OCEAN SHORE HOLDING CO OSHC
March 05, 2014 - 6:42pm EST by
jet551
2014 2015
Price: 14.15 EPS $0.81 $0.00
Shares Out. (in M): 7 P/E 17.0x 0.0x
Market Cap (in $M): 97 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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  • Community Bank
  • Potential Acquisition Target
  • Demutualization

Description

OSHC has appeared in the past on VIC and is a fairly simple story, hence the short writeup.  It is a small, conservative, relatively sleepy local bank located in southern New Jersey, with assets of just over $1 billion.  The company completed its mutual conversion back in December of 2009.  The conversion created a 3-year window in which the company could not be sold.  That window has now been expired for a year, and there is good reason to believe that the company will be acquired in the near term.  At comparable transaction multiples (1.3-1.5x TBV) shares of OSHC would be valued at $19-22.  In the event that a transaction does not occur, we see little downside in the name.  It is currently trading at a lean 0.95x TBV and mid-range P/E of 17x.

The Company
OSHC is headquartered in Ocean City, New Jersey, and serves the southern New Jersey “shore communities” through a total of twelve full-service offices in the southeastern corner of the state, approximately 65 miles east of Philadelphia and 130 miles south of New York.  While small, the company has strong market share in its local geographies – roughly 10% of area deposits, according to 2012 FDIC data.
 
OSHC’s lending is focused primarily on residential mortgages (85% of loan dollars), including a large component of second homes.   They also lend to a lesser extent against commercial real estate (4%), construction projects (4%), and consumer home equity lines of credit (7%).  Lending standards are conservative, with loan-to-value ratios in excess of 80% only when secured by first and/or second liens on owner-occupied one-to-four-family residences or private mortgage insurance.   Management has recently stated the LTV on its entire book to be approximately 60%.  As a result, OSHC has experienced exceedingly low default rates, with allowance for loan losses at 0.56% of total loans at December 31, 2013.
 
NPA's As A Percent Of Assets
2011 2012 2013
.66% .64% .55%
 
On the deposit side, the company again works closely within its local communities, with substantially all of its depositors residing in the state of New Jersey.  Of this, core deposits represent 75% of the total, with more than half of this coming from sticky checking products for commercial accounts and local municipalities/school districts.  Importantly, the bank has no brokered deposits.  Cumulatively, this has led the bank to a healthy net interest margin of 3.12% for the year 2013.  This is set to expand, as lending rates have ticked up while deposit interest levels have remained at record lows.
 
The company is tightly staffed, with approximately 150 full time, non-unionized employees, and another roughly 50 part-timers. Its efficiency ratio of 71.0, in line with small-scale peers but inferior to larger players, presents an opportunity for improvement if acquired (see below).

Why it Will Be Acquired
In 2009, the company transitioned from a two-tier mutual holding company to a stock holding company structure, completing its community offering stage in December of that year.  Since then, the company has continued on its path of conservative loan growth, expanded its book value and repurchased shares (including more than 60k shares in 2013, out of a planned 210k share program).  The bank came through Hurricane Sandy entirely unscathed, with no loans affected. 
                                                         
As per regulatory constraint, a converted bank cannot be purchased by an acquirer for a period of three years.  This phase came to a close in early 2013.  The high quality loan portfolio, conservative balance sheet, and strong market share in its attractive geographies make OSHC a prime target for an acquiring regional player.  On its own, the bank lacks the scale and resources to grow out of its current local footprint.

Speculation regarding potential acquirers has centered around regional players including Cape Bank, CBNJ, Kearney, and, most often, Investors and Beneficial.  Reportedly, conversations with management at the latter three have shown them to be quite “conversant” on the topic of OSHC, with OSHC’s footprint fitting neatly into their described territorial growth plans.  

