|Shares Out. (in M):||5||P/E||8.0x||7.3x|
|Market Cap (in $M):||38||P/FCF||n/a||n/a|
|Net Debt (in $M):||0||EBIT||0||0|
BCB Bancorp is a cheap, well-run bank that represents a very good value. It trades at 74% of tangible book, has a tangible equity to tangible asset ratio of 8.3%, yields 6% on the dividend, has non-performing loans to gross loans of just 1.2% and reserves equal to 1.43% of gross loans. It is trading near its all-time low and below where it traded this past March. The market is reacting negatively to a proposed merger with rival Pamrapo Savings Bank (symbol = PBCI).
Assets: As of 6/30/09, there are 4,659,475 shares outstanding, $50.8 million of equity and no goodwill or intangibles. There were $405.3 million of loans, net of $5.9 million in loan loss reserves. Impaired loans totaled $3.7 million. There are $115.4 million in securities held-to-maturity of which $77.2 million consist of US government agencies and $38.2 million of MBS.
Liabilities: Deposits consist of 58% CD's, half of which are jumbo's (>$100K), 24% are savings, 5% money markets and the rest in checking. Long-term debt consists of $110 million of FHLB repo agreements and $4.1 million of trust preferred sub debt. They also have a LOC with the FHLB for $113 million that they tapped for $2 million earlier this year and have since repaid.
Earnings: BCBP earned $0.16/sh in the 2nd Quarter 2009, which included an after tax hit of about $0.05/sh for the one-time FDIC assessment. Also, the bank increased its cash position indirectly by not entirely replacing the GSE securities that were called and paid down. Their securities portfolio decreased $25.9 million over the first half of 2009. I estimate the lost interest income from the reduction had an after-tax impact of $0.03-$0.04/sh to earnings. Given that the bank in the past has earned ROA's around 0.90% and ROE's around 10%, I think they can earn $1.00/sh and easily support the current quarterly dividend of $0.12/sh. I will discuss the earnings potential of PBCI later.
History: BCB Bancorp, or Bayonne Community Bank as it was known initially, started business in November 2000 and has grown to a bank with over $600 million in assets. It has three branches in Bayonne, NJ and one in nearby Hoboken, NJ. The eleven members of the Board of Directors are a tight-knit group. All the board members have been together since the bank was founded in 2000 and they all live or have lived in Bayonne, NJ. In reading the director backgrounds, it is the only time where I have seen members list the high school and grade school from which they graduated. Four members attended Saint Peters College, a Jesuit College in Jersey City, which borders Bayonne on the north. Five members graduated from Marist High School, a Catholic High School in Bayonne. Three members attended the same Catholic grade school in Bayonne, while four others attended other local Catholic grade schools. To understand why this is important, BCBP was started by locals after a slew of bank mergers occurred in the area in the late 1990's. They really want to emphasis that it is a local, community bank. An interesting aside is that the board of directors originally was larger. In late 2003/early 2004, a minority of directors felt that BCBP should sell the bank and led a proxy fight. The effort failed and most of the directors pushing for the sale resigned. Ironically, the intended buyer would have been PBCI.
Merger: This is an all-stock deal where each PBCI share will receive one share of BCBP, with BCBP ("the buyer") being the surviving corporation. PBCI currently has 4,935,542 shares outstanding. The merger is complimentary as BCBP is a commercial bank and PBCI is a thrift with 76% of its loans being residential mortgages. The combined bank would have $1.2 billion in assets, making it the 10th largest bank that is chartered in NJ. The merger is expected to close by year end.
Pamrapo is nearly identical in size to BCBP, with $576 million in assets, has $50 million in equity and trades at 69% of tangible book. Non-performing loans (NPL) are now $19.7 million or 3.43% of total assets; allowance for loan losses was $6.0 million as of 6/30/09. $9.9 million of NPL's are residential mortgages, which is worrisome because the bank's stated policy appears conservative and all are within their lending area. PBCI originates residential mortgages at 80% of LTV and 90% LTV using private mortgage insurance, for terms of 15 or 25 years. On commercial real estate loans, the LTV is 75%. They have $200 million of MBS, split $184 million in agencies and $16 million in CMO's. The deposit base is a mix. Just under half are in low-interest savings and checking account. The other half is in CD's of which 80% of the CD's are short-term, meaning 6 months or less, and half of the CD's are jumbo's. PBCI also has $62 million in FHLB advances.
