Ms Kate wrote:
- quote -

Without turning it into a multipage discussion...that all more or less
fits together. Book value is essentially assets minus debts. You might
think of this as the garage-sale value of the company. Sell off all the
stuff, pay off all the debts, what's left? That's the book value. Huge
simplification but...

In the ideal case "what they have" is all TANGIBLE stuff with
easily-identified value, like cash and things easily converted to cash.
So the garage sale would net a dollar for every dollar in stated book value.

Not every asset falls in that category though, some assets are
INTANGIBLE. From your description there's one on the horizon called
"goodwill," which comes about in most acquisitions.

Imagine you're a bank, and you take $71.8 million of cash that you've
collected from the local Elis, and buy another local bank at an
acquisition price equal to 2.0X book value (not that 2.0 is the actual
multiple, just using it as an example). That means that if you
garage-sale your newly-purchased bank the next day you'd net $35.9
million in cash.

Why would you pay $71.8 million for something worth $35.9 million? In
theory you wouldn't, it's just that some of what you bought isn't fairly
represented by the company's TANGIBLE assets. Part of what you're buying
when you buy Tolland Bank is the Tolland Bank customer base, reputation,
potential for growth, etc. - which are all INTANGIBLE assets of Tolland
Bank - the reason you paid more than a dollar for a dollar's worth of stuff.

To account for this value, post-acquisition, New Haven records $35.9
million in "Goodwill" on its balance sheet. In effect the assumption is
that the price you paid was a fair one, so you carry the overpayment on
the balance sheet as an asset called "goodwill." It's an intangible
asset, though, that is subtracted out when you calculate "tangible book
value" for those who are skeptical about such fluffy "assets."

[As an aside...In the worst cases - for example AOL Time Warner -
Goodwill is "the amount the vacuous senior executives overpaid for a
bunch of money-losing businesses." This got to be so bad that under new
accounting rules you need to record "goodwill impairment," marking down
the stated value of this intangible asset when it's clear that the price
you paid could not be supported by even the most creative math. So a lot
of goodwill on a company's balance sheet is bad, it makes the real value
of the company suspect; if a mea culpa comes there will be large
"write-downs of goodwill" aka "money we gave away." The higher up the
merger chain you get, the more likely these write-downs seem to be - I
have more faith in the price paid for a paper route or lemonade stand
than the average mega-merger!]

Going back to the transaction...Cash on the balance sheet counts dollar
for dollar in tangible book value because cash is a tangible asset. If
you take some of the cash and substitute (a bank + some goodwill) in its
place, you end up with a hit to your tangible book value. Was $100 in
cash, now it's $50 cash, $50 goodwill.

So if the price-to-book ratio is 0.769 before you consider goodwill, and
some acquisitions are about to happen, then it makes sense that tangible
book value (which subtracts goodwill from your assets) is a higher
number like 1.355. Only a company with no intangible assets would have
tangible book value = book value. Make sense?

OK, so what? Going back to the old 1.8 to 2.2X book value range for
acquisitions, it sounds like your bank has some wiggle room to get
bought out, even factoring in the goodwill they'll record after paying a
premium for those two banks. "Pro forma" value is of course not as good
as a going concern value, and represents a risk element to the
investment. And again, 1.8-2.2 isn't written in stone with
acquisitions...the multiples have been higher, but used to be lower.
Also to the extent book value is enhanced (more customers) or eroded
(more bad loans) in the future, the value of the business would adjust
accordingly. Not to mention if the stock issue is oversubscribed - what
would they do with the money?

-Tad

Thanks especially to Tad Borek and Brent Gardner for their detailed
and helpful responses.

The institution in question is New Haven Savings Bank.

The capitalization will mostly be used to gobble up two local
minnows:
Tolland Bank (2002 income: $3.5M ) for a purchase price of $71.8M and
Savings Bank of Manchester (2002 net inc: $25.9M) for purchase price
$607M).

Pro forma price to book ratio at midpoint of expected # of shares in
offering: 76.9%
Pro forma price to 'tangible book value' at midpoint: 135.5%

What exactly is 'tangible book value'? Anyone???

I am interested in finding local expert opinion to advise us on this;
in the meantime, I'm living and learning and trying to figure it out
for myself.

