Keep An Eye On This Second-Step Conversion

Keep An Eye On This Second-Step Conversion

Alamogordo’s (OTCQB:ALMG) second-step conversion offers shareholders an attractive investment with low risk and high rewards. The company has filed all necessary second-step convert documents (S-1) and has board and management approval. When looking at ALMG at a bird’s eye glance, the company appears to be unattractive – P/TBV of 1.29x, efficiency ratio of 98.28% and ROE of -0.13%. Post-convert, the company will have more excess capital to increase efficiency through a deployment in repurchases, higher yielding loans, and acquisitions.

New Efficiency and Capital Options

In 2015, the company earned $0.19/share, giving the bank return on tangible equity of 1.08%. This is significantly below the national average. Though, lower ROTE is expected due to the higher than average ‘total capital to risk-weighted assets’ of 16.93%. Post-conversion, equity to assets will increase in excess of 20% – giving the company plenty of leg-room to expand profitability targets.

ALMG has made excellent progress improving the quality of their loan portfolio since the Great Recession. Back in 2009-2010, noncurrent loans to loans were 5.45% and 5.02%, respectively. In the most recent quarter, noncurrent loans to loans fell to a low 0.63%. With an extremely high capitalization position and quality loan book, there isn’t much risk on the table for investor to incur.

Secondary-Step Conversion

Currently 45.3% of ALMG’s stock is held by the public. This means that 54.7% of the stock is held by the mutual holding company. Moreover, out of the 1,679,500 shares outstanding – really only 760,813 shares are currently outstanding.

According to the S-1, the company is planning on selling 1,207,986-1,879,484 shares in the offering. Post-conversion, the company will have effectively raised $8.84-9.26/share in net proceeds.

Source: S-1

After the conversion the bank will trade on the Nasdaq Capital Market under the symbol ‘BCFT’ and the bank will be called ‘Bank 34’. Additionally, existing shareholders in ALMG will not be diluted post-conversion – current shareholders will have a non-dilutive exchange ratio for BCTF.

In regards to valuation, the following table represents what the company will be worth on a P/TBV bases post conversion.

Source: S-1

If the company sells the minimum amount of shares outstanding, you will effectively be holding a bank with a P/TBV of 56.99%. If the company sells the ‘adjusted maximum’ amount, you will be holding a bank with a P/TBV of 76.94%. It should be noted at this point that the S-1 was filed on June 3 rd. Since then, the stock price has fallen around 4%, meaning the P/TBV, post conversion, is even more attractive.

In my opinion, the company will sell the maximum amount of shares outstanding. This is based upon the company’s growth plan. Moreover, from the language within the S-1, it appears as if the company is converting for growth. In addition, they also stated that they are looking for more organic growth, but will do an acquisition if the right price comes along.

Overall, the company looks attractive on a post-converted standpoint and allows investors to buy an overcapitalized bank for 56-76% tangible book value. Even at 76% tangible book value the company offers at least a 20% annual return. Furthermore, after the first-year post-conversion the company will be able to repurchase shares. If repurchases do not transpire – highly unlikely – the overcapitalized bank could increase their loan portfolio, perform acquisitions or pay dividends. Inclusively, the bank offers a low risk investment for a high return.

Risks

If the conversion does not get approved by shareholders the thesis will not pan out. This is a very minimal risk given that a conversion benefits all parties involved.

The bank may take a while to put new capital to work. The longer it takes to put the capital to work, the lower it will take to realize a better profitability profile. I do think the bank has more than enough ability to put the capital to work in regards to higher yielding loans, acquisitions or dividends.

If the bank does an expensive acquisition, new capital could be wasted.

Conclusion

Mutual conversions are low-hanging fruit that offer investors superior returns with little risk. Historically, mutual conversions have outperformed the market with little volatility. Likewise, Second-step conversions are a great way to get aboard the mutual conversion train – without having to travel around the country depositing money in every mutual holding company left.

ALMG offers investors a chance to own a bank trading for 56-76% TBV. Typically, banks trading for that low of a valuation usually have nasty dilutive stock involved, a history of unprofitability or they are just poorly running banks. ALMG lets investors buy an overcapitalized bank with a growth plan in place. Even at 76% TBV, there isn’t much that could go wrong to influence more downside.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.