CAPITOL FEDERAL FINANCIAL CFFN
December 09, 2010 - 6:34pm EST by
Den1200
2010 2011
Price: 24.61 EPS $0.00 $0.00
Shares Out. (in M): 197 P/E 0.0x 0.0x
Market Cap (in $M): 197 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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Description

CFFN is a 2nd step conversion that will likely price somewhere next week. The book closes on Monday.

 

CFFN is a overly conservative run thrift, soon to be bank, based in Kansas and 2 counties in Missouri. It has 46 branches with an average deposit base per branch of $113.9 million according to the offering doc. (I get to a range of $101 to $106 million)

Post 2nd step its tangible equity to assets will be more than 20%.

It's NPA over assets pre 2nd step is 0.47% which will decline to 0.42% or less post 2nd step. The pre 2nd step NPL to total loans is 0.62%. Both numbers compare very favorably to the industry.

 

The offering is the following:

At the minimum CFFN wants to issue 118.15 million shares at $10 which results in a TBV per share of $11.92 or a PtoTBV of 0.84.

At the midpoint CFFN offers 139 million shares at $10 which results in a TBV per share of $11.09 or a PtoTBV of 0.90.

At the maximum CFFN will offer 159.85 million shares at $10 which results in a TBV per share of $10.47 or a PtoTBV of 0.96.

 

But there is also potentially a better way of getting the shares. 29.5% of the post 2nd step shares are already outstanding and carry the following exchange rates.

If the minimum amount of shares are issued then the exchange ratio is 2.2637 shares per pre 2nd step share.

If the midpoint amount of shares are issued then the exchange ratio is 2.6632 shares per pre 2nd step share.

If the maximum amount of shares are issued then the exchange ratio is 3.0627 shares per pre 2nd step share.

 

So lets say you buy the pre 2nd step CFFN shares at the current price of $24.30, at the minimum issuance you pay $10.73 per share or 0.90 times TBV. But if the midpoint number of shares are issued, you pay only $9.12 per share or 0.82 TBV and if the maximum number of shares are issued, you pay only $7.93 per share or 0.76 times TBV.

 

Here is an overview of what you would pay based at different prices of the pre 2nd step CFFN stock

 

Minimum (Offering = 0.84 PtoTBV)

Exchange Ratio

Price Paid Post 2nd

PtoTBV

 $                                23.5

2.2637

 $      10.38

                     0.87

 $                                24.0

2.2637

 $      10.60

                     0.89

 $                                24.5

2.2637

 $      10.82

                     0.91

 $                                25.0

2.2637

 $      11.04

                     0.93

 

 

 

 

Midpoint (Offering = 0.90 PtoTBV)

Exchange Ratio

Price Paid Post 2nd

PtoTBV

 $                                23.5

2.6632

 $        8.82

                     0.80

 $                                24.0

2.6632

 $        9.01

                     0.81

 $                                24.5

2.6632

 $        9.20

                     0.83

 $                                25.0

2.6632

 $        9.39

                     0.85

 

 

 

 

Maximum (Offering = 0.96 PtoTBV)

Exchange Ratio

Price Paid Post 2nd

PtoTBV

 $                                23.5

3.0627

 $        7.67

                     0.73

 $                                24.0

3.0627

 $        7.84

                     0.75

 $                                24.5

3.0627

 $        8.00

                     0.76

 $                                25.0

3.0627

 $        8.16

                     0.78

 

So there are two decisions to be made. A. Do you believe that at the $10 issuance price that CFFN shares are cheap? And B. What do you believe the number of shares issued will be?

 

Lets start with CFFN and why I believe it to be an attractive risk reward.

 

CFFN's issuance price even if the maximum amount of shares are issued will have a PtoTBV of 0.96 (at the low end of the offering it will be 0.84), while comparable banks trade at significantly higher multiples if adjusted for size, tangible equity to total assets and non performing assets to total assets.

 

Here is a list of comps

 

Comps CFFN

 

Total Assets

TE/Tot Assets

NPA/Tot Assets

PtoTBV

BRKL

Brookline Bancorp, Inc.

 $      2,660

16.9%

0.50%

                      1.39

DNBK

Danvers Bancorp Inc.

 $      2,631

9.9%

0.73%

                      1.21

FFBC

First Financial Bancorp.

 $      6,155

10.3%

2.25%

                      1.67

FFIN

First Financial Bankshares Inc.

 $      3,447

11.3%

0.65%

                      2.66

HCBK

Hudson City Bancorp, Inc.

 $    60,617

9.0%

1.98%

                      1.11

IBKC

IberiaBank Corp.

 $    10,561

9.8%

0.69%

                      1.43

NWBI

Northwest Bancshares, Inc.

 $      8,143

14.0%

2.10%

                      1.08

NAL

New Alliance Bancshares Inc.

 $      8,826

10.4%

0.81%

                      1.52

THFF

First Financial Corp.

 $      2,562

12.4%

1.33%

                      1.38

SFNC

Simmons First National Corporation

 $      3,018

10.7%

1.61%

                      1.55

UVSP

Univest Corp. of Pennsylvania

 $      2,114

10.2%

1.68%

                      1.48

 

 

 

11.34%

1.25%

 

 

 

 

 

 

 

CFFN

Minimum

 $      9,669

20.6%

0.42%

                      0.84

CFFN

Midpoint

 $      9,877

22.1%

0.41%

                      0.90

CFFN

Maximum

 $    10,086

23.5%

0.40%

                      0.96

 

As one can see, CFFN will have by far the highest level of TE to Total Assets, the lowest level of NPA to Total Assets and with about $10 billion in assets it is has enough size for larger institutions to be interested. Size does matter I believe when it comes to these second step conversions and you tend to see that as they often price at higher multiples upon their conversion than institutions with small asset bases.

As you can see almost all are currently trading at a multiple of more than 1.2 times TBV, most trade in a range of 1.3 to 1.5, all the while having much lower TE/Total Assets and higher NPA/Total Assets. The most relevant outliers are HCBK and NWBI. HCBK trades at 1.11 times TBV, but it has close to 5 times the NPA/Tot Assets than CFFN will have post conversion and it is also exposed in a large way to jumbo loans, a continuing worry for many. NWBI sells for 1.08 times TBV and has 2.1% NPAs, also more than 5 times that of CFFN post conversion.

 

One important piece of information regarding CFFN's current offering valuation is related to its failed effort to do the conversion over the summer. This was related to the widespread sell off of the banks from April 2010 through the end of August 2010. The closing date was supposed to be August 24, 2010. In the 70 days prior to August 2010, 6 2nd step conversions came to market and 5 of them were selling below their offering price. Given the uncertainty surrounding the whole banking sector at that time interest was lacking.

Anyway all that was a real negative for CFFN as it required a new appraisal. And this time the appraisal came in 18.2% lower than the first one. The appraisal was mostly based upon comps, recently completed conversions and the failed CFFN deal. So in essence the deal got scuffled because of the decline in bank stocks and then that decline in bank stocks resulted in a lower appraisal, right before the valuations of the same comps went up again. Talk about bad timing. Actually, it was quite obvious that the appraisal had to come in lower as management really needs this to get done as the OTS is about to go away and the OTS itself does not like prices to break the offering price.

