Continuing an online bank valuation discussion:
We’ll remember that we first looked at this in October 2010, and we then revisited this again in more detail in July 2011. In the first 2010 review, we just took a cursory look. At the time we compared your bank to five similarly-sized publicly traded banks. When we looked again nine months later, in July 2011, we saw that of the five ‘comparable’ banks we had identified in 2010, one had been bought, one merged, and the remaining three were all up in price, one significantly. In our 2011 follow-up look, we saw that your privately owned Metropolis' financial performance over those interim nine months compared favorably to each of those publicly traded banks, especially in earnings growth. That’s when I suggested not bailing too cheaply if it wasn’t necessary.
We’ll recall that in our July 2011 follow-up review (which we took off-board since it was becoming a specialized discussion to your situation) I pulled together quite a bit of additional data on more publicly traded banks -- this time focusing on banks of similar 'quality' (per Bankrate).
Here are those tables again. Again, these are about six months old now – with that data from July 2011. You are welcome to update them if you like – I not going to again -- at this point they are illustrative and I suspect they’d still get us to about the same place. What we did here was take a closer look at all similarly sized, publicly traded – and this is important – similarly ‘safety-rated’ banks across the country. As with Metropolis, these banks are all rated '4' on Bankrate's five-star rating scale. [Following the tables, I've included some notes and links relating to the table's ‘ratings’ and ratios.]
The 'comparable' banks - again, similar-sized banks and publicly traded - can provide some idea of relative pricing. Your bank certainly had been performing well vs. these. It has had an impressive expense 'efficiency rating' (see notes below), similar to the best large banks, including M&T and USBancorp. Metropolis seems to be frugal but efficient.
Again, this is from back in July 2011:
($millions)
(the columns may appear a bit squirrely)
*****************************************************************
Notes:
First, some of your bank’s financial and rating information can be found here:
CITY NATIONAL BANK OF METROPOLIS, 423 FERRY STREET, METROPOLIS, Illinois 62960
STAR RATING: 4
http://www.bankrate.com/rates/safe-sound/financial-statement...
Secondly, a quick perspective on Bankrate’s ‘star’ ratings:
5-star - Superior
4-star - Sound
3-star - Performing
2-star - Below peer group
1-star - Lowest rated
http://www.bankrate.com/rates/safe-sound/ratings-structure.a...
Finally, some ‘Fool’ notes on bank ‘efficiency ratios’, shown in the table:
The efficiency ratio is the traditional measure for bank productivity. At its simplest, it is the cost required to generate each dollar of revenue. Its simplicity is an advantage, but the ratio always needs a business context, and consideration of the complicating factors is discussed below….[see linked narrative]… ..Once calculated, the next thought is how to interpret the efficiency ratio. A bank's non-interest expense level reflects its efficiency in converting inputs into revenue. A cost to revenue ratio of 50%, or below, is admired. A less efficient bank will have a higher efficiency ratio, say, 70% and above. So, all other things being equal, a low efficiency ratio is good.
http://www.fool.com/investing/dividends-income/2006/12/14/ba...
*******************************************************************
So here’s what I’d do –
I’d ask the bank manager for the basis of their pricing. Have they had an appraisal recently? (Anytime?) Or are they just guessing, or offering some portion of book value or something? If they have done an appraisal, ask to see it. If they are comparing themselves to publicly traded banks, which ones? (Similarly 4-star?)
Here’s a question for them: is their price their estimate of ‘fair value’ of the shares, or ‘fair market value’. There can be a big difference. ‘Fair value’ is your proportionate share of the market value of the company. ‘Fair market value’, on the other hand, is the value of your (minority interest) shares, which typically would be valued at substantially less (discounted because minority holdings in private companies can get pushed around, and so in practical terms are worth less per share to a hypothetical buyer than the controlling shareholder’s shares). I’m digressing now, but in shareholder-rights litigation – say for example they solicited your shares at a low price knowing they had a buy-out offer at a higher price, and you sold, found out, then sued – most courts would be looking to get you the full-proportionate-value ‘fair value’. (Similarly for minority-holding spouses in divorces, usually). Anyway, if they do have some appraised basis for the shares, this would be an important point for you to know as it relates to the appraisal.
