OCEAN SHORE HOLDING CO OSHC
March 18, 2011 - 4:53pm EST by
rii136
2011 2012
Price: 12.29 EPS $0.80 $1.08
Shares Out. (in M): 7 P/E 15.5x 11.3x
Market Cap (in $M): 83 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 83 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

Description

Ocean Shore is a small, conservative community bank trading at 85% of book value and a pro-forma P/E of 11.3x.  The company also pays a 2% dividend.  Asset quality has been fantastic, with NPAs below 1% for 2000-2010.  Like other similar banks recently posted on VIC, we believe that OSHC and other small banks with minimal credit issues will eventually trade more in-line with historical multiples of P/Tbv and EPS, with less credit risk along the way.  Multiple expansion, combined with book value growth in line with ROE, should provide attractive risk adjusted returns over the next several years. Because of liquidity, this is likely only appropriate for personal accounts.

Overview:

Ocean Shore is a 12 branch, $1B+ community bank headquarted in Ocean City, NJ.  The company recently completed a second step conversion in December 2009.  As with other second steps, this conversion left the bank slightly overcapitalized in a tough lending environment.  Last month, OSHC announced a buyout CBHC, a $135M bank located in Egg Harbor City, NJ.  The acquisition was done at 130% of TangBV and a P/E of 10.3x.  Post-acquisition, OSHC plans to consolidate 3 of CBHC's 5 branches, which should result in cost savings of $800k/yr.  Proforma for the cost savings, OSHC paid 6x earnings.  We believe this was a very smart way to deploy capital, given the other options available (buying agency bonds, trying to ramp up loan growth in a competitive environment, or having excess cash on balance sheet).  Below are the key financial before & after the acquisition:

 

Before

After

TBV

100.5

97.8

Shares out

6.79

6.79

TBV / Sh

$14.80

$14.40

Current Price

$12.29

$12.29

Tang BV/Sh

83%

85%

Net Inc

5.4

7.4

ROE

5.4%

7.5%

EPS

$0.80

$1.08

P/E

15.5

11.3

Asset Quality:  Nearly 80% of Ocean Shore's loan book is one-to-four family, residential loans.  The average LTV on the entire loan book is 60%, and LTVs at issuance have been 80%.  The quality of OSHC's loan book is reflected in their historical NPA ratios:

 

2005

2006

2007

2008

2009

2010

NPA %

0.02%

0.10%

0.05%

0.29%

0.25%

0.63%

The number jumped slightly in 2010 due to a couple mortgages becoming non-performing in the most recent quarter.  Even though the loans became non-performing, management did not take allowances against them because of the assets securing them are comfortably in excess of the principle outstanding, such that default unlikely result in impairment.

Deposits:  OSHC has a solid deposit franchise.  Core deposits are about 60% of total deposits.   In 2010, deposits grew 12%.

 

2005

2006

2007

2008

2009

Core Deposits %

69%

64%

59%

56%

60%

Other Metrics:  Pre-acquisition, NIM was 3.43% for FY 2010 and the efficiency ratio was 64%.  NIM could be higher if management would invest in agency securities instead of holding excess cash on the balance sheet, but they are conservative and do not want to be buying agency securities given current yields.

Valuation:  Since 1994, banks like OSHC have typically traded for 150% of TBV value and P/Es of about 16x.  Today, a handful of banks like OSHC trade at or below tangible book value.  We eventually believe that OSHC will be re-rated, either through the market or by an acquirer.  At the very least, we think OSHC's recent acquisition is a conservative benchmark (130% BV).  The combination of book value compounding at the current ROE (~8%) and an eventual re-rating of the stock should result in attractive IRRs, likely ranging from 16% to 33% percent depending on the duration and multiple assumed.  OSHC should be eligible to sell itself 3 years from its second step date (end of 2012), so we think the 2013 targets and IRRs are the most likely of potential outcomes.

 

2010

2011

2012

2013

2014

TBV

$14.40

$15.55

$16.79

$18.14

$19.59

Price @ 115%

$16.56

$17.88

$19.31

$20.86

$22.52

Price @ 130%

$18.72

$20.21

$21.83

$23.58

$25.46

IRR @ 115%

 

45%

25%

19%

16%

IRR @ 130%

 

64%

33%

24%

20%

 

 

Catalyst

**Continued M&A activity of smaller banks at higher multiples
**Continued execution
**Expiration of 3yr restriction on company putting itself up for sale
    sort by    
      Back to top