The result of this all was that instead of the minimum - maximum offering range of 144.5 million to 195.5 million shares offered over the summer, the number of shares offered went to a range of 118.15 million to 159.850 million shares offered or 18.3% cheaper than over the summer, all for the same 70.5% ownership percentage.

 

I don't think it makes much sense to value CFFN right now on an ROE basis as its TE/TA is about to increase markedly. The company has said that its options for the excess capital are to acquire other banks with a profile of strong core deposits and/or open more branches or to buy back stock/pay dividends. Since they have to wait at least one year to buy back stock I assume in the short-term an acquisition and/or building more branches is more likely. Management tends to be very conservative, so the hope is that they will not overpay. A positive though is that the employee ownership plan and management will have significant ownership and upside, which hopefully prevents them from allocating capital in a subpar manner.

 

Another potential upside would be selling the company in 3 years. Many of these deals go for 2 times book or more, especially those with strong core deposits, good efficiency ratios, low NPAs and a strong balance sheet/excess tangible equity.

 

Regarding the dividend, CFFN will pay out 100% of total earnings for the first two years, expected to be about 30 cents and will also pay a 60 cents welcome dividend for a year one dividend yield of 9%.

 

When it comes to deposits, CFFN has the second largest market share of 7.6% in Kansas, after the 7.78% for BofA.

 

Here is a listing of deposit metrics for the state of Kansas.

 

Kansas Banking Metrics (as of June 30)

# branches

Deposits ($000)

Deposits Per Branch ($000)

Market share

BofA

59

 $     4,672,548

 $                 79,196

7.78%

CFFN

43

 $     4,373,844*

 $               101,717

7.60%

Intrust Bank

42

 $     2,810,214

 $                 66,910

4.68%

Commerce Bank National

59

 $     2,710,439

 $                 45,940

4.52%

US Bank National

30

 $     1,398,373

 $                 46,612

2.33%

Emprise Bank

41

 $     1,195,571

 $                 29,160

1.99%

Fidelity Bank

20

 $     1,164,244

 $                 58,212

1.94%

Wells Fargo

8

 $     1,164,182

 $               145,523

1.94%

Sunflower Bank

26

 $        948,297

 $                 36,473

1.58%

Corefirst Bank

28

 $        838,565

 $                 29,949

1.40%

* The FDIC data stated $4,563,623 in deposits ($106.1 million per branch), but I decided to go with the current numbers in the offering document.

 

I did not review the Missouri numbers as with only two branches, that seem pretty new, the numbers are not very insightful.

 

As one can see that the Kansas market is still fairly fragmented and it seems that CFFN might be an attractive takeover candidate by a large bank trying to increase its market share in state or one that wants to enter the market with a bang. Just comparing markets share, in CA BofA has a 26.28%, while WFC has a 19.19% market share.

 

CFFN also has the second highest deposits per branch, 28.44% more than third ranked BofA ($79.2 million), and after WFC's $145.5 million per branch.

 

The efficiency ratio for CFFN is 42.65%

 

Regarding sources of funds, as of June 30, CFFN had total deposits of $4.373 billion. Advances form FHLB were $2.396 billion. In addition other borrowings were $713.609 million. CFFN has a policy that brokered deposits cannot be more than 10% of total deposits. On June 30, total brokered deposits were $83.7 million or 2% of all deposits. The other borrowings were mostly repurchase agreements ($660 million or 8% of total assets). In addition post conversion, CFFN will have between $1.99 and $2.37 billion in tangible equity.

 

If you want the detail on the sources of funds, look on page 105 of the November 12 S-1.

 

When it comes to assets, CFFN has $8.543 billion in assets.

As of June 30, one to four family real estate loans totaled $5.06 billion or 94.4% of the total loan portfolio and 59.3% of total assets. All loans are full doc and serviced internally. All loans with an LTV over 80% carry mortgage insurance. Multi family and commercial loans are $67.12 million or 1.3% of total loans, construction is $36.31 million or 0.7% of total loans. Consumer loans are $196.28 million or 3.6% of total loans.

 

Besides internally generating one to four unit mortgages, CFFN also purchases loans. All loans have to be underwritten according to the CFFN underwriting guidelines.

Of the $5.6 billion in mortgages, $4.1 billion is fixed and 0.95 billion is adjustable.

For a detail on the mortgage loan book (including delinquent and non-performing) look at page 98 of the S-1.

 

Below is a layout of the mortgage loan book including exposure by state.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Origination

Calendar

Year

 

Originated

Loans

 

 

Purchased

Loans

 

 

Total Loans

 

 

Originated

Non-

Performing

Loans

 

 

Purchased

Non-

Performing

Loans

 

 

Total

Non-

Performing

Loans

 

 

(Dollars in thousands)

2002 and prior

 

$

673,471

 

 

$

14,292

 

 

$

687,763

 

 

$

 2,768

 

 

$

 363

 

 

$

3,131

2003

 

 

379,592

 

 

 

30,393

 

 

 

409,985

 

 

 

 885

 

 

 

 290

 

 

 

 1,175

2004

 

 

293,294

 

 

 

199,393

 

 

 

492,687

 

 

 

 1,740

 

 

 

 6,224

 

 

 

 7,964

2005

 

 

379,958

 

 

 

188,219

 

 

 

568,177

 

 

 

 778

 

 

 

 15,202

 

 

 

 15,980

2006

 

 

399,756

 

 

 

18,507

 

 

 

418,263

 

 

 

 2,671

 

 

 

 11

 

 

 

 2,682

2007

 

 

528,978

 

 

 

154

 

 

 

529,132

 

 

 

 1,229

 

 

 

--

 

 

 

 1,229

2008

 

 

595,897

 

 

 

72,056

 

 

 

667,953

 

 

 

 467

 

 

 

--

 

 

 

 467

2009

 

 

925,166

 

 

 

77,450

 

 

 

1,002,616

 

 

 

--

 

 

 

--

 

 

 

--

2010

 

 

278,725

 

 

 

6,457

 

 

 

285,182

 

 

 

--

 

 

 

--

 

 

 

--

 

 

$

4,454,837

 

 

$

606,921

 

 

$

5,061,758

 

 

$

 10,538

 

 

$

 22,090

 

 

$

32,628

 

As you can see, most of the delinquencies are related to 2004 and 2005 vintages. Most of those losses are related to $210 million in 2004 and 2005 vintage Interest Only loans that were purchased in 2005. CFFN stopped buying Interest Only loans in 2006. The current NPLs related to that Interest Only portfolio are $16 million or half of the total NPLs.