Ignore the background noise of the bank's commitment to the Community
Reinvestment Act and to other parts of the demutualization and get some
fundamental analysis of whether this is a good opportunity for your family.

There should be plenty of local independent information available.

The OP could name the institution, I'm sure there would plenty of people
that would take a look at it and render an opinion.


"Ignoramus24603" <ignoramus24603[at]NOSPAM.24603.invalid> wrote in message
news:c1lgki$3pn$0[at]pita.alt.net...
- quote -

"Ms Kate" <krinconn[at]yahoo.com> wrote in message
news:6140a8b.0402261036.7fd54fff[at]posting.google.com...
- quote -

For years, Peter Lynch touted this scenario on an annual investment idea
panel. Every year, he was right.

Simple math: Mutual Savings Bank is worth $1. Bank sells stock in IPO for $1
cash.

Bank is now worth $2 --- $1 asset + $1 cash.

Investor owns bank for $1 basis, with book value of $2.

It doesn't take long for a well managed going concern to at least equal
their book value.

This isn't my math, it's Peter Lynch's. A stock broker I know specializes in
this, and he's made some teachers and janitors in New Jersey RICH by opening
up savings accounts in the remaining mutual savings banks. He told me that
he's done this deal on over one hundred banks, and only 2 didn't pan out.
Most doubled within months.

Personaly, I would not bet the farm on it, and Tad is right, get an
advisor's opinion -- preferably one who has done this before (and most
advisors haven't, no matter how many letters they have after their names).

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

Ms Kate wrote:
- quote -

There are also
- quote -

Could I interest you in a loan for the up-front money in exchange for a
81/19 split? [kidding, kidding]

First - everything below is GENERAL and it would make sense to pay
someone in your area to evaluate all of this for you.

I have seen a few "bank-IPOs" happen and in each, it's been a very
rewarding investment. Completely anecdotal; I have no idea what the
overall percentages are. Perhaps the offering circulars provide some
guidance or sources of info.

And in general I like regional banks as investments. Rather, small local
banks that become regional banks that become super-regional banks that
become national banks, through a series of acquisitions. The higher you
get up the food chain with mergers, the dopier the numbers seem to get,
and you can make money at each step ("you" being the target's
shareholders, and of course all of the executives). Bank consolidation,
while it runs in spurts, is a trend that shows no signs of stopping
because enough people seem to be convinced that financial companies
benefit from "scale". Many of these people are directors or executives
of banks, and benefit from the transactions, but that's another discussion.

So I think it's worth evaluating the bank on its merits for acquisition.
Not an easy thing to do but some things to consider for armchair-analysis:

First, book value. Many banks get bought out at a share price equal to
say 1.8 to 2.2X the book value per share. Sometimes higher (following
general rule above), used to be lower (<1.5). Book value should be
prominently displayed and discussed ad nauseum in the offering
materials, along with projections because it changes as the bank grows.
So if the IPO price ($10?) puts the share price at 0.8X projected book,
or 6.0X projected book, you have some information to consider. One
complicating factor is the risk that they've cooked the book - like any
accounting value it's subject to some subjective decisions in
calculation, and of course projections are just educated guesses. That's
a question for a CFA who knows something about bank financials, but if
you're in CT (based on email address?) you shouldn't be able to swing a
dead cat without hitting one!

Next, one thing in favor of banks as investments is the fact that
they're a regulated industry. The need to keep the financials within
some legally-mandated guidelines means that unlike the pets.coms of the
world, there's only so much they can do to run the business into the
ground. Still it's worth looking at how the bank actually makes money.
Boring is better. Local mortgages on single-family homes? Big clunky
commercial real estate loans for some steel & concrete monstrosity built
on spec and currently 90% vacant? Any pre-IPO earnings spike from what
may be non-repeatable events? (like "everyone in town refinancing at 5.5%")

Think like a buyer...strong locations w/good leases or buildings owned
by the bank can be helpful. Local ordinances limiting the numbers of
bank branches (though uncommon) can be helpul. Above all ample/loyal
customers & good, conservative loans can be helpful. Is there a regional
bank on a buying spree? Also good. The five-year lockout is a damper on
things but not the end of the world; you need to plan to hold, but it's
five years to spiff the business up for the sale.

