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Small Bank Newsletter
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November 2005
APPALACHIAN BANCSHARES, INC (APAB $16.33-$16.75) they just made the move to the NASDAQ from the pink sheets. They also just completed a secondary offering of 1,100,000 shares at $16 a share through Sandler O’Neil and they have an over allotment of another 165,000 that will be issued, most likely. The stock rarely traded before this and now is the first time you can get size in the stock. It has traded over 100,000 shares on its first day on the NASDAQ. With many new bank stock offerings, this months, under- water, and the banks and thrifts in general having their worst sell off in 6 months. You must pick your way through all the high priced deals and look for gems like this one at fair prices (only 1.6 times book and a P/E of 13.) If they were to sell, which we don’t think is anytime soon, they would get 2.6 times book, not bad. But we think you can make 15%+ per year for the next ten, with much less than over-market downside risk. Look for the stock to move to the $20 level over the next 18 months with very little downside risk. Earnings will continue to grow at 25%+ per year for the foreseeable future and being just over 10 years old now, the Bank has most of the big costs behind them, and the Bank can start to leverage profits the next 10 years. This Bank turned a profit very fast at the start and is committed to keep earnings growing double digits. Net interest margins going up and up to 4.72% in the latest quarter. Asset quality is very strong with strong reserves at 1.21%, and total asset now at $516 million.
They priced this deal right and usually this means a very strong stock, but with almost every secondary going under water this month, other than STNJ, and IBCA, can we be right 3 times in a row? We think so!
Book value is almost $11 a share and management owns around 34% of the stock as they just bought 8% of the new offering. With the efficiency ratio still over 61%, there is plenty of room for earnings growth in the coming years. They have over $260 million in deposits at their two main locations, very nice for country boys. Look for loan growth to continue to expand as they are in some great growing markets, without the risk of Vegas.
Accumulate now under $17.50 and buy all you can under $16.50, downside should be limited to around $15 in a very bad market. They are headquartered in our favored bank state, Elligay, GA.
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FOLLOW UPS:
- 1. NORTH FORK BANC (NFB) while we had never covered this one before, the bank is getting near attractive valuation with the big bank sell-off, and they just increased their share buyback to 16 million shares from 13 million shares. We would load up on this one at $23 or less and enjoy the big cash dividend. Maybe a Canadian Bank will come down and take them or someone else. This could be the new wave of mergers people have not thought about. Canadian Banks are mostly all at new highs. Firms also have being lowering their rating to sell, on NFB, although Citi, raised it to buy from hold this month! We are thinking like Citi, that can’t be good!
2. WAUWATOSA SAVINGS BANK (WAUW) got a nice 15% pop, time to sell, dead money we feel, earnings growth is going to be hard the next few years.
3. CBC HOLDINGS (CBHC) trying to take some stock private at $17.80, buy more up to $14.00 if you can get any. Looks like this wave of savings costs will continue. If this goes through earnings will be over $2.10 a share in 2006.
4. ATLANTIC LIBERTY (ALFCthe stock has been more active lately, even though it is way up from when we first recommended it last year at $20. We think a sale of the Bank is coming very soon and they could fetch $30-$35 a share. Their book value is understated a little as they own some good real estate. So with a book of $20 a share, they should be able to get at least 1.5 times book and maybe 1.75 times book. Plenty of fat to cut as expenses are very high for a bank of this size, so the P/E of say 17 equals a $34 price tag. Downside should be limited to around the $26 area. If we do get a deal in ALFC, we could also see Brooklyn Federal (BFSB) get a nice pop, also. Buy more now, under $28.50, sell by 1/31/06 if no deal comes.
5. GB&T BANCSHARES (GBTB) e bank sold off again in the recent bank slide, keep buying under $21.00. Our largest holding.Big money is made being a contrarian, period. If you want to take more risk, than we like to try Flagstar Bank (FBC) under $16 and sell over $20 on any news. They could get $25 in a deal but we don’t think that will happen with the price at this level as management owns half on the stock. The stock is cheap, but can get cheaper in this type of weak bank stock market. Downside should be limited to around the $13 area if bad news did come out. We don’t think it will. The market has been very hard on any thing Thrift related the past month. We still are buyers of thrifts like FFCH below $28 and KFED under $11.50, and would look at AF if it gets back under $23. Banks like GBTB, APAB, ASFE, VLLY, and STNJ should make more and more money as rates rise.
BankNewsletter.com 1-888-814-7575 10/04
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- Douglas Hughe
s -- Small Bank Newsletter, Hughes Investment Management
, can and does take positions, in stocks it recommends.All material
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