Company News

Bermuda Commercial Bank (BCB) is a corporate and private wealth bank, offering a range of financial services through its subsidiaries International Corporate Management of Bermuda, BCB Trust Company Limited, Bercom Nominees Limited, and BCB (Mauritius) Limited. In September 2006, three of the bank’s directors resigned over allegations of money laundering activity involving clientele of First Curacao International Bank N.V. (FCIB), the bank’s main shareholder. Over the past year, BCB has been actively searching for a new majority owner or potential merger partner.

After a series of delays, BCB released its annual report for fiscal 2006, which showed very healthy bottom-line earnings, in addition to some cause for concern. Operating income for fiscal 2006, net of one-time items, was a record $8.4 million, representing a 62% increase over 2005 operating earnings of $5.2 million. Net interest income rose 41%, from $8.2 million in 2005 to $11.6 million in 2006. This substantial growth in interest income was accompanied by a huge loss in customer deposits, which declined by $375 million, or 46%. Part of this reduction was due to the loss of some large client accounts following the FCIB money laundering charges and the subsequent downgrade in BCB’s credit ratings by both Fitch and Moody’s (an act that appears unwarranted and which the company is attempting to rectify.) The second part of this reduction was the continuation of a trend seen over many years at BCB, where certain clients invest large amounts of funds at both month and quarter-end.

BCB reported earnings of $2.8 million for the first six-months of fiscal 2007, a decrease of 34% from the $4.3 million earned during the same period in 2006. Notably, 12% of this decline was due to nonrecurring expenses related to the sale process of the bank. The remainder of the decline can be attributed to lower interest and fee-based income generated on a reduced base of customer deposits. On the positive side, the bank reported significant improvements in customer deposit levels since the client withdrawals relating to the FCIB investigation last autumn. Total assets grew from $465 million on September 30, 2006 to $583 million on March 31, 2007 – an increase of 26%. It would appear that BCB is enacting a successful turnaround strategy to rebuild its battered customer deposit base.

Negotiations for a BCB sale or merger have taken substantially longer than anticipated. We find this delay understandable, given the bank’s difficulties over the past year combined with its desire to seek out the greatest value for shareholders. We sense that an agreeable deal will be struck in due course,likely with a foreign bank attempting to gain a foothold in the lucrative Bermuda market. Although it is difficult to predict the precise terms, there appears to be substantial value to be unlocked in the company – which is profitable, flush with cash, and still in possession of a healthy customer base.

By applying an 11.0x multiple to our fiscal 2007 operating earnings estimates of $1.28 we generate a one-year target price of $14.00 – a level which we would deem the “starting point” for an eventual stock buyout or merger. Until a deal is consummated, shareholders should be content with an annual dividend payment of $0.80 – which represents a current yield of 6.50% – in addition to any year-end “bonus” dividend payments. LOM rates the shares of Bermuda Commercial Bank as a “buy”. We would note that BCB’s credit ratings were just placed under “further review for downgrade” by Moody’s. This should be a non-event due to a pending ownership change and the bank’s low-risk balance sheet.
However, in the unlikely event of another ratings downgrade, we would expect to see a “second wave”
of client withdrawals.