The logical acquirer based on size and geography is most likely Beneficial Bank, and the company doesn't dispute that.  In company presentations, Beneficial has repeatedly emphasized its desire to grow via acquisition, “to strategically grow in other key Philadelphia/Southern New Jersey markets”.  Beneficial had been kept on the acquisition sidelines in 2013 due to an ongoing DOJ investigation concerning potential Fair Housing Act violations.  In late January, the DOJ concluded its inquiries, without finding fault, and turned the situation back to the FDIC.  This is now expected to be fully resolved in early 2014.  Similarly, Investors Bank is in the midst of completing its conversion second-step (expected to close in Q2), which would give it additional firepower to pursue an OSHC acquisition. It has been sensible for OSHC to wait until these two catalysts are completed, and thus be available to the full slate of potential buyers.
 
OSHC has also seen its investor base shift towards an activist slant.  As 2013 drew to a close, the company’s second-largest outside shareholder, Rangeley Capital LP, began to press the acquisition issue in a friendly, but firm exhibition of “pre-activism”.  The firm issued a public letter to the OSHC board urging it to “undertake a strategic review of potential avenues to maximize value for Ocean Shore's owners”, including considering “the possibility of a sale”  [http://seekingalpha.com/instablog/957061-chris-demuth-jr/2427501-oshc-owners-forum].  Seidman & Associates and Clover Partners (currently the 5th and 6th largest investors in OSHC) have also been known for their successful activism in the small bank space, with the former (which just established a position in Q4 2013) being described as “the premier activist investor in the sector” by a well-regarded sell side analyst. Finally, M3F, a small-bank specialist, has held roughly an 8% stake in the shares for the last year and a half.  In our opinion, the patience of these experienced material shareholders is unlikely to last throughout the duration of 2014.

Valuation
In an acquisition, OSHC shares are likely to fetch a price of approximately $19-22 per share.  This is based on a price/TBV value of 1.3-1.5x, which is in the middle-of-the-range for recent similar transactions.
 
Mid-Altantic Bank Thrift M&A Since Jan 1, 2013
 
Buyer/Target Deal Announced Total Assets Deal Value/TBV
Provident New York Bancorp/ Sterling Bancorp 4/4/2013 2,750,842 1.68
Center Bancorp, Inc./ ConnectOne Bancorp, Inc 1/21/2014 1,242,673 1.79
Provident Financial Services, Inc./ Team Capital Bank 12/20/2013 949,224 1.91
Peoples Financial Services Corp./ Penseco Financial Services Corporation 6/28/2013 929,788 1.47
F.N.B. Corporation/ BCSB Bancorp 6/14/2013 642,295 1.34
Lakeland Bancorp, Inc./ Somerset Hills Bancorp 1/29/2013 368,930 1.52
WSFS Financial Corporation/ First Wyoming Financial Corporation 11/25/2013 307,712 1.30
ESSA Bancorp, Inc./ Franklin Security Bancorp, Inc. 11/18/2013 225,648 0.86
1st Constitution Bancorp/ Rumson-Fair Haven Bank & Trust Co. 8/15/2013 214,052 1.29
Wilshire Bancorp, Inc./ BankAsiana 6/10/2013 207,330 1.37
Private investor - Jacob M. Safra/ T. Rowe Price Savings Bank 5/29/2013 175,017 1.00
Haven Bancorp, MHC/ Hilltop Community Bancorp 6/5/2013 167,672 1.30
Riverview Financial Corporation/ Union Bancorp 3/7/2013 123,779 0.94
Southern National Bancorp of Virginia/ Prince George's Federal Savings Bank 1/8/2014 104,108 0.89
       
Median for banks greater than $300m and less than $2b in assets     1.49
Median for all     1.33
       
Source: Sandler O’Neill      
Note: Excludes deals: (1) priced at <0.5 x TCE  (2) where no deal value is available      
 
Should the company remain independent, we see little downside in value to the current share price.  At a P/E multiple of 17x and P/TBV multiple of 0.95x, the bank is trading squarely in the low-mid part of its peer group range.  With a conservative balance sheet, stable core franchise, slightly increasing interest rates in the medium term, and a healthy active share repurchase program, shares should find a floor at or near the current price.   
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

