Description
Dutchfork is the holding company for four-branch Newberry Savings Bank of South Carolina. It recently IPO'd at $10 a share which represented a P/B of 53.76% and a P/E of 8.93 (as of 12-31-99).
It's important to note that the thrift appraisal process focuses on one or two particular dates. The regulators take a snapshot of the bank's balance sheet and earnings on those dates and base the IPO valuation on those numbers. The primary date used was 12-31-99, with minor emphasis on 3-31-00. Sometimes there are distortions to both normalized equity and earnings on those dates that bear further scrutiny and investigation.
The appraiser looks at both earnings and equity in order to price the issue fairly. They looked at earnings in the quarter just prior to 12-31-99 and used the $298,000 earned, as part of the formula for the valuation process. What's interesting about that number is that the bank had donated $104,000 to charity in the quarter...which understates their true earnings. In 1998, the bank had also given $248,000 to charity while earning $1.2M for the year. This mutual was an EXTREMELY good corporate citizens because they didn't care about ROE or return to shareholders because they didn't have any. Their mission was to take care of their stakeholders which were primarily the depositors in their community.
The equity snapshot once again focused on 12-31-99 and, to a lesser extent, 3-31-00. The bank had done something unusual in early '99 by shifting and growing its balance sheet much more than normal. Assets grew by $40M, with MBS growing by $25M and investments by $15M. There was a much greater emphasis on 'long-term fixed securities' because the returns were much better. From an operating standpoint, this strategy made total sense but it does throw a lot of interest rate risk onto the balance sheet. On 12-31-99, Newberry owned $33.3M of long-term fixed US Agencies, Zeros, and deep discounted fixed rate CMO's. The average interest rate from these fixed rate investments was both relatively high and very safe. Unfortunately, early 1999 was not the time to buy a lot of long-term fixed product...interest rates rose all year. The bank's portfolio couldn't have looked any worse in the last two years than the 2 dates chosen and the bank's equity was written down from $20.8M to $16.1M after taxes. The OTS grew very nervous because rates looked like they would continue their upward momentum putting Newberry's equity in jeopardy and strongly encouraged a conversion. So the appraisal was based on lower than normalized earnings and equity but still came in at the very attractive price of 53.76 P/B and 8.93 P/E.
The bank's first priority as a public company is to do whatever it takes to get the OTS to allow buybacks and dividends. This shouldn't be very difficult because the OTS allowed this bank to be capitalized with a relatively large amount capital. The leveraging of this capital into short-term and variable product will go a long ways in minimizing the importance of the $33.3M in long-term fixed product. The bank is also reserved at a very conservative 365% to non-performing loans.
The bank has intimated that the 3rd quarter will look much better in several areas. The interest sensitivity is not nearly as bad as it looks (they have purchased swaps) and in recent weeks, lower rates 'are' having a real positive affect on the portfolio.
Interestingly, the bank is not sure if they fall under the new 3-year moratorium on buying a newly-converted thrift or if they fall under the 1-year rule. They converted just as the rules were changing and are trying to pin the OTS down on a ruling.
Variable loans already make up a good portion of their balance sheet but pay lower rates. The long-term fixed assets cost the bank about 19 basis points to maintain while a home grown loan on the books cost 179 basis points to service.
A large percentage of the insiders' net worth is in the bank. The three officers at the bank ALL bought the max allowed which was $175K and the 3 outside directors also bought heavily with one also maxing out.
Catalyst
The very simple act of buying back shares at 60%-100%% of tangible book value (when the OTS allows them in one year), will greatly enhance the value of this little bank...as there are only 1.56M shares outstanding. The OTS has recently changed the buyback rules for newly-converted thrifts...now allowing almost unlimited buybacks after one year. The bank has stated that they will have no better use for this excess capital than buying back their own shares below their current book value of $20 a share.