Share Plus Bancorp (SPBC) is a well-positioned bank that is trading at a large discount to tangible book value. It has tons of capital, good loan growth prospects, a manageable number of problem loans, and a strong deposit base. It's former sponsor companies are a mix of Pepsi-related companies including YUM! Brands subsidiaries such as KFC, Taco Bell, and Pizza Hut, which has created a strong customer base.
The bank converted to a public thrift because it needed capital in late 2010. After taking its lumps in 2008-2010, the bank had a tangible common equity ratio of 7.4% pre-conversion. As a mutual thrift, it wasn’t positioned to earn back its capital cushion since mutuals are run with a focus on offering cheap banking services to its depositors. As a public company with an incentivized management team (direct ownership and options), the company is well positioned to exploit its unique customer franchise to generate profits, while the conversion has provided the bank with a strong capital cushion.
SPBC trades at 65% of TBV, while a healthy bank with a nice deposit mix should trade for at least 100% of TBV, with the additional upside of a premium to TBV in the case of a buyout. If management proves especially adept at lowering their efficiency ratio and writing conservative loans, earnings power should receive a boost that will attract a premium to TBV by the market. Even if the bank doesn’t really grow earnings from its current level, it has excess capital from the conversion that it could return $1m/year to shareholders through dividends and buybacks, a 5% yield at current prices.
The bank is going to have a depressed return on equity over the next several quarters as it just increased its capital by 50% in the conversion. In the quarters up to the conversion, the bank was earning a ROE above 5%, but it has since dropped to 3%. If the bank can revert back to earning a 5% ROE, it would represent a 7.5% return at current prices. While this is not a mouthwatering return, the price has a number of catalysts to benefit from. A dividend would draw attention. Continued growth in TBV would exert upwards pressure on the share price even if still trades at 65% of TBV. Banks are pretty much hated right now and any shift from shunned to merely tolerated would boost the psychology behind banks. Danvers Bancorp, which converted in Jan. 2008 received a bid in January 2011 for the company, which is evidence that these conversions are watched by acquisitive banks looking for access to low cost deposits in areas with loan growth. SPBC is positioned in a similar fashion, so there is potential for them to be acquired if they do not achieve reasonable returns.
SPBC started out in 1958 as the credit union for Frito employees. Over the years due to Frito-Lay merging then being bought out by Pepsi, who also owned YUM! Brands at one point, SPBC now has branches in the corporate offices of Frito-Lay, YUM!, Taco Bell, KFC, and Pizza Hut. On top of these 6 locations, it has 2 branches, one in the Oak Lawn neighborhood of Dallas and Plano. This footprint has lead to a good deposit mix that has franchise value. Only 38% of the bank’s funding is in CDs of FHLB advances. The rest is in sticky traditional deposits. Interestingly, the bank only owns 1 of its 8 locations, but has a leasing expense of $1.1m in 2010. The corporations that it has locations in likely view it as a benefit to offer their employees and not as a source of rental income. There are switching costs to kicking SPBC out though as all the employees would be inconvenienced with changing their bank.
The bank has been proactive in restructuring debt and so the reported NPL ratios are higher than reality. For instance, on a $200m loan book, they had restructured 3 commercial real estate loans totaling $5.1m in the most recent quarter. The loans had extended maturities and lower interest rates in exchange for the borrowers paying back 5% of the principal. In the accounting, this is considered a troubled debt restructuring. All the loans are current. This caused the reported NPL to be over 4%, which reflects poorly on the bank when subjected to a cursory look.
Another curious feature is that the bank has branches in Louisville, KY (2), Irvine, CA (1), and then 5 in the Dallas-Fort Worth metro area. Louisville and Irvine are much less attractive demographically and economically, but the bank only lends to employees of the corporations in which it has locations (Taco Bell and KFC). The area in Texas where the bulk of its lending is focused has a much healthier economy and its freestanding branches are located in affluent areas. Overlaying macroeconomic data on the Louisville or Irvine regions on the banks creditworthiness is a possible reason why the bank remains undervalued.
SPBC looks like a market neutral stock that has a basic undervaluation due to its size and the traditional technical reasons that make mutual thrift conversions cheap. While the returns aren't thrilling, there is downside protection in the valuation as well as the pretty efficient market for acquiring banks. The bank is not close to distressed territory to warrant the current valuation, which has catalysts to move higher in the form of the ending on restrictions on buybacks and being acquired in 1 year and 3 years respectively post conversion.
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