Spinoff & Reorg Profiles
July 2005 Excerpt
Copyright 2005 William E. Mitchell
American Bank Holdings, Inc.
American Bank Holdings (OTC: ABKD.OB) completed a rights offering on June 27, 2005, under circumstances implying insider optimism.
Shareholders as of April 28, 2005 received, for each share owned, 0.5119 right to purchase an additional share for $9.00, rounded to the nearest whole share. Any rights not exercised by June 20 were distributed at management’s discretion, free, to friends, family and themselves, for exercise at $9.00, expiring June 27.
The rights offering has completed.
Everything about this deal seems to imply a management with dollar signs in its eyes, rubbing its hands with glee. This is good news for all shareholders, as long as they are not diluted out unknowingly. Here are the signals.
No press release was issued about the offering.
Rights were not transferable. One of the company’s existing shareholders reported to us that he received unusually short notice of the impending offering.
The oversubscription privilege went entirely to management and its friends and family. Management announced its intent to increase its ownership from 20% to about 33%, if possible, via the oversubscription.
In addition to the 1 million shares offered to shareholders, management offered an additional 150,000, only to insiders, at the same terms.
Perhaps most interesting, the offering was not reported to the SEC until after the record date, making it impossible for any non-shareholder to buy the stock and receive the rights distribution in response to reading SEC reports.
We infer from these clues that management may have been anxious to limit access to the offering by professional investors, so that many existing, less educated investors would fail to exercise, and thus maximize the insider opportunity.
Author does not own American Bank Holdings.
American Bank Holdings is a micro-cap community bank operating in the Washington, DC area since 1983. Since 1999, it has been engaged primarily in commercial business loans and mortgages. Revenue has grown relatively smoothly at a compound annual rate of nearly 18% over the past 5 fiscal years.
Compared to other small banks, and rapid growth aside, this isn’t an outstanding business (it is, however, outstandingly cheap – see below). With a 2004 efficiency ratio of 72%, it is a middling performer compared to other banks its size, and far less impressive than the best-known models of community banking efficiency, such as Farmers & Merchants (36%) or Bank of Granite (37%).
The firm does appear both to lend and reserve conservatively. It has approximately doubled its loan loss reserves, from 3.1% to 7.6%, in the past five years, versus actual nonperforming loans averaging 1% over the past 5 years, declining to under 0.5% in 2004.
One could argue that the structure of the rights offering was sufficiently self-interested by management to make us wary of their intentions toward outside passive minority shareholders. This is a gray area, but shareholders do appear to have been well treated overall over the years.
American Bank Holdings has geographically concentrated mortgage risk near a city that probably ranks in the top 3 terrorist targets worldwide. Terrorism risk is generally uninsured and uninsurable. However, the company operates only one branch in the city of Washington, with the rest in Maryland suburbs, plus one newer operation in North Carolina. Within a diversified portfolio, this appears a tolerable risk.
The major owners of American Bank Holdings include management, a couple of investment partnerships,
and a handful of large national U.S. banks, including Bank of America.
In summary, this is a solidly growing, reasonably conservative, but otherwise undistinguished bank, with one exception: it is unusually cheap.
American Bank Holdings earned $1.25 per share in 2004, and is currently trading at $9.30. Since the rights offering has increased the outstanding shares by 50%, we should adjust the 2004 EPS to 83 cents, putting the firm at 11 times earnings.
This is inexpensive in both absolute and relative terms. An earnings yield of 9% on a growing business speaks for itself, while the PE ratio is approximately half that for similarly sized banks with similar efficiency ratios (source for the average: Wedbush Morgan Securities community banking report released June 28, 2005). This suggests a relative bargain providing some protection against a slowdown in the banking sector.
Another valuation approach sometimes used for small regional banks is to estimate the value to an acquirer, calculated simply as the present value of net interest after provision for loan losses (to see the logic, assume that the acquirer simply fires everyone and keeps the clients). Using a conservative discount rate of 20%, we get a share value of $13.24. This is before taking into account any growth.
Buy and hold.
back issues upon request to current subscribers.