However, PBCI has some issues. First, the long-time CEO, Bill Campbell, who still owns 12% of the bank, resigned in February, and the CFO is serving as interim CEO. My interpretation is that he was forced out. The 87 year-old vice chairman recently died. The dividend was suspended. Three of the five remaining board members are in their 70's. PBCI made a loan to a local hospital, Bayonne Medical Center (BMC), which filed for bankruptcy. Unsecured creditors are disputing $1.0 million in principal repayment that the bank received prior to filing b/k, as well as BMC agreeing to change the loan from a line of credit to a mortgage. The chairman of BMC, Herman Brockman, is a director of PBCI and Bill Campbell was a director of BMC. The big issue, however, is an investigation involving their insurance subsidiary, which revealed problems with commissions being paid directly to the manager of the insurance subsidiary, instead of the subsidiary. A federal grand jury has issued subpoenas to senior bank executives and directors involving anti-money laundering and Bank Secrecy Act violations. The bank has already recovered $270K of commissions and has hired forensic accountants who reviewed the commissions back to 2003. They have uncovered an additional $223K of commissions due to the bank. The Office of thrift Supervision (OTS) issued a Cease & Desist (C&D) order against the bank in September 2008. PBCI's 2nd quarter earnings included the establishment of a $3.0 million reserve for litigation.
My take: Pamrapo has a strong motive to merge with BCBP. It is evident that PBCI is not capable of functioning on its own. Besides the recent loss of its CEO and vice chairman, the investigation highlights a lack of internal controls. The two options are to build those controls themselves, or merge with a bank that already has them, which regulators tend to like. The former CEO of PBCI who resigned in February is Bill Campbell. Donald and Eugene Campbell own a law firm on the same block as where the PBCI HQ is and they set up the trust for Bill's PBCI stock. Donald Campbell is general counsel for PBCI. An old SNL power-point showed a Brian Campbell as manager of the financial services unit, which is where the problems occurred. There is a Robert Campbell in charge of marketing. My interpretation is that Brian Campbell is Bill's son; he took some insurance commission kick-backs and used the bank to hide the money. It's the latter part that is the concern. It appears that Bill also knew about the arrangement.
FAS 141(R): Revised accounting standards became effective for mergers occurring after 12/15/2008. One key concept is that all assets and liabilities of an acquired entity are recorded at fair value. That means property and equipment get written up to fair value. I think the fair value of the PBCI owned properties will increase by $2.5 million, as the last property that they bought was in 1985. For banks, all loans and securities in assets, including those held to maturity, are recorded at fair value. This means that PBCI's loans will be recorded at net of loan loss reserves. The held-to-maturity securities for PBCI would take a small haircut for fair value but otherwise, the assets generally will be bumped up. A second issue is that negative goodwill is no longer allowed, and any excess fair value of the purchase exceeding the purchase price will be recorded as an ordinary gain in the income statement. As of yet, no one knows if this is taxable or not, which could lower the combined equity. My guess is that it will be taxed on a GAAP basis but not IRS (since it is essentially an unrealized gain). This will create a deferred tax liability.
I calculated a pro forma balance sheet for the combined banks and arrived at a tangible book value of $10.12/sh. Since the spreadsheet that I used came from a friend, I won't post it but I can describe the methodology. Start with the 10Q from 6/30/09 for each bank. Adjust PBCI's figures to fair value listed in the Q (Note that both banks use the same CPA firm, which should reduce surprises in valuations). I made the following adjustments to PBCI:
- Reduced loans by $7 million for additional reserves
- Added $5.0 million in core deposit intangibles
- Added $2.5 million for fair value of PBCI property
- Added $4 million to litigation reserve
- Assumed deal value of $39.8 million (# of PBCI shares X BCBP price)
Take PBCI's adjusted assets and subtract the adjusted liabilities and the $39.8 mm deal value. The result, about $20.3 million, is what used to be called negative goodwill and will be recorded as a gain. I subtracted $3.0 million for deal expenses (and reduced new BCBP's cash by $3.0 million) to arrive at a $17.3 million gain. Assuming a 35% tax rate, I split the figure so $6.0 million went into new BCBP's deferred tax liability and $11.3 million went into new BCBP's AOCI. The result is $101.8 million in equity for new BCBP.
From 1992 to 2008, PBCI's median ROA was 1.06% and the median ROE was 10.45%. Assuming the combined entity earns an ROA between 0.9% and 1.0%, new BCBP would earn between $1.13 and $1.26 per share. That's a P/E of between 7.1 and 6.4, respectively. It trades at an estimated 80% of merged TBV. I do expect some synergy with the merger. They do not need two headquarters and several branches could be consolidated.
Geography: Bayonne is located on the tip of the Bergen Neck peninsula in New Jersey. To the East is New York Bay and to the West is Newark Bay. To the South is Kill van Kull and Staten Island, while to the North lies Jersey City, its only land border. The estimated population is 58,000, which tends to be blue collar, middle class and Irish & Polish Catholic. Notable Bayonne residents have included the baseball player Joe Borowski (Marist High '89), actor Frank Langella and everyone's favorite chairman of the House Financial Services Committee, Barney Frank.
- BCBP has more commercial loans, of recent vintage, which may turn sour.
- PBCI's legal problems get worse
- Concentration of risk within one geographic area
- merger goes through