Cardinal Bankshares, Floyd, VA (CDBK)

The Case of an Unmotivated Straggler in Floyd


Don't you think it's time Leon Moore got his spine back and took another shot at selling Cardinal Bankshares? I have no doubt shareholders would support selling the bank, given how far its performance has fallen behind other community banks since they voted down Moore's proposed sale in 2002 to Mountain Bank.


Disclosure: As of this posting, I own significant shares of CDBK and may subsequently either dispose of them or purchase more.

Prospective Buyers
CDBK would make a nice "fill-in" for any of these three franchises:
Carter Bank & Trust, Martinsville,VA (CARE)
First Citizens BancShares, Raleigh, NC (FCNCA)
National Bancshares, Blacksburg,VA (NKSH)
Financial Snapshot
(as of 12/31/2011)

Total assets:
$266,160
Tangible book value per share:
$21.51
NPAs to assets:
7.6%
Price to book:
67%
Market cap:
$22.7M
Dividend yield:
1.1%
Trailing 12-month return on assets:
0.44%
Trailing 12-month return on equity:
3.4%
Scoundrels
Leon Moore, Chairman
Leon Moore, President
Leon Moore, CEO
Red Flags
In June, 2002 Cardinal agreed to sell to Mountain Bank for $24 per share. Ten years of executive salaries and board fees later, the stock is barely half that price.

Triple-threat executive Leon Moore only owns 3,086 shares directly. A sale of Cardinal at $24 per share would net Moore a mere $21,000—not even 10% of the $224,701 he pulled down in compensation last year.

Rarely does one see such a brazen case of a CEO lying about the true state of affairs of a company in the Annual Report:
  • Leon's Lie #1: The "Fortress balance sheet." Since 2007, NPL's have leapt from .69% of loans and REO to the current 15.2%. Hardly a fortress. The moat around it perhaps.  
  • Leon's Lie #2: "Solid results" in 2011. According to the Notes to the Financial Statements, bad loans nearly doubled from $10.5M to over $19M, while the provision for the year dropped from $661K in the prior year to $592K and the allowance also dropped below $3M, one of the lowest allowances to NPAs in the entire industry. By comparison, National Bancshares (NKSH) has an allowance of over $8M versus NPL's of $5.2M. Had Cardinal provided for just half the increase in bad loans, pre-tax income would have gone from $1.1M to a loss of $3.2M
  • Leon's Lie #3: "We don't make bad loans, but loans do occasionally go bad." An additional 7% ($8.5M) in loans going bad in one year out of only $130M hardly qualifies as an "occasional" experience. Why are Cardinal's loans suddenly going bad so fast, now that the economy is showing signs of life and other banks are recovering? Has Cardinal been hiding bad loans? Are Directors burying their heads in the sand and not admitting just how much the bank stands to lose on these loans?
Sources
* NOTE: Although public companies usually readily post their annual reports and proxy statements on their websites, Cardinal chooses not to. If you'd like your own copy, you'll apparently need to contact J. Alan Dickerson, CFO or call 1-888-562-4130.

Harvest Community Bank, Pennsville, NJ (HCBP)

A Case of Self-Dealing on the Banks of the Delaware River


Wouldn’t shareholders of Harvest Community be best served by a sale, e.g., at 120% of book value, $15/share? From a stock that’s trading at $3.5, looks to me like shareholders could make a 300% return if they could convince the bank board to do the right thing, instead of wallowing around between $3 and $5 per share while officers and directors line their own pockets.


Disclosure: As of this posting, I own significant shares of HCBP and may subsequently either dispose of them or purchase more.

Prospective Buyers
Penn Bancshares, Pennsville, NJ (PEBA) In late 2005, the Fed gave PEBA permission to buy up to 24.89% of Harvest Community Bank
Elmer Bancorp, Elmer, NJ (ELMA), a local bank that’s doing well for which this acquisition would represent a great in-market transaction
Fulton Financial, Lancaster, PA (FULT), also has branch overlap that would make an acquisition like this logical
Financial Snapshot
(as of 12/31/2011)

Total assets:

$191,554,000
Tangible book value per share:
$12.76
NPAs to assets:
6.7%
Price to book:
37.6%
Market cap:
$5.5M
Dividend yield:
$0.00
Trailing 12-month return on assets:
-1.05%
Trailing 12-month return on equity:
-12.6%
Scoundrels
Michael Williams, Chairman of the Board
Dennis Engle, CEO
Jenny Engle, CEO’s wife
Entire Board of Directors, the 12 joint owners of Wheat Properties LLC
Red Flags
CEO Dennis Engle only owns 1050 shares of stock outright, and was paid $188K in 2011
Engle led shareholders to believe Harvest Community Bank was having a great Q4 2011, when in fact it lost $4.2M pretax, a loss greater than the previous five years' earnings combined
The Directors as a group own an entity called Wheat Properties LLC, which purchased the branch building in Salem City on October 20, 2000 for $240,000, for which the bank pays $79,925 per year in rent — a nice fat 33% annual return for the Directors.
Google searches for "Wheat Properties" suggest great efforts have taken to keep the entity under the radar, and reveal little, other than:
Wheat Properties - one way Harvest Community Bank Directors screw shareholders
Harvest Community used one of its Director’s law firms, which billed it $187,393 over the last two years.
The bank also made payments to JKE Marketing—a company owned by Dennis Engle’s wife Jenny Engle—of $88,020 over the last two years. Is this President’s Message from the bank homepage the sort of thing Jenny Engle is getting $44,000 a year to produce for shareholders, I wonder?

Shareholders getting shallow message from Harvest Community Bank President
Sources
* NOTE: Although public companies usually readily post their annual reports and proxy statements on their websites, Harvest chooses not to. If you'd like your own copy, you'll need to contact rturmol@harvestcommunitybank.com