 

 

 

One- to Four-Family

 

 

Loans 30 to 89

Days Delinquent

 

 

Non-Performing Loans

 

State

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

 

Average LTV

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kansas

 

$

3,707,019

 

 

 

73.2

%

 

$

11,441

 

 

 

51.5

%

 

$

9,099

 

 

 

27.9

%

 

 

76

%

Missouri

 

 

766,175

 

 

 

15..2

 

 

 

4,538

 

 

 

20.4

 

 

 

1,461

 

 

 

4.5

 

 

 

106

 

Illinois

 

 

69,639

 

 

 

1.4

 

 

 

145

 

 

 

0.7

 

 

 

3,038

 

 

 

9.3

 

 

 

77

 

Texas

 

 

46,996

 

 

 

0.9

 

 

 

85

 

 

 

0.4

 

 

 

430

 

 

 

1.3

 

 

 

78

 

New York

 

 

44,499

 

 

 

0.9

 

 

 

--

 

 

 

--

 

 

 

720

 

 

 

2.2

 

 

 

126

 

Florida

 

 

45,145

 

 

 

0.9

 

 

 

1,154

 

 

 

5.2

 

 

 

3,574

 

 

 

11.0

 

 

 

103

 

Colorado

 

 

31,402

 

 

 

0.6

 

 

 

736

 

 

 

3.3

 

 

 

830

 

 

 

2.5

 

 

 

83

 

Arizona

 

 

29,668

 

 

 

0.6

 

 

 

1,656

 

 

 

7.5

 

 

 

3,230

 

 

 

9.9

 

 

 

81

 

Connecticut

 

 

28,664

 

 

 

0.6

 

 

 

--

 

 

 

--

 

 

 

149

 

 

 

0.5

 

 

 

93

 

Virginia

 

 

26,672

 

 

 

0.5

 

 

 

566

 

 

 

2.5

 

 

 

1,402

 

 

 

4.3

 

 

 

83

 

New Jersey

 

 

25,657

 

 

 

0.5

 

 

 

316

 

 

 

1.4

 

 

 

355

 

 

 

1.1

 

 

 

68

 

Minnesota

 

 

26,455

 

 

 

0.5

 

 

 

620

 

 

 

2.8

 

 

 

592

 

 

 

1.8

 

 

 

84

 

Other states

 

 

213,767

 

 

 

4.2

 

 

 

953

 

 

 

4.3

 

 

 

7,748

 

 

 

23.7

 

 

 

95

 

 

 

$

5,061,758

 

 

 

100.0

%

 

$

22,210

 

 

 

100.0

%

 

$

32,628

 

 

 

100.0

%

 

 

87

%

 

Total delinquent loans (30 to 89 days) at June 30 represented 0.27% of total assets, a decrease of about $3.7 million over September 30, 2009. (For detail see page 96 of S-1) Of all delinquent loans about 38.9% cured over the last 12 months. Non mortgage related delinquencies were $892K out of a total of $23.112 million. Total non-performing loans (+90 days including ROE) represented pre 2nd step 0.47% of total assets. Post 2nd step that will decline to 0.42% or less. NPAs increased by $1.7 million over September 30, 2009. Of all NPAs, $552K was non-mortgage related out of total of $40.330 million.

 

As of June 30, the allowance for loan losses was $15.7 million or 38.9% of all NPAs.

 

The average LTV as for purchased loans as of June 30 was 58% with an average FICO (updated June 30) of 741. The average LTV for originated loans was 66% with an average FICO of 761. Below is a matrix from the S-1 that lays out the LTV/FICO exposures. As one can see, the majority of the loans has a FICO of 751 or above and an LTV of less than 70%. (See page 95 of S-1)

 

 

 

Credit Score

 

 

 

Less than 660

 

 

661 to 700

 

 

701 to 750

 

 

751 and above

 

Total

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

LTV ratio

 

Amount

 

 

total

 

 

Amount

 

 

total

 

 

Amount

 

 

total

 

 

Amount

 

 

total

 

 

Amount

 

 

total

 

 

 

(Dollars in thousands)

 

Less than 70%

 

$

120,349

 

 

 

2.4

%

 

$

132,960

 

 

 

2.6

%

 

$

400,925

 

 

 

7.9

%

 

$

1,956,772

 

 

 

38.6

%

 

$

2,611,006

 

 

 

51.5

%

70% to 80%

 

 

107,808

 

 

 

2.1

 

 

 

114,100

 

 

 

2.3

 

 

 

330,266

 

 

 

6.5

 

 

 

1,147,369

 

 

 

22.7

 

 

 

1,699,543

 

 

 

33.6

 

More than 80%

 

 

78,932

 

 

 

1.6

 

 

 

71,150

 

 

 

1.4

 

 

 

186,641

 

 

 

3.7

 

 

 

414,486

 

 

 

8.2

 

 

 

751,209

 

 

 

14.9

 

Total

 

$

307,089

 

 

 

6.1

%

 

$

318,210

 

 

 

6.3

%

 

$

917,832

 

 

 

18.1

%

 

$

3,518,627

 

 

 

69.5

%

 

$

5,061,758

 

 

 

100.0

%

 

CFFN also holds a book of securitizations of $1.62 billion. Except for $3.6 million private label MBS all are related to Fannie, Freddie or Ginnie.

 

On the investment securities side, CFFN owns $1.2 billion, mostly debentures issue by Fannie, Freddie and Ginnie as well as munis. Over the last year it grew from $480 million to $1.2 billion. About 1 billion of that has a WAL of 1.1 years.

 

In addition, CFFN holds $136 million in FHLB stock and $179.52 million in other assets.

 

The interest rate spread for the year through August was 1.78% and the net interest margin 2.06%.

 

The existing employee ownership plan plans to buy 4.0% of the offering. In case that maximum amount of shares are issued, the employee ownership plan would own 6.08% of the company. In addition there are the pre-conversion ownership and post-conversion stock based incentive plans. The OTS requires that all restricted stock and options vest at the earliest in 5 years (except in case of a buyout). Total inside ownership if all planned restricted stock and options vest will be 12.93%. Besides the 6.08% employee ownership, there will be 1.62% outstanding in restricted stock and 5.23% in options. 1.7% of the options are pre-conversion and 3.53% will be post-conversion ($ exercise price of $10).

 

Pre-conversion there are 405,031 options outstanding which translates into between 916.9K options and 1,240.5K options post-conversion depending on the # of shares issued. The average exercise price pre-conversion is $34.11 which translates into a new exercise price of $15.1 per share in case the minimum amount of shares are issued and $11.1 in case the maximum amount of shares are issued. (Of the 405,031 options outstanding, 305,081 were exercisable.) For details see page F-47 of the S-1.

 

Lastly, based on the midpoint shares issuance, John B. Dicus (dad) and John C. Dicus will own post conversion 1.554 million and 1.587 million shares, representing a total monetary interest at $10 of $31,491,970. Management and directors in the aggregate will own a total of 5.263 million shares (2.7%) post-conversion.  This does not include options and restricted stock awards.

 

Risks:

- The asset quality is worse than expected. Could be, but given that we are now in year 4 of this mortgage/credit mess, one would assume that NPAs by now are somewhat representative of current asset quality.

- Leverage can be an issue too with banks as most of us noticed over the last few years, but with TE/TA of more than 20% post-conversion it is difficult to see how this bank goes out of business, especially given its current level of delinquencies and NPAs. We'd have to see quite the reversal in asset quality to see this bank go out of business.

