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A Florida Bank Thats Ready to Step Up
03/14/2007 12:00 am EST
Richard Young, founder of Young Research & Publishing, and Jeremy Jones, editor of Distressed Securities and Takeover Candidates, identify a small, underperforming Florida bank that could make move up to the big time.
Incorporated in 1998 by a group of experienced industry veterans, Bank of Florida (NASDAQ: BOFL) runs a high-growth, high-touch operation in Florida's premier banking markets. Headquarters for this community bank are in Naples, Florida. BOFL is a takeover candidate, but you can profit even without a takeover.
The banking business is ideally suited for consolidation because banks offer a similar product, run similar strategies, and operate under the same regulatory environment. The number of banks in the US today has declined to just over 7,400 from over 14,400 in 1984. That is an average of 318 net takeovers per year.
[One way] to spot takeover candidates in the banking industry is to invest in banks that (1) operate in attractive markets and (2) trade at a reasonable price. Bank of Florida qualifies on both accounts.
Florida is one of the most attractive banking markets in the United States. Population growth is above average, job creation is robust and, more important, a wealthy class of baby boomers views Florida as an ideal retirement destination.
Within Florida, the southwest portion of the state is arguably the most attractive banking market, [and] Bank of Florida is well-positioned to take advantage of [it]. Upon the closing of a pending acquisition with Old Florida Bank, Bank of Florida will become the fourth-largest publicly traded bank based in Florida.
Bank of Florida sells for a price that is not just reasonable; it is attractive. After the acquisition of Old Florida Bank, we estimate [it will trade at a price-to-tangible-book-value] ratio of 1.8x. The median P/TBV of comparable Florida banks is 2.5x. If taken over, you can expect Bank of Florida to fetch 3.0x-3.5x TBV, based on recent acquisition multiples. In a best-case scenario, we see a takeout value of $35 per share. Without a takeover, the stock could trade up to $25 per share within the next year.
The chance of a near-term takeover is low, but more likely within the next couple of years. Purchase shares before the institutional investment community latches on to the Bank of Florida story and bids up the price.
[Even] without the prospect of a takeover, Bank of Florida still offers a compelling story. Assets, deposits, and interest income have grown at an average annual rate of over 60% during the past five years. [It] can easily grow at 25% annually over the next three to five years.
Bank of Florida operates a high-growth, high-touch strategy which often translates into poor operating ratios at a growing bank. Significant improvement is just around the corner. Furthermore, bank management has set intermediate-term financial targets that, if achieved, will move the bank onto the radar screen of many more institutional investors.
Bank of Florida is a thinly traded stock, so use limit orders when you purchase the shares. Buy BOFL below $21.50 per share. [The stock changed hands at $18.8 early Wednesday--Editor.]
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