-Continued and more forceful shareholder activism
-Beneficial Bank FDIC investigation concludes and Investors Bank completes its second step conversion to a stock holding company, ultimately resulting in a sale of the company to either of these entities or another
    sort by    

    Description

    OSHC has appeared in the past on VIC and is a fairly simple story, hence the short writeup.  It is a small, conservative, relatively sleepy local bank located in southern New Jersey, with assets of just over $1 billion.  The company completed its mutual conversion back in December of 2009.  The conversion created a 3-year window in which the company could not be sold.  That window has now been expired for a year, and there is good reason to believe that the company will be acquired in the near term.  At comparable transaction multiples (1.3-1.5x TBV) shares of OSHC would be valued at $19-22.  In the event that a transaction does not occur, we see little downside in the name.  It is currently trading at a lean 0.95x TBV and mid-range P/E of 17x.

    The Company
    OSHC is headquartered in Ocean City, New Jersey, and serves the southern New Jersey “shore communities” through a total of twelve full-service offices in the southeastern corner of the state, approximately 65 miles east of Philadelphia and 130 miles south of New York.  While small, the company has strong market share in its local geographies – roughly 10% of area deposits, according to 2012 FDIC data.
     
    OSHC’s lending is focused primarily on residential mortgages (85% of loan dollars), including a large component of second homes.   They also lend to a lesser extent against commercial real estate (4%), construction projects (4%), and consumer home equity lines of credit (7%).  Lending standards are conservative, with loan-to-value ratios in excess of 80% only when secured by first and/or second liens on owner-occupied one-to-four-family residences or private mortgage insurance.   Management has recently stated the LTV on its entire book to be approximately 60%.  As a result, OSHC has experienced exceedingly low default rates, with allowance for loan losses at 0.56% of total loans at December 31, 2013.
     
    NPA's As A Percent Of Assets
    2011 2012 2013
    .66% .64% .55%
     
    On the deposit side, the company again works closely within its local communities, with substantially all of its depositors residing in the state of New Jersey.  Of this, core deposits represent 75% of the total, with more than half of this coming from sticky checking products for commercial accounts and local municipalities/school districts.  Importantly, the bank has no brokered deposits.  Cumulatively, this has led the bank to a healthy net interest margin of 3.12% for the year 2013.  This is set to expand, as lending rates have ticked up while deposit interest levels have remained at record lows.
     
    The company is tightly staffed, with approximately 150 full time, non-unionized employees, and another roughly 50 part-timers. Its efficiency ratio of 71.0, in line with small-scale peers but inferior to larger players, presents an opportunity for improvement if acquired (see below).

    Why it Will Be Acquired
    In 2009, the company transitioned from a two-tier mutual holding company to a stock holding company structure, completing its community offering stage in December of that year.  Since then, the company has continued on its path of conservative loan growth, expanded its book value and repurchased shares (including more than 60k shares in 2013, out of a planned 210k share program).  The bank came through Hurricane Sandy entirely unscathed, with no loans affected. 
                                                             
    As per regulatory constraint, a converted bank cannot be purchased by an acquirer for a period of three years.  This phase came to a close in early 2013.  The high quality loan portfolio, conservative balance sheet, and strong market share in its attractive geographies make OSHC a prime target for an acquiring regional player.  On its own, the bank lacks the scale and resources to grow out of its current local footprint.

    Speculation regarding potential acquirers has centered around regional players including Cape Bank, CBNJ, Kearney, and, most often, Investors and Beneficial.  Reportedly, conversations with management at the latter three have shown them to be quite “conversant” on the topic of OSHC, with OSHC’s footprint fitting neatly into their described territorial growth plans.  

    The logical acquirer based on size and geography is most likely Beneficial Bank, and the company doesn't dispute that.  In company presentations, Beneficial has repeatedly emphasized its desire to grow via acquisition, “to strategically grow in other key Philadelphia/Southern New Jersey markets”.  Beneficial had been kept on the acquisition sidelines in 2013 due to an ongoing DOJ investigation concerning potential Fair Housing Act violations.  In late January, the DOJ concluded its inquiries, without finding fault, and turned the situation back to the FDIC.  This is now expected to be fully resolved in early 2014.  Similarly, Investors Bank is in the midst of completing its conversion second-step (expected to close in Q2), which would give it additional firepower to pursue an OSHC acquisition. It has been sensible for OSHC to wait until these two catalysts are completed, and thus be available to the full slate of potential buyers.
     