- The biggest risk I believe is capital allocation. What is management going to do with all that TE? Now if it was Ken Lewis running this place I'd be worried. But this management is known to be very conservative. The branches are clearly well run and its book of assets has done significantly better than its competitors. Management pre-conversion already had a boat load of capital, still it did not reach for earnings which is a good sign. So I feel somewhat confident they will do the right thing. They surely are incented to do so.

- Of CFFN's mortgage loan book, 73.2% is related to Kansas and 15.2% related to Missouri.

 

Concluding, I feel that CFFN makes for an attractive risk reward. For one, despite having the lowest level of NPA/TA, the highest TE/TA and above average total assets, it is clearly trading at a fairly large discount to comps, 30% plus even in case the maximum amount of shares are issued. CFFN should probably be trading a premium to its average comp, given the quality of its balance sheet and its total size of assets.

So there are three ways to get a hold of this company. Either one buys the currently trading CFFN stock and hope that as many shares are issued as possible. Or one can sign up to the offering and hope that only the minimum amount of shares are issued. Remember the book will likely close this coming Monday. And lastly, one can just try to buy the stock once it starts trading post-conversion.

Catalyst

Conversion
A significant discrepancy in risk adjusted valuation versus comp.
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    Description

    CFFN is a 2nd step conversion that will likely price somewhere next week. The book closes on Monday.

     

    CFFN is a overly conservative run thrift, soon to be bank, based in Kansas and 2 counties in Missouri. It has 46 branches with an average deposit base per branch of $113.9 million according to the offering doc. (I get to a range of $101 to $106 million)

    Post 2nd step its tangible equity to assets will be more than 20%.

    It's NPA over assets pre 2nd step is 0.47% which will decline to 0.42% or less post 2nd step. The pre 2nd step NPL to total loans is 0.62%. Both numbers compare very favorably to the industry.

     

    The offering is the following:

    At the minimum CFFN wants to issue 118.15 million shares at $10 which results in a TBV per share of $11.92 or a PtoTBV of 0.84.

    At the midpoint CFFN offers 139 million shares at $10 which results in a TBV per share of $11.09 or a PtoTBV of 0.90.

    At the maximum CFFN will offer 159.85 million shares at $10 which results in a TBV per share of $10.47 or a PtoTBV of 0.96.

     

    But there is also potentially a better way of getting the shares. 29.5% of the post 2nd step shares are already outstanding and carry the following exchange rates.

    If the minimum amount of shares are issued then the exchange ratio is 2.2637 shares per pre 2nd step share.

    If the midpoint amount of shares are issued then the exchange ratio is 2.6632 shares per pre 2nd step share.

    If the maximum amount of shares are issued then the exchange ratio is 3.0627 shares per pre 2nd step share.

     

    So lets say you buy the pre 2nd step CFFN shares at the current price of $24.30, at the minimum issuance you pay $10.73 per share or 0.90 times TBV. But if the midpoint number of shares are issued, you pay only $9.12 per share or 0.82 TBV and if the maximum number of shares are issued, you pay only $7.93 per share or 0.76 times TBV.

     

    Here is an overview of what you would pay based at different prices of the pre 2nd step CFFN stock

     

    Minimum (Offering = 0.84 PtoTBV)

    Exchange Ratio

    Price Paid Post 2nd

    PtoTBV

     $                                23.5

    2.2637

     $      10.38

                         0.87

     $                                24.0

    2.2637

     $      10.60

                         0.89

     $                                24.5

    2.2637

     $      10.82

                         0.91

     $                                25.0

    2.2637

     $      11.04

                         0.93

     

     

     

     

    Midpoint (Offering = 0.90 PtoTBV)

    Exchange Ratio

    Price Paid Post 2nd

    PtoTBV

     $                                23.5

    2.6632

     $        8.82

                         0.80

     $                                24.0

    2.6632

     $        9.01

                         0.81

     $                                24.5

    2.6632

     $        9.20

                         0.83

     $                                25.0

    2.6632

     $        9.39

                         0.85

     

     

     

     

    Maximum (Offering = 0.96 PtoTBV)

    Exchange Ratio

    Price Paid Post 2nd

    PtoTBV

     $                                23.5

    3.0627

     $        7.67

                         0.73

     $                                24.0

    3.0627

     $        7.84

                         0.75

     $                                24.5

    3.0627

     $        8.00

                         0.76

     $                                25.0

    3.0627

     $        8.16

                         0.78

     

    So there are two decisions to be made. A. Do you believe that at the $10 issuance price that CFFN shares are cheap? And B. What do you believe the number of shares issued will be?

     

    Lets start with CFFN and why I believe it to be an attractive risk reward.

     

    CFFN's issuance price even if the maximum amount of shares are issued will have a PtoTBV of 0.96 (at the low end of the offering it will be 0.84), while comparable banks trade at significantly higher multiples if adjusted for size, tangible equity to total assets and non performing assets to total assets.

     

    Here is a list of comps

     

    Comps CFFN

     

    Total Assets

    TE/Tot Assets

    NPA/Tot Assets

    PtoTBV

    BRKL

    Brookline Bancorp, Inc.

     $      2,660

    16.9%

    0.50%

                          1.39

    DNBK

    Danvers Bancorp Inc.

     $      2,631

    9.9%

    0.73%

                          1.21

    FFBC

    First Financial Bancorp.

     $      6,155

    10.3%

    2.25%

                          1.67

    FFIN

    First Financial Bankshares Inc.

     $      3,447

    11.3%

    0.65%

                          2.66

    HCBK

    Hudson City Bancorp, Inc.

     $    60,617

    9.0%

    1.98%

                          1.11

    IBKC

    IberiaBank Corp.

     $    10,561

    9.8%

    0.69%

                          1.43

    NWBI

    Northwest Bancshares, Inc.

     $      8,143

    14.0%

    2.10%

                          1.08

    NAL

    New Alliance Bancshares Inc.

     $      8,826

    10.4%

    0.81%

                          1.52

    THFF

    First Financial Corp.

     $      2,562

    12.4%

    1.33%

                          1.38

    SFNC

    Simmons First National Corporation

     $      3,018

    10.7%

    1.61%

                          1.55

    UVSP

    Univest Corp. of Pennsylvania

     $      2,114

    10.2%

    1.68%

                          1.48

     

     

     

    11.34%

    1.25%

     

     

     

     

     

     

     

    CFFN

    Minimum

     $      9,669

    20.6%

    0.42%

                          0.84

    CFFN

    Midpoint

     $      9,877

    22.1%

    0.41%

                          0.90

    CFFN

    Maximum

     $    10,086

    23.5%

    0.40%

                          0.96

     

    As one can see, CFFN will have by far the highest level of TE to Total Assets, the lowest level of NPA to Total Assets and with about $10 billion in assets it is has enough size for larger institutions to be interested. Size does matter I believe when it comes to these second step conversions and you tend to see that as they often price at higher multiples upon their conversion than institutions with small asset bases.

    As you can see almost all are currently trading at a multiple of more than 1.2 times TBV, most trade in a range of 1.3 to 1.5, all the while having much lower TE/Total Assets and higher NPA/Total Assets. The most relevant outliers are HCBK and NWBI. HCBK trades at 1.11 times TBV, but it has close to 5 times the NPA/Tot Assets than CFFN will have post conversion and it is also exposed in a large way to jumbo loans, a continuing worry for many. NWBI sells for 1.08 times TBV and has 2.1% NPAs, also more than 5 times that of CFFN post conversion.

