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:
-
Non-interest deposits represent ~50% of total deposits and borrowings.
-
Commercial Real Estate and Commercial & Industrial represent nearly all of loan portfolio
-
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
-
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