I’d ask the questions. On the one hand, it will help you make an informed decision, and on the other, they may think through what they are telling you.
Unfortunately, they may give some line about being fair to others who have cash out – that this is the price, etc. I wouldn't be put off by this. I’d at least try to get their rationale for their number. And remember – while they are private, and perhaps close-to-the-vest, they are also (obviously) non-public. If they are not providing information, it’s not because there are SEC disclosure barriers or anything (no ‘insider’ issues).
We’ll remember that we first looked at this in October 2010, and we then revisited this again in more detail in July 2011. In the first 2010 review, we just took a cursory look. At the time we compared your bank to five similarly-sized publicly traded banks. When we looked again nine months later, in July 2011, we saw that of the five ‘comparable’ banks we had identified in 2010, one had been bought, one merged, and the remaining three were all up in price, one significantly. In our 2011 follow-up look, we saw that your privately owned Metropolis' financial performance over those interim nine months compared favorably to each of those publicly traded banks, especially in earnings growth. That’s when I suggested not bailing too cheaply if it wasn’t necessary.
We’ll recall that in our July 2011 follow-up review (which we took off-board since it was becoming a specialized discussion to your situation) I pulled together quite a bit of additional data on more publicly traded banks -- this time focusing on banks of similar 'quality' (per Bankrate).
Here are those tables again. Again, these are about six months old now – with that data from July 2011. You are welcome to update them if you like – I not going to again -- at this point they are illustrative and I suspect they’d still get us to about the same place. What we did here was take a closer look at all similarly sized, publicly traded – and this is important – similarly ‘safety-rated’ banks across the country. As with Metropolis, these banks are all rated '4' on Bankrate's five-star rating scale. [Following the tables, I've included some notes and links relating to the table's ‘ratings’ and ratios.]
The 'comparable' banks - again, similar-sized banks and publicly traded - can provide some idea of relative pricing. Your bank certainly had been performing well vs. these. It has had an impressive expense 'efficiency rating' (see notes below), similar to the best large banks, including M&T and USBancorp. Metropolis seems to be frugal but efficient.
Again, this is from back in July 2011:
($millions)
Name Symb Bankrate MarkCap$ NetInc$ PE Assts$ Efficiency%
BancorNewJersey BKJ 4 48.6 2.2 22.6 370 61.9
Louisiana Banc LABC 4 54.8 2.6 21.4 321 64.0
SomersetHills SOMH 4 45.6 2.5 18.1 329 71.4
EagleBancorp MT EBMT 4 43.1 2.4 17.8 326 65.3
Neffs Bancor NEFB 4 50.3 3.4 14.7 278 42.9
BankSouthCarol BKSC 4 44.4 3.1 14.3 281 60.6
ConsumersBanc CBKM 4 23.1 2.0 11.3 263 72.9
FirstWestVirgin FWV 4 25.2 2.3 10.8 278 71.6
CommerlBancOH CMOH 4 20.9 2.3 9.0 304 68.0
CitizensFirst CZFC 4 14.8 2.5 5.8 350 66.7
HeritageBanksh HBSKE ? 28.8 2.1 13.8 267 70.6
Median........ 2.4 14.3 304 66.7
Metropolis - 2010 4 3.2 278 48.6
Metropolis - 2011 Q1 4 1.0 303 43.2
____________________________________________________________
Name Price/Bk Loan/Depos% Payout% Div$ DivYld Equ/Assts ROA
BancorNewJersey 0.96 94 80% -1.717 3.5% 13.5 0.6%
LouisianaBanc 0.90 95 0% - 0.0% 18.8 0.8%
SomersetHills 1.15 74 45% -1.118 2.5% 12.0 0.8%
EagleBancorp MT 0.82 90 25% -0.612 1.4% 16.1 0.7%
Neffs Bancor 1.07 52 25% -0.863 1.7% 16.8 1.2%
BankSouthCarol 1.54 82 54% -1.688 3.8% 10.2 1.1%
ConsumersBanc 0.97 80 40% -0.813 3.5% 9.0 0.8%