     

    One important piece of information regarding CFFN's current offering valuation is related to its failed effort to do the conversion over the summer. This was related to the widespread sell off of the banks from April 2010 through the end of August 2010. The closing date was supposed to be August 24, 2010. In the 70 days prior to August 2010, 6 2nd step conversions came to market and 5 of them were selling below their offering price. Given the uncertainty surrounding the whole banking sector at that time interest was lacking.

    Anyway all that was a real negative for CFFN as it required a new appraisal. And this time the appraisal came in 18.2% lower than the first one. The appraisal was mostly based upon comps, recently completed conversions and the failed CFFN deal. So in essence the deal got scuffled because of the decline in bank stocks and then that decline in bank stocks resulted in a lower appraisal, right before the valuations of the same comps went up again. Talk about bad timing. Actually, it was quite obvious that the appraisal had to come in lower as management really needs this to get done as the OTS is about to go away and the OTS itself does not like prices to break the offering price.

    The result of this all was that instead of the minimum - maximum offering range of 144.5 million to 195.5 million shares offered over the summer, the number of shares offered went to a range of 118.15 million to 159.850 million shares offered or 18.3% cheaper than over the summer, all for the same 70.5% ownership percentage.

     

    I don't think it makes much sense to value CFFN right now on an ROE basis as its TE/TA is about to increase markedly. The company has said that its options for the excess capital are to acquire other banks with a profile of strong core deposits and/or open more branches or to buy back stock/pay dividends. Since they have to wait at least one year to buy back stock I assume in the short-term an acquisition and/or building more branches is more likely. Management tends to be very conservative, so the hope is that they will not overpay. A positive though is that the employee ownership plan and management will have significant ownership and upside, which hopefully prevents them from allocating capital in a subpar manner.

     

    Another potential upside would be selling the company in 3 years. Many of these deals go for 2 times book or more, especially those with strong core deposits, good efficiency ratios, low NPAs and a strong balance sheet/excess tangible equity.

     

    Regarding the dividend, CFFN will pay out 100% of total earnings for the first two years, expected to be about 30 cents and will also pay a 60 cents welcome dividend for a year one dividend yield of 9%.

     

    When it comes to deposits, CFFN has the second largest market share of 7.6% in Kansas, after the 7.78% for BofA.

     

    Here is a listing of deposit metrics for the state of Kansas.

     

    Kansas Banking Metrics (as of June 30)

    # branches

    Deposits ($000)

    Deposits Per Branch ($000)

    Market share

    BofA

    59

     $     4,672,548

     $                 79,196

    7.78%

    CFFN

    43

     $     4,373,844*

     $               101,717

    7.60%

    Intrust Bank

    42

     $     2,810,214

     $                 66,910

    4.68%

    Commerce Bank National

    59

     $     2,710,439

     $                 45,940

    4.52%

    US Bank National

    30

     $     1,398,373

     $                 46,612

    2.33%

    Emprise Bank

    41

     $     1,195,571

     $                 29,160

    1.99%

    Fidelity Bank

    20

     $     1,164,244

     $                 58,212

    1.94%

    Wells Fargo

    8

     $     1,164,182

     $               145,523

    1.94%

    Sunflower Bank

    26

     $        948,297

     $                 36,473

    1.58%

    Corefirst Bank

    28

     $        838,565

     $                 29,949

    1.40%

    * The FDIC data stated $4,563,623 in deposits ($106.1 million per branch), but I decided to go with the current numbers in the offering document.

     

    I did not review the Missouri numbers as with only two branches, that seem pretty new, the numbers are not very insightful.

     

    As one can see that the Kansas market is still fairly fragmented and it seems that CFFN might be an attractive takeover candidate by a large bank trying to increase its market share in state or one that wants to enter the market with a bang. Just comparing markets share, in CA BofA has a 26.28%, while WFC has a 19.19% market share.

     

    CFFN also has the second highest deposits per branch, 28.44% more than third ranked BofA ($79.2 million), and after WFC's $145.5 million per branch.

     

    The efficiency ratio for CFFN is 42.65%

     

    Regarding sources of funds, as of June 30, CFFN had total deposits of $4.373 billion. Advances form FHLB were $2.396 billion. In addition other borrowings were $713.609 million. CFFN has a policy that brokered deposits cannot be more than 10% of total deposits. On June 30, total brokered deposits were $83.7 million or 2% of all deposits. The other borrowings were mostly repurchase agreements ($660 million or 8% of total assets). In addition post conversion, CFFN will have between $1.99 and $2.37 billion in tangible equity.

     

    If you want the detail on the sources of funds, look on page 105 of the November 12 S-1.

     

    When it comes to assets, CFFN has $8.543 billion in assets.

    As of June 30, one to four family real estate loans totaled $5.06 billion or 94.4% of the total loan portfolio and 59.3% of total assets. All loans are full doc and serviced internally. All loans with an LTV over 80% carry mortgage insurance. Multi family and commercial loans are $67.12 million or 1.3% of total loans, construction is $36.31 million or 0.7% of total loans. Consumer loans are $196.28 million or 3.6% of total loans.

     

    Besides internally generating one to four unit mortgages, CFFN also purchases loans. All loans have to be underwritten according to the CFFN underwriting guidelines.

    Of the $5.6 billion in mortgages, $4.1 billion is fixed and 0.95 billion is adjustable.

    For a detail on the mortgage loan book (including delinquent and non-performing) look at page 98 of the S-1.

     

    Below is a layout of the mortgage loan book including exposure by state.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Origination

    Calendar

    Year

     

    Originated

    Loans

     

     

    Purchased

    Loans

     

     

    Total Loans

     

     

    Originated

    Non-

    Performing

    Loans

     

     

    Purchased

    Non-

    Performing

    Loans

     

     

    Total

    Non-

    Performing

    Loans

     

     

    (Dollars in thousands)

    2002 and prior

     

    $

    673,471

     

     

    $

    14,292

     

     

    $

    687,763

     

     

    $

     2,768

     

     

    $

     363

     

     

    $

    3,131

    2003

     

     

    379,592

     

     

     

    30,393

     

     

     

    409,985

     

     

     

     885

     

     

     

     290

     

     

     

     1,175

    2004

     

     

    293,294

     

     

     

    199,393

     

     

     

    492,687

     

     

     

     1,740

     

     

     

     6,224

     

     

     

     7,964

    2005

     

     

    379,958

     

     

     

    188,219

     

     

     

    568,177

     

     

     

     778

     

     

     

     15,202

     

     

     

     15,980

    2006

     

     

    399,756

     

     

     

    18,507

     

     

     

    418,263

     

     

     

     2,671

     

     

     

     11

     

     

     

     2,682

    2007

     

     

    528,978

     

     

     

    154

     

     

     

    529,132

     

     

     

     1,229

     

     

     

    --

     

     

     

     1,229

    2008

     

     

    595,897

     

     

     

    72,056

     

     

     

    667,953

     

     

     

     467

     

     

     

    --

     

     

     

     467

    2009

     

     

    925,166

     

     

     

    77,450

     

     

     

    1,002,616

     

     

     

    --

     

     

     

    --

     

     

     

    --

    2010

     

     

    278,725

     

     

     

    6,457

     

     

     

    285,182

     

     

     

    --

     

     

     

    --

     

     

     

    --

     

     

    $

    4,454,837

     

     

    $

    606,921

     

     

    $

    5,061,758

     

     

    $

     10,538

     

     

    $

     22,090

     

     

    $

    32,628

     

    As you can see, most of the delinquencies are related to 2004 and 2005 vintages. Most of those losses are related to $210 million in 2004 and 2005 vintage Interest Only loans that were purchased in 2005. CFFN stopped buying Interest Only loans in 2006. The current NPLs related to that Interest Only portfolio are $16 million or half of the total NPLs.

