Friends Bank (OTC:FRIE)

Note: this is an extremely illiquid situation. I purchased a few hundred shares over the week following the announcement, but have been unable to acquire any more at a price I consider safe. Therefore, this may not be an overly actionable idea, but is still interesting nonetheless.

 

Business overview

Friends Bank (FRIE) is an OTC listed, regional bank, based in Florida. It is also a “dark company” which means it no longer reports its results with the SEC – making it very difficult to analyse.

 

Why am I interested?

On the 20th February, they announced a very peculiar transaction: FAIRWINDS Credit Union, another Florida based bank, announced they were acquiring FRIE, but did not disclose a priceI’ve been tracking risk arbitrage opportunities for a long time, but this is the first transaction I have come across that didn’t reveal a price. Combined with the stock being “dark” and therefore, difficult to analyse, my attention was well and truly grabbed.

 

What could it be worth?

I managed to acquire a few shares in what is probably the most illiquid issue I’ve ever attempted to acquire, and reached out to the board to try and get a copy of the latest annual report. Unfortunately, I’m yet to hear back from them…

 

I did however, manage to find some financials reported to the Federal Financial Institutions Examination Council which I found via the Capital IQ platform (see screen shots below)

frie 3

frie 4frie 5

The key numbers being:

Assets: $95m

Equity: $10m

 

Per OTC Markets the last reported number of shares outstanding (as at 12/31/2010) was 1,183,247 – giving us a per share, book value of ~$8.70 ($10m / 1.18m). The share count is the biggest risk in this investment as I have not been able to verify the number. Looking through the accounts since 2010, the company was slightly loss making in 2011 & 12, but the balance sheet looked to absorb it. However, I cannot guarantee that they did not issue shares during this period.

 

Historically, M&A transactions in the regional bank sector have occured at prices >1X tangible book value:

FRIE

 

Even adjusting for the tiny size of FRIE, a multiple of ~1.2X book value seems reasonable. Especially because FRIE is generating a decent 1% ROA and has been consistently growing for the last 5+ years.

FRIE 2

 

Putting it all together

We have a bank currently under a takeover offer, with an unknown price. It has a book value of $8.70 and precedent transactions have occured in the range of 1.2-1.5X. Now here is the interesting part, I was able to acquire my stake for an average price of $7.60 – or <0.90X book value!

 

Due to the uncertainty around this deal, I obviously couldn’t make this a large bet. However, I think it is extremely unlikely that the deal has been priced at <1X book value, giving me a decent margin of safety. I also think the potential upside well and truly offsets the “uncertainty risk” with potential profits of 35-70%.Most importantly, I believe it is highly unlikely that the market is pricing the stock efficiently, given the access to information is difficult, the liquidity non-existent and the upside highly uncertain.

 

Overall, I think this is an attractive situation, hidden way off the beaten path. With the deal expected to close in Q3 2019, even a 1X multiple would be a highly attractive IRR. The downside on a “deal break” is probably ~$5.60 (or 25%) which would be a very cheap price for a decent little bank. Given the consolidation that has occurred in this industry over the years, I put the probability of a deal of this size breaking due to regulatory interference very low.

 

As always, this is not financial advice. Do your own research. Do not rely on any numbers or logic I present – they could all be inaccurate or flawed.

 

8 thoughts on “Friends Bank (OTC:FRIE)

  1. It has been a few year since I looked at dark banks. Some suggestions if I may. Dig into the call report. Quick glance – Looks like net income was 1,225,000. 325,000 was from tax credit and 250,000 was negative loan loss provision. Are they items that negatively impacted results? What changed from the 2017 report. Is the real run rate 700,000 pretax? Report shows a dividend amount of 105,000. What was the dividends per share during the year? If you know that you can calculate shares outstanding. otcmarkets.com shows one for $0.05 per share. Was there another? Look at quarterly reports to see if there was more than one. Or, maybe the bank will just tell you the number of shares outstanding.

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    1. Hi Tim, thanks for the suggestions. As I mentioned at the start of my post, FRIE is incredibly illiquid and the stock moved higher before I could acquire any meaningful stock. Given it represents <1% of my portfolio and I have no intention of buying more at the current prices, it doesn't make sense for me from a return on time perspective to do any more digging.

      Appreciate the feedback though!

      Cheers,
      Dan

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    1. If you take the reported profit after tax, and deduct the net increase in equity value, you get ~$100k which lines up with what you’ve found. Therefore, you could be correct and share count might be 2m+

      This would put the current BV/S at ~4.75 and current multiple at 2X TBV (which is definitely at the higher end…)

      Good find!

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  2. For anyone still interested/following this one Li hit the nail on the head and the share count is 2.1m with a book value per share of $4.89 as per the 2018 shareholder letter (which I just received).

    Thankfully (luckily) for me, due to the large initial margin of safety, it still looks like I should make a decent profit on this investment because the takeover price came in at $9

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