    OSHC has also seen its investor base shift towards an activist slant.  As 2013 drew to a close, the company’s second-largest outside shareholder, Rangeley Capital LP, began to press the acquisition issue in a friendly, but firm exhibition of “pre-activism”.  The firm issued a public letter to the OSHC board urging it to “undertake a strategic review of potential avenues to maximize value for Ocean Shore's owners”, including considering “the possibility of a sale”  [http://seekingalpha.com/instablog/957061-chris-demuth-jr/2427501-oshc-owners-forum].  Seidman & Associates and Clover Partners (currently the 5th and 6th largest investors in OSHC) have also been known for their successful activism in the small bank space, with the former (which just established a position in Q4 2013) being described as “the premier activist investor in the sector” by a well-regarded sell side analyst. Finally, M3F, a small-bank specialist, has held roughly an 8% stake in the shares for the last year and a half.  In our opinion, the patience of these experienced material shareholders is unlikely to last throughout the duration of 2014.

    Valuation
    In an acquisition, OSHC shares are likely to fetch a price of approximately $19-22 per share.  This is based on a price/TBV value of 1.3-1.5x, which is in the middle-of-the-range for recent similar transactions.
     
    Mid-Altantic Bank Thrift M&A Since Jan 1, 2013
     
    Buyer/Target Deal Announced Total Assets Deal Value/TBV
    Provident New York Bancorp/ Sterling Bancorp 4/4/2013 2,750,842 1.68
    Center Bancorp, Inc./ ConnectOne Bancorp, Inc 1/21/2014 1,242,673 1.79
    Provident Financial Services, Inc./ Team Capital Bank 12/20/2013 949,224 1.91
    Peoples Financial Services Corp./ Penseco Financial Services Corporation 6/28/2013 929,788 1.47
    F.N.B. Corporation/ BCSB Bancorp 6/14/2013 642,295 1.34
    Lakeland Bancorp, Inc./ Somerset Hills Bancorp 1/29/2013 368,930 1.52
    WSFS Financial Corporation/ First Wyoming Financial Corporation 11/25/2013 307,712 1.30
    ESSA Bancorp, Inc./ Franklin Security Bancorp, Inc. 11/18/2013 225,648 0.86
    1st Constitution Bancorp/ Rumson-Fair Haven Bank & Trust Co. 8/15/2013 214,052 1.29
    Wilshire Bancorp, Inc./ BankAsiana 6/10/2013 207,330 1.37
    Private investor - Jacob M. Safra/ T. Rowe Price Savings Bank 5/29/2013 175,017 1.00
    Haven Bancorp, MHC/ Hilltop Community Bancorp 6/5/2013 167,672 1.30
    Riverview Financial Corporation/ Union Bancorp 3/7/2013 123,779 0.94
    Southern National Bancorp of Virginia/ Prince George's Federal Savings Bank 1/8/2014 104,108 0.89
           
    Median for banks greater than $300m and less than $2b in assets     1.49
    Median for all     1.33
           
    Source: Sandler O’Neill      
    Note: Excludes deals: (1) priced at <0.5 x TCE  (2) where no deal value is available      
     
    Should the company remain independent, we see little downside in value to the current share price.  At a P/E multiple of 17x and P/TBV multiple of 0.95x, the bank is trading squarely in the low-mid part of its peer group range.  With a conservative balance sheet, stable core franchise, slightly increasing interest rates in the medium term, and a healthy active share repurchase program, shares should find a floor at or near the current price.   
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    -Continued and more forceful shareholder activism
    -Beneficial Bank FDIC investigation concludes and Investors Bank completes its second step conversion to a stock holding company, ultimately resulting in a sale of the company to either of these entities or another
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