     

     

     

    One- to Four-Family

     

     

    Loans 30 to 89

    Days Delinquent

     

     

    Non-Performing Loans

     

    State

     

    Balance

     

     

    % of Total

     

     

    Balance

     

     

    % of Total

     

     

    Balance

     

     

    % of Total

     

     

    Average LTV

     

     

     

    (Dollars in thousands)

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Kansas

     

    $

    3,707,019

     

     

     

    73.2

    %

     

    $

    11,441

     

     

     

    51.5

    %

     

    $

    9,099

     

     

     

    27.9

    %

     

     

    76

    %

    Missouri

     

     

    766,175

     

     

     

    15..2

     

     

     

    4,538

     

     

     

    20.4

     

     

     

    1,461

     

     

     

    4.5

     

     

     

    106

     

    Illinois

     

     

    69,639

     

     

     

    1.4

     

     

     

    145

     

     

     

    0.7

     

     

     

    3,038

     

     

     

    9.3

     

     

     

    77

     

    Texas

     

     

    46,996

     

     

     

    0.9

     

     

     

    85

     

     

     

    0.4

     

     

     

    430

     

     

     

    1.3

     

     

     

    78

     

    New York

     

     

    44,499

     

     

     

    0.9

     

     

     

    --

     

     

     

    --

     

     

     

    720

     

     

     

    2.2

     

     

     

    126

     

    Florida

     

     

    45,145

     

     

     

    0.9

     

     

     

    1,154

     

     

     

    5.2

     

     

     

    3,574

     

     

     

    11.0

     

     

     

    103

     

    Colorado

     

     

    31,402

     

     

     

    0.6

     

     

     

    736

     

     

     

    3.3

     

     

     

    830

     

     

     

    2.5

     

     

     

    83

     

    Arizona

     

     

    29,668

     

     

     

    0.6

     

     

     

    1,656

     

     

     

    7.5

     

     

     

    3,230

     

     

     

    9.9

     

     

     

    81

     

    Connecticut

     

     

    28,664

     

     

     

    0.6

     

     

     

    --

     

     

     

    --

     

     

     

    149

     

     

     

    0.5

     

     

     

    93

     

    Virginia

     

     

    26,672

     

     

     

    0.5

     

     

     

    566

     

     

     

    2.5

     

     

     

    1,402

     

     

     

    4.3

     

     

     

    83

     

    New Jersey

     

     

    25,657

     

     

     

    0.5

     

     

     

    316

     

     

     

    1.4

     

     

     

    355

     

     

     

    1.1

     

     

     

    68

     

    Minnesota

     

     

    26,455

     

     

     

    0.5

     

     

     

    620

     

     

     

    2.8

     

     

     

    592

     

     

     

    1.8

     

     

     

    84

     

    Other states

     

     

    213,767

     

     

     

    4.2

     

     

     

    953

     

     

     

    4.3

     

     

     

    7,748

     

     

     

    23.7

     

     

     

    95

     

     

     

    $

    5,061,758

     

     

     

    100.0

    %

     

    $

    22,210

     

     

     

    100.0

    %

     

    $

    32,628

     

     

     

    100.0

    %

     

     

    87

    %

     

    Total delinquent loans (30 to 89 days) at June 30 represented 0.27% of total assets, a decrease of about $3.7 million over September 30, 2009. (For detail see page 96 of S-1) Of all delinquent loans about 38.9% cured over the last 12 months. Non mortgage related delinquencies were $892K out of a total of $23.112 million. Total non-performing loans (+90 days including ROE) represented pre 2nd step 0.47% of total assets. Post 2nd step that will decline to 0.42% or less. NPAs increased by $1.7 million over September 30, 2009. Of all NPAs, $552K was non-mortgage related out of total of $40.330 million.

     

    As of June 30, the allowance for loan losses was $15.7 million or 38.9% of all NPAs.

     

    The average LTV as for purchased loans as of June 30 was 58% with an average FICO (updated June 30) of 741. The average LTV for originated loans was 66% with an average FICO of 761. Below is a matrix from the S-1 that lays out the LTV/FICO exposures. As one can see, the majority of the loans has a FICO of 751 or above and an LTV of less than 70%. (See page 95 of S-1)

     

     

     

    Credit Score

     

     

     

    Less than 660

     

     

    661 to 700

     

     

    701 to 750

     

     

    751 and above

     

    Total

     

     

     

     

     

     

    % of

     

     

     

     

     

    % of

     

     

     

     

     

    % of

     

     

     

     

     

    % of

     

     

     

     

     

    % of

     

    LTV ratio

     

    Amount

     

     

    total

     

     

    Amount

     

     

    total

     

     

    Amount

     

     

    total

     

     

    Amount

     

     

    total

     

     

    Amount

     

     

    total

     

     

     

    (Dollars in thousands)

     

    Less than 70%

     

    $

    120,349

     

     

     

    2.4

    %

     

    $

    132,960

     

     

     

    2.6

    %

     

    $

    400,925

     

     

     

    7.9

    %

     

    $

    1,956,772

     

     

     

    38.6

    %

     

    $

    2,611,006

     

     

     

    51.5

    %

    70% to 80%

     

     

    107,808

     

     

     

    2.1

     

     

     

    114,100

     

     

     

    2.3

     

     

     

    330,266

     

     

     

    6.5

     

     

     

    1,147,369

     

     

     

    22.7

     

     

     

    1,699,543

     

     

     

    33.6

     

    More than 80%

     

     

    78,932

     

     

     

    1.6

     

     

     

    71,150

     

     

     

    1.4

     

     

     

    186,641

     

     

     

    3.7

     

     

     

    414,486

     

     

     

    8.2

     

     

     

    751,209

     

     

     

    14.9

     

    Total

     

    $

    307,089

     

     

     

    6.1

    %

     

    $

    318,210

     

     

     

    6.3

    %

     

    $

    917,832

     

     

     

    18.1

    %

     

    $

    3,518,627

     

     

     

    69.5

    %

     

    $

    5,061,758

     

     

     

    100.0

    %

     

    CFFN also holds a book of securitizations of $1.62 billion. Except for $3.6 million private label MBS all are related to Fannie, Freddie or Ginnie.