Outside of the acquisition context...well you could evaluate it on its
merits as a long-term holding - on its future profitability. That's not
easy (get the cat!). Local banks tend to be profitable, but merit a
lower price-to-earnings ratio than average. It wasn't long ago that P/Es
of 10 or less were common, even in some of the larger regional banks,
though you need to look hard these days to find that.

The 80/20 loan thing just sounds like a bad idea (talk to a lawyer). As
for what percentage of your own money to consider investing...totally
subjective, but I can't imagine an opportunity worth risking a financial
future on. Especially because you've already achieved some financial
success (contrast a 22 year old considering a 100% investment of $3000
in net worth). The idealized local sterling-silver bank might merit an
"overweight" but every business comes with its risks, and a takeover
might never come. In any event it sounds like you'd need to hold for
five years to get that payday, and to the extent you need money before
then...

You hinted at an ethical question related to the progression of the bank
to a public company, and since you mentioned it I assume it's something
you've thought about. FWIW, I see bank consolidation as being different
from the Wal-mart effect (and no not just because I like investing in
banks). I do my best to patronize local hardware stores, restaurants,
coffee shops, specialty stores, etc...they add to the diversity of
things, have higher quality and to me are worth a little more. A world
of big-box stores is boring and unlikely to serve anyone who doesn't
have "average" needs, but the economics favor those kinds of businesses
in the same way they favor bad radio and movies like "Titanic".

Banks are different in that the product is money, with what are really
slight variations in service. There are still thousands of separate
businesses out there, "new entry" is relatively easy, and arguably the
current system might be inefficient for consumers. Local banks with ties
to the community are nice, but they're not exactly benevolent
institutions - perhaps at some point they were but that day may have
passed. Service does seem to decline with larger firms, partly to pay
for mergers, but I think we're already seeing the backlash even in the
biggies - eg WaMu's no-fee checking. There are plenty of credit unions
that are unlikely to go away, and if anything, keep pressure on the
industry.

So IMHUO if you profit, I think you can do so with a clear conscience!

-Tad

In article <6140a8b.0402261036.7fd54fff[at]posting.google.com> , Ms Kate wrote:
- quote -

Great job saving money!

You are offered an opportunity to buy stock. A necessarily element of
deciding whether you want this stock or not is to find out how much
the stock it is worth, to compare that with its selling price. How
good is the business of the bank, how much profits will it earn in the
future, and how much of the profits the management is likely to pay
out to shareholders. The latter is important, as some managements are
pretty good at wasting profits.

If you had billions of dollars, how much would you pay to buy this
bank as a whole, to pay you good income from its profits?

Since your questions did not include any discussion of that, I would
like to make an assumption that you have not analyzed it. Since you
have not analyzed it, you should not buy this stock.

This is purely a decision making based observation. This may be a
wonderful bank that will make its shareholders rich. It may also be a
not so wonderful bank. You are not, however, ready to make a buying
decision.

i

A local bank in which my family has 4 accounts is undergoing a
mutual-to-stock conversion. We have been offered the opportunity to
buy up to $700K worth of stock for each of the 4 accounts.

There was a certain amount of local controversy and resistance to this
bank's conversion, and as a sop to the mayor and other pressure
groups, the bank agreed to fund a low-income-cheap-mortgage foundation
to the tune of $40 million from the capitalization. There are also
some anti-takeover measures they have had to include in their re-org
which apparently will keep them from being takeover targets for the
next 5 years.

Oh yes, the local alternative-weekly is reporting that 'unethical'
deals are being offered by outsiders willing to 'loan' the up-front
stock money in return for an 80/20 split on investment profit.

How can I tell whether this deal is the opportunity of a lifetime for
us or just a high-risk proposition? We are regular middle-class
working folk with 3 kids to put through college, incomes of about
$100K / yr, a stock portfolio worth ~ $280K, available cash of ~ 150K,
and pension funds + IRA's of about ~$200K, and home equity of about
$125K. So, in theory we could invest part or all of the $160K, or we
could liquidate the stocks in addition, or we could get a second
mortgage in addition, or we could risk involving ourselves with one
of these outsider investors....

So, considering those factors and any others, how much of our net
worth should we risk on this?