop a '1' on it. Met99 |
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