     

    On the investment securities side, CFFN owns $1.2 billion, mostly debentures issue by Fannie, Freddie and Ginnie as well as munis. Over the last year it grew from $480 million to $1.2 billion. About 1 billion of that has a WAL of 1.1 years.

     

    In addition, CFFN holds $136 million in FHLB stock and $179.52 million in other assets.

     

    The interest rate spread for the year through August was 1.78% and the net interest margin 2.06%.

     

    The existing employee ownership plan plans to buy 4.0% of the offering. In case that maximum amount of shares are issued, the employee ownership plan would own 6.08% of the company. In addition there are the pre-conversion ownership and post-conversion stock based incentive plans. The OTS requires that all restricted stock and options vest at the earliest in 5 years (except in case of a buyout). Total inside ownership if all planned restricted stock and options vest will be 12.93%. Besides the 6.08% employee ownership, there will be 1.62% outstanding in restricted stock and 5.23% in options. 1.7% of the options are pre-conversion and 3.53% will be post-conversion ($ exercise price of $10).

     

    Pre-conversion there are 405,031 options outstanding which translates into between 916.9K options and 1,240.5K options post-conversion depending on the # of shares issued. The average exercise price pre-conversion is $34.11 which translates into a new exercise price of $15.1 per share in case the minimum amount of shares are issued and $11.1 in case the maximum amount of shares are issued. (Of the 405,031 options outstanding, 305,081 were exercisable.) For details see page F-47 of the S-1.

     

    Lastly, based on the midpoint shares issuance, John B. Dicus (dad) and John C. Dicus will own post conversion 1.554 million and 1.587 million shares, representing a total monetary interest at $10 of $31,491,970. Management and directors in the aggregate will own a total of 5.263 million shares (2.7%) post-conversion.  This does not include options and restricted stock awards.

     

    Risks:

    - The asset quality is worse than expected. Could be, but given that we are now in year 4 of this mortgage/credit mess, one would assume that NPAs by now are somewhat representative of current asset quality.

    - Leverage can be an issue too with banks as most of us noticed over the last few years, but with TE/TA of more than 20% post-conversion it is difficult to see how this bank goes out of business, especially given its current level of delinquencies and NPAs. We'd have to see quite the reversal in asset quality to see this bank go out of business.

    - The biggest risk I believe is capital allocation. What is management going to do with all that TE? Now if it was Ken Lewis running this place I'd be worried. But this management is known to be very conservative. The branches are clearly well run and its book of assets has done significantly better than its competitors. Management pre-conversion already had a boat load of capital, still it did not reach for earnings which is a good sign. So I feel somewhat confident they will do the right thing. They surely are incented to do so.

    - Of CFFN's mortgage loan book, 73.2% is related to Kansas and 15.2% related to Missouri.

     

    Concluding, I feel that CFFN makes for an attractive risk reward. For one, despite having the lowest level of NPA/TA, the highest TE/TA and above average total assets, it is clearly trading at a fairly large discount to comps, 30% plus even in case the maximum amount of shares are issued. CFFN should probably be trading a premium to its average comp, given the quality of its balance sheet and its total size of assets.

    So there are three ways to get a hold of this company. Either one buys the currently trading CFFN stock and hope that as many shares are issued as possible. Or one can sign up to the offering and hope that only the minimum amount of shares are issued. Remember the book will likely close this coming Monday. And lastly, one can just try to buy the stock once it starts trading post-conversion.

    Catalyst

    Conversion
    A significant discrepancy in risk adjusted valuation versus comp.

    Messages


    SubjectSoap Box
    Entry12/09/2010 09:31 PM
    Memberdavid101

     

    Den,

     

    I have been following these 2nd steps and the demise of the OTS has caused a number of MHC thrifts to 2nd step in the past year. I will commend the Dicus duo for using almost every shareholder-friendly play in the MHC playbook, with buybacks, dividends, buybacks, waiving the MHC dividend, and more buybacks. They really maximized the structure - they "got it" - whereas many other thrift CEO's did not.

     

    Philosophically, I have an issue with an over-capitalized bank raising more capital in order to extinguish said capital via dividends and buybacks. Several terms come to mind to describe this situation but unfortunately, given how ORIT has done, it probably works.

     

    Best wishes.

     

    David

     


    SubjectRE: excuse my ignorance
    Entry12/09/2010 09:36 PM
    MemberDen1200

    In principle you are right. I do think though that using a 10% ROE per 1 multiple of TBV is a little high. What if one assumes that 1 times book only requires an 8% normalized ROE? Then a 12% ROE gets you 1.5 times book. Or what if it only requires a 6% normalized ROE? The current valuation of banks in general, and the one I have seen over the years, assumes a lower expected % normalized ROE for each multiple of TBV than 10%. Even JPM currently trades at 1.41 times TBV with a current LTM ROE of 8.9% and I would guess to say that JPM at this time has a lot more hair on it than CFFN does.

    Many banks with average franchise and excess capital have been bought for 2 times TBV which in your scenario would require a normalized ROE of 20%. I know of not many banks that get a 20% normalized ROE without having high, too high, levels of leverage. The following is another way I like to think about this. Lets say I have $100 in cash, most people would agree that is worth 1 times book. But if I keep that cash and invest it at this time in "safe" securities, like treasuries, my return/ROE will be less than 3% if I keep my duration at or below 10 years. So, cash at a 3% return is worth book, but a stable company/bank with excess capital, and above average assets requires a 10% normalized ROE per multiple of book? I know we need a risk premium, but 7% seems large to me. By the way, I think holding on to cash is risky too.

     

    In the end it all comes down to the believe that that excess capital will be put to use in a productive manner resulting in decent ROEs, as we need with all our investments. Will this capital be allocated well by management through acquisition, buybacks, dividends or will a larger bank buy CFFN with the expectation of producing adequate ROEs. CFFN management surely is incented to produce adequate ROEs or to sell the bank at an adequate multiple in 3 years. Now if that excess equity stays on the balance sheet forever at little to no return then your argument is correct. I just do not believe that will be the case long-term.

     

    Another point of data is that I rarely see a bank getting sold for less than book, even pretty crappy ones. As I said before, good banks (excess capital, great core deposits, excellent branches, good assets, etc) tend to be sold at close to 2 times TBV. I am pretty sure that some of that is related to management hubris at times, but there are also other reasons. For one, larger entities are able to take out costs, larger entities have an easy time absorbing excess capital, etc. It often is cheaper to buy a good bank in an attractive geography rather than build from the ground up. It takes some time and money to gather those deposits while those branches have high fixed costs.


    Subjectgreat job
    Entry12/10/2010 09:05 AM
    Memberissambres839
    This is a very comprehensive and well written report. Thanks.