FirstWestVirgin 0.81 52 52% -1.208 4.8% 11.2 0.8%
CommerlBancOH 0.85 82 21% -0.481 2.3% 8.0 0.8%
CitizensFirst 0.38 91 0% - 0.0% 11.0 0.7%
HeritageBanksh 0.76 96 26% -0.552 1.9% 14.1 0.8%
Median...... 0.90 82 26% 12.0 0.8%
Metropolis - 2010 64 ? 11.5% 1.3%
Metropolis - 2011 Q1 56 ? 10.9% 1.4%
(the columns may appear a bit squirrely)
*****************************************************************
Notes:
First, some of your bank’s financial and rating information can be found here:
CITY NATIONAL BANK OF METROPOLIS, 423 FERRY STREET, METROPOLIS, Illinois 62960
STAR RATING: 4
http://www.bankrate.com/rates/safe-sound/financial-statement...
Secondly, a quick perspective on Bankrate’s ‘star’ ratings:
5-star - Superior
4-star - Sound
3-star - Performing
2-star - Below peer group
1-star - Lowest rated
http://www.bankrate.com/rates/safe-sound/ratings-structure.a...
Finally, some ‘Fool’ notes on bank ‘efficiency ratios’, shown in the table:
The efficiency ratio is the traditional measure for bank productivity. At its simplest, it is the cost required to generate each dollar of revenue. Its simplicity is an advantage, but the ratio always needs a business context, and consideration of the complicating factors is discussed below….[see linked narrative]… ..Once calculated, the next thought is how to interpret the efficiency ratio. A bank's non-interest expense level reflects its efficiency in converting inputs into revenue. A cost to revenue ratio of 50%, or below, is admired. A less efficient bank will have a higher efficiency ratio, say, 70% and above. So, all other things being equal, a low efficiency ratio is good.
http://www.fool.com/investing/dividends-income/2006/12/14/ba...
*******************************************************************
So here’s what I’d do –
I’d ask the bank manager for the basis of their pricing. Have they had an appraisal recently? (Anytime?) Or are they just guessing, or offering some portion of book value or something? If they have done an appraisal, ask to see it. If they are comparing themselves to publicly traded banks, which ones? (Similarly 4-star?)
Here’s a question for them: is their price their estimate of ‘fair value’ of the shares, or ‘fair market value’. There can be a big difference. ‘Fair value’ is your proportionate share of the market value of the company. ‘Fair market value’, on the other hand, is the value of your (minority interest) shares, which typically would be valued at substantially less (discounted because minority holdings in private companies can get pushed around, and so in practical terms are worth less per share to a hypothetical buyer than the controlling shareholder’s shares). I’m digressing now, but in shareholder-rights litigation – say for example they solicited your shares at a low price knowing they had a buy-out offer at a higher price, and you sold, found out, then sued – most courts would be looking to get you the full-proportionate-value ‘fair value’. (Similarly for minority-holding spouses in divorces, usually). Anyway, if they do have some appraised basis for the shares, this would be an important point for you to know as it relates to the appraisal.
I’d ask the questions. On the one hand, it will help you make an informed decision, and on the other, they may think through what they are telling you.
Unfortunately, they may give some line about being fair to others who have cash out – that this is the price, etc. I wouldn't be put off by this. I’d at least try to get their rationale for their number. And remember – while they are private, and perhaps close-to-the-vest, they are also (obviously) non-public. If they are not providing information, it’s not because there are SEC disclosure barriers or anything (no ‘insider’ issues).