American Business Bank: Growth at a Reasonable Price

I initiated a new position in a tiny L.A. based bank, American Business Bank (OTC:AMBZ), recently at an average price of $21.60. It is now a 4% position in the portfolio. AMBZ trades over-the-counter and has no SEC filings, but no reason to worry since its financials can be verified with call reports that AMBZ is required to file with FDIC.

American Business Bank operates in the niche of banking middle market companies. The narrow focus has served AMBZ really well - assets have grown from less than 100M when the bank opened its doors in 1998 to over a billion dollars today. Net income has grown from less than a million to over ten million today. If you looked at its financials, you would not know that the US banking sector just experienced the worst crisis since the Great Depression. It has had virtually no non-accruals, no OREO, or net charge offs. Despite this, the balance sheet today has close to 2% of net loans in reserves for future loan losses. Furthermore, its cost of funding is among the lowest, if not the lowest in the nation at 35 bps. It has achieved these enviable results by consistently doing a ROAE of 12% to 14%. 

Despite this, AMBZ trades at a very small premium to tangible book value of $18.80 and at 9x TTM P/E of $2.33. I believe that a position in AMBZ today presents the opportunity to make a total return of 50% to 200% as it grows its asset base to $1.5 to $2 billion by 2016 with no downside in any scenario that I can imagine (market volatility is not considered as downside - we are talking about chances of permanent loss).

Here is a link to the detailed write-up.