    SubjectRE: TBV
    Entry12/10/2010 11:42 AM
    MemberDen1200
    Since there will be such a high TE/TA, i.e. lots of cash and since the asset book seems better compared to comps and since of the $8.54 billion in assets, only $56.6 million of the investment securities and $1.1 billion in MBS is booked as available for sale, I feel that stated TBV will not adjust very much.
    When it comes to the HTM, one could make an argument that when rates rise assets should lose/could lose economic value, but the $1.1 billion in HTM investment securities has a very short duration, about 1 year. I do not know what the duration on the MBS book is, but since it is all Fannie, Freddie and Ginnie, I do not feel we are at great risk of losing economic book value as we all know Uncle Sam will backstop pretty much anything financial nowadays. (The same argument can be made for the investment securities as it is almost all Fannie, Freddie and Ginnie debentures.) When it comes to the whole loan mortgage book, I think the performance as shown in the NPL and NPA ratios to total assets over the last few years shows that CFFN has done a much better job underwriting loans than comps. Also look at the LTV/FICO table that was included in the write up. LTVs and FICOs do look very attractive. Now I have listed under my risks the Kansas/Missouri concentration. If the economy in that region tanks again then we will see further deterioration in the whole loan mortgage book.
     
    One last point, the HTM book GAAP wise never profited from the decline in book value, so rising rates are just a clawback from previously unbooked gains, not economic losses.

    SubjectRE: RE: TBV
    Entry12/10/2010 12:04 PM
    MemberDen1200
    In my last answer I wrote "One last point, the HTM book GAAP wise never profited from the decline in book value, so rising rates are just a clawback from previously unbooked gains, not economic losses." I meant that HTM book GAAP wise never profited from the decline in interest rates, so ...

    SubjectDisclosure
    Entry12/10/2010 12:43 PM
    Memberdeerwood
    Is there a table breaking down the exchange at different levels of bv in CFFN's filings? I can't seem to find it.

    SubjectRE: Disclosure
    Entry12/10/2010 01:35 PM
    MemberDen1200
    I am not 100% what exchange you are referring to, but I think the ones in par 3 and/or 4 of this write-up cover it. If not, let me know.

    SubjectPreliminary results
    Entry12/10/2010 02:56 PM
    Memberdavid101
    I see that they sold 38.5 million shares in the resolicit and it now goes to syndicate. Do you think that Sandler will bring this in at min or mid? Sandler get $0.075 for every share they sell, so they will receive an additional $1.5 million for bringing it to mid.
    David

    SubjectRE: Preliminary results
    Entry12/10/2010 03:09 PM
    MemberDen1200
    The incentive for both Sandler and management is to get as many shares as possible. Also, the book has to be approved by the OTS before it can be allocated. The OTS also wants as many shares as possible. Now people have told me all the orders are coming in at the minimum, which is the most attractive outcome to sell for sell siders. Now management has stated that they really want this deal done.
    The 38.5 million is a number that was much higher than was expected. Those people clearly think this is an attractive opportunity.

    SubjectRE: Dead $
    Entry12/11/2010 10:51 AM
    MemberDen1200
    HBOS and KFFG are just too small for me.
     

    SubjectRE: Dead $
    Entry12/12/2010 05:04 PM
    Memberissambres839
    Utah,
     
    I would disagree. Mgmt is being very shareholder friendly by going for a 9% dividend and committing, once the restriction is over, to buybacks. With the bank being so conservative with lending practices and being so large, it actually is quite attractive to larger cap investors who are looking for clean banks.
     
    I think this will be a successful deal and will trade well. Even though it is being offered at $10 per share, the market at the minimum is valuing it at $11 already.

    SubjectRE: Dead $
    Entry12/13/2010 12:32 PM
    MemberDen1200
    Here are some thoughts on PBCT. PBCT came public at 142% of TBV. Then within months, they bought another bank at 3.7 times TBV. Their pro-forma NPA/TA are 2.10%. They just closed on two acquisitions which took TBV to $9 from I think $9.8. And they currently trade at $13.50 1.5 times TBV. So we have 5 times worse NPA/TA, we have less TE/TA, we have a history of TBV destroying acquisitions, we have a stock that came public at 1.42 times TBV. No wonder the stock has gone no where. And then it is still trading at 1.5 times current TBV.
     
    Lets compare that to CFFN. It is coming public at 0.84 to 0.96 of TBV (with comps with worse numbers trading in the 1.3/1.5 range), has 0.47% TBV/TA (and if it was not for the IO disaster it would be half that), has 20% TE/TA and has shown excellent shareholder friendly behavior. Just look at their results. Since April 1, 1999 when CFFN came public at $10 a share, CFFN has paid out more than $20 in dividends and the stock is up about 150%. Btw since April 1, 1999 the average thrift stock is down 19.2%. In addition CFFN since 1999 has bought back stock too. And management is currently stating they want to continue these kind of things. Pretty shareholder friendly to me if you ask.
    I am not sure why you would put PBCT in the same bucket, except naturally if you believe they are going to go the same direction of buying banks at 4 times TBV, which given the conservative and shareholder friendly management seems unlikely to me.
     
    Now getting to HBOS. That is a bank with $200 million in assets. Its NPA/TA are I think 4 times as bad as CFFN.
     
    And when it comes to KFFG. I would say that that bank is an unmitigated disaster. They have $900 million in assets, 4% NPA/TA in Southern CA. 35% of loans are multi family, 14% commercial loans and 42% single family. Yes, they are for sale, but no one wants them. There are so many FDIC deals in that same area that are cheaper risk adjusted. And when it comes to selling, since their asset book is an unmitigated disaster, the uncertainty related to this book of assets is very high which must make it an acquirer hesitant to pay a multiple much higher than the current multiple. I will gladly pay 0.3 time book more for CFFN (which requires the stock to come public at the maximum range.)
     
    When it comes to the waived dividends issue. From my perspective that is a mood issue as it does not impact me as a new shareholder.

    SubjectRE: The results are in...
    Entry12/15/2010 08:17 PM
    MemberDen1200
    Yes.
    It seems they are offering 118.15 million shares. Of those 38.5 million shares are pre-sold to the employee plan and depositors. That leaves 79.65 million shares.
    I heard there was a lot of interest, but most came in at the minimum # of shares requirement.
    That makes the TBV $11.92 or at $10 0.84 times TBV. If we get shares, that should be a good deal.

    SubjectIt was 11 times oversubscribed.
    Entry12/16/2010 09:57 AM
    MemberDen1200
    I am surprised that it was done at the minimum with that much demand. Management, the old shareholders and Sandler had all the incentive to do as many shares as possible. My allocation was a pittance. I assume that is what happens when you don't trade much.

    SubjectRE: RE: RE: The results are in...
    Entry12/16/2010 10:02 AM
    MemberDen1200
    Thank you for your reply. I always appreciate feedback. Sadly for me I do make mistakes and it always helps when people point things out.
    Yes, I know the stock was flat since 2002 through the last few months, but if one looks at the stock prices of many other banks I would suggest one would have still been better of with CFFN than pretty much any other bank.
    Also, if you return that much equity to the shareholders it is difficult to grow assets and EPS.

    SubjectRE: It was 11 times oversubscribed.
    Entry12/16/2010 10:03 AM
    MemberDen1200
    I did end up buying a fair chunk in the open market, so overall I am still ok.

    SubjectRE: Deposit Accounts at Conversion Candidates
    Entry12/16/2010 12:05 PM
    MemberDen1200
    Some investors do so. But there often are limitations, like the amount of time, amount of the deposit and some more. I know people that have had deposits with banks for more than 10 years. Now with the OTS going away many are eager to convert before that.
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